GC Luxury Group : CBGL The Trend Report 2022

GC LUXURY GROUP, CHICAGO

The GC Luxury Group specializes in the most significant luxury markets in Chicago and specific surrounding suburban areas. We are connected across the country and have extensive connections with luxury markets around the globe. Our group consists of fellow Coldwell Banker Luxury Property Specialists, Vikki Kokuzian, Rodolfo Zavala, Jon Crocilla and Craig Hogan and we are based in the Gold Coast office in Chicago on Michigan Avenue in the Gold Coast.

With direct access to over 100,000 agents working in nearly 3,000 offices and 44 countries around the world, our group can satisfy the needs and expectations of today's luxury sellers and buyers. We are a highly trained and dedicated group with unmatched resources. Through direct marketing using our access to Wealth Engine, proprietary digital and print media marketing, a global MLS, global agent networks and worldwide syndication we leave no stone unturned.

Our goal is to maximize our client’s investment and our value to them.

Jon Crocilla

Craig Hogan

Rodolfo Zavala

Vikki Kokuzian

TO THE

TREND REPORT: 2022

on the MARKET AHEAD

We are delighted to introduce you to our new report.

The Trend Report has been designed with the purpose of curating insights from various sources including our exclusive Coldwell Banker Global Luxury/Censuswide survey, the Institute for Luxury Home Marketing, Wealth-X, and top industry experts to uncover the major trends guiding the luxury real estate market now and in the future.

This year’s theme is “Perspective for the Market Ahead.” Recognizing that the market is in a state of transition after two years of unprecedented homebuying, we wish to share with you a big-picture view of what’s happening in the high-end property landscape. We identified six key trends that will be driving the market now and over the next few years:

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We hope you find the information included in our report to be invaluable and welcome any questions about the report or the current luxury real estate market.

Methodology

The Coldwell Banker Global Luxury® program collaborated with Censuswide, the Institute for Luxury Home Marketing, and Wealth-X to provide insights into wealth creation, real estate, property investment, luxury spending preferences, and emerging trends.

Censuswide Research conducted by Censuswide between August 2, 2022 and August 15, 2022. The survey reached 2,001 U.S. consumers aged 18+ with a household income of $1M+ and who have bought a home in the U.S. worth $1M+, with quotas of a minimum of 100 per the regions targeted. Censuswide abides by and employs members of the Market Research Society which is based on ESOMAR guidelines and principles.

Institute for Luxury Home Marketing

For The Trend Report 2022, the Institute for Luxury Home Marketing analyzed the data for the top 10% of 120 U.S. markets. Data contained is from January 1, 2019 to August 31, 2022 and has been computed by the Institute for Luxury Home Marketing’s data research partner and shared with Coldwell Banker Global Luxury® and based on information attained both privately and publicly. The Top 10% is defined as homes (or in terms of inventory or list prices), matching or exceeding the 90th percentile sold price for homes sold from January 1, 2019 to August 31, 2022. Closed sales reported later than this analysis period were not included. Property-specific sales records were standardized, inaccurate sale prices were corrected when necessary and all duplicate records were manually excluded. As a result, statistics available via the source data providers may not correlate to this analysis.

Data is then represented both monthly and yearly throughout the report, using medians, averages, totals, percentages, and ratios. However, unless otherwise specified, statistics

typically presented in this report represent both the monthly median and the median of monthly medians of the respective data. Market Status is an analysis of Sales Ratio and represents market speed and market type: where the sales ratio is 15% or less, it is a buyer's market. If it is greater than 15% and less than 21% it is a balanced market. Over 21% it is a seller's market. If greater than 100%, MLS data reported previous month’s sales exceeded remaining inventory pulled at the end of the month.

Wealth-X

This report presents data on the wealthy from Wealth-X’s latest comprehensive update to their proprietary Wealth and Investable Assets Model, which gauges the size and combined wealth of the population with personal wealth of $1M+. The model produces statistically significant estimates for total private wealth and estimates the size of the population by level of wealth and investable assets for the world, and for each of the top 70 economies and 200 cities. Wealth-X’s model is unique in the sense that the Wealth-X Database enables them to construct wealth distribution patterns using real, rather than assumed wealth distributions, making the model much more reliable.

Wealth-X updates the model’s macroeconomic inputs on a regular basis and recently completed a comprehensive once-in-five-years update of the model. This entailed updating historic macroeconomic and country-specific indicators, and wealth distribution curves. This was undertaken, firstly, to ensure that we have gauged correctly the relationships between the indicators that the model is using; and secondly (although no less importantly) in light of the fact that the Wealth-X Database has grown significantly over the past five years. This update allows Wealth-X to include even more accurate wealth distribution curves, enhancing the model’s statistical precision and reliability.

Executive Summary

• A Market in transition. The luxury property sector is showing signs of a reset following an unprecedented homebuying boom during 2020 and 2021. Emerging from the pandemic, highnet-worth buyers have shifted their focus. Rising interest rates, inflation, and increasing economic uncertainty have also softened demand from 2021.

• Real Estate as a long-term Investment. The high-end real estate market is still in a strong position for 2022 and 2023. Luxury single-family home prices have seen 60% appreciation since 2017 while luxury attached home prices increased nearly 41%. According to a survey of over 2,000 U.S.-based affluent individuals conducted by Censuswide and the Coldwell Banker Global Luxury program, four in five (80%) affluent respondents believe that real estate is a safe investment.

• Not Quite a Buyer’s Market. The majority of luxury home markets analyzed for The Trend Report were still seller’s markets as of August 2022 – but conditions are gradually shifting in buyers’ favor. Property hunters have more negotiating power, but they still have to contend with low inventory and high prices.

• Demand for Smaller Homes Rises. Affluent buyers appear to be turning toward smaller properties, including secondary and investment homes. An analysis of 20 U.S. markets between April and August 2022 reveals that luxury single-family homes with smaller footprints (2,500 to 3,500 square feet) sold 18.6% faster than larger single-family homes (4,500 to 5,000 square feet).

• Second Thoughts Could Spark Moves. About 25% of survey respondents who purchased a home in the last two years said they were not satisfied with their home purchase. Driven by investment priorities and quality of life, they could be on the move again. The locations they’re most interested in? New York and California.

• Seeking Stability. The wealthy may be gravitating toward real estate that gives them financial, emotional, or psychological stability in the face of rising uncertainty. They’ll be looking to diversify their real estate portfolios, create long-term generational wealth, make opportunistic buys in traditional luxury centers, or seek properties in locations less affected by climate change and extreme weather.

• Global Property Buying is Back. The affluent are returning to global property buying. About 92% of U.S.-based respondents are now considering purchasing a property abroad. A strong U.S. dollar, rising cost of living, surging home prices, and political climate at home are among their chief reasons for their interest overseas.

• High-Net-Worth Hedging Set to Grow. The newly minted millionaires of the last two years are not only diversifying their real estate assets, but also looking to lessen their exposure to higher interest rates in the short-term by using cash and other creative financing options.

MARKET IN PERSPECTIVE

MICHAEL ALTNEU Vice President of Global Luxury, Coldwell Banker Real Estate LLC

How do you analyze a market that’s in a state of flux?

Typical real estate analysis is based on year-to-year comparables. But by any measure, 2021 was a year without precedent. Mass wealth creation and lifestyle changes during the pandemic spurred a once-in-a-generation homebuying boom characterized by rapid sales, bidding wars, and record price appreciation. Now the luxury property market is transitioning, making it nearly impossible to predict.

Backdrop of Uncertainty

Uncertainty has been a theme in 2022. Questions have swirled about whether the U.S. economy is slowing or not. The Federal Reserve has spent the year hiking interest rates to curb inflation. Borrowing costs are now at the highest they’ve been since 2008.¹ Geopolitical events, such as the war in Ukraine and its resulting energy crisis, have begun to impact some markets globally. High-net-worth individuals, while more insulated from economic downturns than the general population, are a naturally cautious bunch and have begun to temper their homebuying compared to 2021.

These factors are all playing out now in high-end markets across the U.S. to varying degrees. The data varies widely between locations, price points, and property types, muddying the forecast waters. Are we in a buyer’s market? Are we in a seller’s market? A lot of it depends on where you look, and what you are looking at.

Trending Toward Balance

We can see that the pendulum is swinging toward balance. While 2022 luxury home data is still showing that we are in a seller’s market comparable to 2021, inventory levels have risen and sales have decreased yearover-year. Decreasing sales ratios each month also offer a snapshot of where the luxury property market could be headed.

SALES RATIOS

EXPLAINED

Sales ratio measures the monthly sales against the remaining active listings at the end of each month. 21% or greater is a SELLER’S MARKET, less than 21% to 15% is a BALANCED MARKET and 15% or below is a BUYER'S MARKET.

Source: Institute for Luxury Home Marketing

2022 in context

While 2022 market statistics show declining sales and increasing inventory compared to 2021, these numbers need to be put in context. As previously noted, 2021 was an extraordinary year, and that level of feverish buying activity is unlikely to be repeated in our lifetimes. But when you compare 2022 to 2019 – a benchmark year – inventory is actually significantly lower and sales are higher. Prices have also continued to rise for the first eight months of 2022, albeit at a slower pace than 2021. This could

as rates continue to notch up – but even so, some luxury real estate professionals may feel that a reset is needed. Those who have lived through a few real estate cycles argue that 17% annual price appreciation wasn’t sustainable. Perhaps some of them are even eager to see the market return to a more balanced state with a healthy annual price appreciation of 3% to 5%. Their buyers may end up happier since they may finally have an easier time finding a home.

50 U.S. Luxury Markets

SINGLE-FAMILY HOMES

vs. 2022

Monthly Inventory

Solds Median Sold Price

26,484 12,569

The Big Picture

Despite the headlines, the luxury property market is still in a strong position.

Stock markets may have fallen by 20% in 2022,² reducing the overall wealth of individuals with a net worth of over $5 million by 12% from 2021, per Wealth-X. But stock volatility could actually push the affluent investor toward real estate. After all, people often want to buy tangible assets as opposed to stocks or bonds during challenging economic times.

The latest figures from Wealth-X also reveal a silver lining if you understand the data. While it looks like real estate asset allocation has remained unchanged from 2021 to 2022, most of the loss can be attributed to stock options, such as REITs, rather than bricks and mortar real estate.

12,348

10,680 4,597 34,677 14,449 $2,253,832 $1,295,000

$919,898

The survey of high-net-worth individuals that the Coldwell Banker Global Luxury program undertook in collaboration with Censuswide also reinforces their reliance on real estate for overall wealth building and investment. Nearly 80% of them agreed that real estate is a safe investment.

Respondents

Real Estate is

Investment

HOMES

many of them recognize that real estate

increases in value over time. Their homes today are worth more than they were a year ago. All of this not only emphasizes the underlying strength of the luxury property segment, but also how much the affluent are willing to play the long game when it comes

lifestyle and real estate investments today. They may not see the same record profits as they saw in 2021, but over the next few years, prices are expected to appreciate. There is still great

luxury homebuyers and sellers.

the

help us sort through a market that appears to be rapidly shifting direction after two unprecedented years of homebuying, we called upon a range of experts for this report. We talked to mortgage insiders and wealth advisors, as well as luxury real estate veterans around the globe. They helped us uncover six trends that will guide the next few years. Together with the Censuswide/

Coldwell Banker Global Luxury survey and our collected real estate data from the Institute for Luxury Home Marketing, their insights offer a rare glimpse into the minds of today’s affluent consumers and a barometer on what will be driving luxury real estate decisions in the near future.

AN UNCONVENTIONAL

Buyer’s MARKET

A new kind of buyer’s market is taking shape in luxury real estate. A mixed set of factors has created a unique situation for affluent buyers where they are gaining negotiating ground yet still have to contend with low inventory and high prices.

Historic Housing Boom Winds Down

After two heated years of rising home prices and demand combined with record low inventory, the housing market may be headed for a cooldown. As the Federal Reserve went into inflation-fighting mode this year, mortgage rates have risen faster than they have in a decade.¹ Some affluent buyers –despite being more insulated from economic downturns than the average buyer – have taken notice, either adjusting their buying strategies or putting the brakes on their homebuying plans as they take a watch-and-wait approach.

This notable shift began to take shape in June 2022 as inventory levels for luxury homes notched up for the first time in two years. With more properties to choose from and less competition, affluent buyers are finally feeling the pressure ease. Fewer properties are also selling for over asking, although prices remain high.

There are other signs that the property market has started to loosen for buyers.

Home sales have started to decline comparatively year-over-year and the rate of price increases has slowed. According to Freddie Mac, home value increases are expected to slow down from 17.8% in 2021 to 10.4% by the end of 2022.²

This improving set of market conditions has begun to open the door for buyers this year.

Inventory and Sales 2021 vs. 2022

Still Not Your Traditional Buyer's Market

While key indicators such as slowing demand and more inventory signal the start of a buyer’s market trend, the current state of the luxury real estate market is more contradictory.

Inventory is still not keeping up with demand. Most markets are reporting supply is below their 10-year averages³ seen before the start of pandemic. Unexpectedly, July and August 2022 saw a significant decline in the number of new luxury property listings entering the market. The level of new luxury listings was down 20% compared to May and June 2022 and only up 7% compared July and August 2021.

This decline could be a result of the affluent taking the summer to travel again, or it could signal seller hesitancy about listing their home amid less favorable conditions. Some sellers may also just not be ready to move again, especially if they were among the group of early YOLO (“You Only Live Once”) buyers who purchased their dream home during the pandemic. Per our survey, over 72% of

respondents stated that they were satisfied with their home purchase in 2020 and 2021.

Equally atypical of a buyer’s market is price stabilization. Luxury property prices, while at record highs, have held and are even predicted to rise over the next five years4 (with the exception of some overinflated markets). Furthermore, these influencing factors vary considerably across the country,5 by location as well as by property type.

This creates a unique set of market conditions for buyers to navigate; they may have increasingly more negotiating leverage, but equally they will still need to contend with tight inventory conditions and high prices.

A traditional buyer's market occurs when supply exceeds demand.

Not All Luxury

Equal

It's important to note that not all luxury markets are exhibiting the same conditions.

Single-family Homes

of August 2022, the majority of single-family home markets we analyzed were still considered seller's markets. However, a shift could be ahead.

For example, Denver and Greater Seattle are currently seller's markets that appear to be moving into a transitional phase since housing supply increased between May and August 2022 compared to the first four months of the year. By contrast, conditions in Coeur d'Alene, Idaho, and Miami have moved from balanced markets to being more favorable to buyers in recent months. On the other end of the spectrum are Greater Boston and Cincinnati, where the seller's advantage actually got stronger by the end of August.

it is a

it is a seller’s market.

Equally, there are significant differences across property types. Although both single-family and attached luxury markets are currently still favoring sellers, there are more dramatic changes for single-family properties, which are offering buyers opportunities not seen a year ago.

attached homes

Indicators are present for more favorable buying conditions in the luxury attached sector, but inventory levels would need to increase to be considered a true buyer’s market.

Among the markets with the strongest potential to turn buyerfriendly, three are in Florida: South Walton, Miami, and Palm

Beach County. Other markets with potential include two resort mountain communities, which saw heated demand during the pandemic as people snapped up vacation homes: Summit County, Colorado, and Lake Tahoe, California.

On the flip side, several markets on the East Coast are trending the other way for attached product and becoming even more favorable to sellers as condo and townhome inventory stays low: Brooklyn, Greater Boston, McLean and Vienna County in Virginia, and South Shore in Massachusetts.

Mass Affluent vs. Ultra Affluent

A mixed dynamic can also be seen across luxury home price segments. In the top 10% of the market or the “mass affluent” sector, buyers tend to be more rate-sensitive and may be holding off on big-ticket purchases (like houses) in the short-term to see how the economy lands with inflation. In the top 5% of the market, however, purchasing might have slowed for slightly different reasons. With the pressures of the pandemic largely behind them and abundant cash reserves, ultra-wealthy individuals may be able to take their time to find the perfect home but are finding that their choice of desirable properties is severely limited.

“I have multiple buyers looking to purchase a luxury oceanfront home in Pebble Beach,” shared Tim Allen, a Luxury Property Specialist affiliated with Coldwell Banker Realty in Carmel-bythe-Sea, where prices for oceanfront properties often top the $25 million mark. “They are ready to pay a premium to secure the property of their dreams, but we simply have no homes for sale that fit their criteria.”

Lack of desirable inventory has plagued several other well-known ultra-luxury property markets, including New York City and Aspen. Properties valued over $10 million saw very little change in their inventory levels during the first eight months of 2022, compared to the same period in 2021. If there was a slight increase in inventory, there was often a corresponding increase in sales. “You can’t buy what is not available,” added Allen.

Not all ultra-wealthy buyers are waiting on the sidelines to make their move, however. Some are willing to purchase smaller properties to secure a foothold in the right location. While the mass affluent tend to be more strategic in their buying as they weigh the costs of selling, buying, and financing, ultra-wealthy individuals’ deep pockets allow them to make decisions to suit their current requirements.

“There is an interesting shift happening in locations such as Carmel-by-the-Sea,” said Allen. “[Mass affluent] buyers during the pandemic purchased smaller luxury cottages as second home escapes, but now that many have decided not to go back to the city, they are looking for larger homes. Recognizing this will come with a significant price increase, they are now ready to move further inland. This has opened the door for the ultra-affluent to step in, especially if the [smaller] home is move-in ready to the level of their expectations.”

Affluent Buyers Remain Bullish

Regardless of an affluent buyer’s financial profile, there is still significant confidence in the luxury real estate market.

According to our survey, nearly 90% of respondents believe in the stability of owning property. Even if some buyers have dropped out of the real estate game due to fatigue, frustration, or even hesitation this year, they may be primed to return as inventory levels improve.

“The reality is, we are coming out of one of the best real estate markets in history,” said Gary Gold, a Luxury Property Specialist affiliated with Coldwell Banker Realty in Beverly Hills. “But that level of demand and price appreciation wasn’t sustainable. The difference between the last two years and today is that prices are not going up 20% every year. Instead, they may rise 5% a year. That’s still a really good market.”

It’s important to look beyond one or two annual data points to have a complete understanding of what this new kind of buyer’s market will mean for buyers and sellers alike. A more nuanced view of local markets and varying luxury price segments is needed. And one cannot discount the bullish sense of optimism among affluent buyers as they navigate these new dynamics.

in 10Almost

high-net-worth respondents think that the real estate market in 2023 will be better or the same as 2022 for investment.

40%

of respondents who are planning a home purchase in the future plan to do so in 1-3 years.

While the luxury home market may be in flux as it finds its footing after two years of soaring prices and demand, the overall market fundamentals are historically strong. The law of supply and demand applies. With luxury housing supply still low in many markets across the U.S., home prices are expected to remain stable. At the end of the day, people of certain means prioritize their surroundings, choosing to live where and how they wish. In periods of great market volatility, the tangible and enduring value of real estate often holds even greater appeal.

PUTTIN G IT IN PE R SPECTIVE M. RYAN GORMAN, Chief Operating Officer, Coldwell Banker Real Estate LLC

Some affluent buyers may be rethinking the pandemic musthave of a big primary residence.

Higher prices, rising interest rates, and a shortage of larger properties may be contributing factors.

Affluent buyers also appear to be turning their sights toward buying smaller secondary and investment properties.

When Bigger Was Better

During the pandemic, homes suddenly needed to be centers for working, living, playing, and learning. Buyers responded to these lifestyle changes by purchasing bigger homes in further-out locations and helped by low interest rates, they were willing to pay top dollar to get these dream homes.

Between 2020 and 2021, prices for single-family homes with over 3,500 square feet in over 100 markets shot up 27.4%.

to what was happening for attached homes under 1,500 square feet, the trend becomes more clear: prices fell by 1.5% by June 2020, and took until the end of 2021 to rebound.

Start of Sizing Down

in-depth analysis of 20 top U.S. markets shows that luxury

homes with smaller footprints (2,500 to 3,500 square feet) were selling 18.6% faster than larger single-family

homes (4,500 to 5,000 square feet) between April and August 2022, whereas in 2021, the same larger homes sold 21.6% faster than the smaller square-foot homes.

These findings are supported by the latest 2022 new construction statistics. Second quarter 2022 data from the Census Quarterly Starts and Completions by Purpose and Design and a NAHB analysis1 found that the median single-family square floor area inched down to 2,302 square feet. The average square footage for new single-family homes also decreased to 2,498.

There are a number of dynamics at play for why this could be occurring.

Recalibrating Expectations

Some affluent consumers entering the homebuying scene in 2022 and 2023 may be recalibrating their expectations to account for new market conditions.

While inventory levels for larger footprints remain below prepandemic levels, smaller properties have seen a steady increase of availability month-over-month since April 2022. This has opened up the market in this category, causing some affluent buyers to reconsider whether they actually need a larger property.

Now that the pandemic has loosened its grip on lifestyle decisions, the big house may not be as much of a necessity as it was during 2020 and 2021. Some affluent buyers may not need or want to work from home anymore. Schools are open again, and kids don’t need extra spaces for at-home learning and play. Others may be looking to return to city life, where smaller footprints prevail.

Record high prices, coupled with rising interest rates, have also caused some buyers to adjust their house budgets.

“If they are cash buyers, they may lower the price point they are looking in if the property prices are not to their liking or if their cash was impacted by the recent stock market fluctuations,” said Jill Hertzberg of The Jills Zeder Group, a Luxury Property Specialist affiliated with Coldwell Banker Realty in Miami Beach.

WANT VS. NEED

The want versus need dynamic appears to be at play for many affluent buyers. Since the inventory level for properties under 3,500 square feet is rising, buyers simply have more housing options to choose from in this category compared to the very high end of the market, where inventory remains low.

Choosing to step down a level in price not only allows them more options but the ability to get a foothold in their desired location.

Since the affluent tend to be more insulated from economic variants than the general population, current market dynamics may cause them to wait for their dream home while also mitigating their exposure to higher interest rates or a potential economic downturn.

Inventory levels for properties under 3,500 square feet have RISEN BY 129% since April 2022.

Focus Shifts Away from Primary Residences

Conventional wisdom says that affluent homeowners who bought bigger, better primary residences, or made dream home purchases during the pandemic are most likely going to be settling down – and not looking to sell – in the near future.

With their primary residence more or less accounted for, they can now turn their attention toward building generational wealth by investing in multiple, lesser-priced, smaller homes.

After all, we already know their affinity for real estate investment is high.

In fact, many appear to have their sights set on these types of property purchases over the next few years. According to our survey, only 28% of high-net-worth respondents who are planning a home purchase in the future said that the new home would be a primary residence. Comparatively, 72% of those said that the new home would be either a second residence, rental property, or vacation home.

Their focus on investment and secondary home ownership is notable, as these properties tend to be smaller and priced lower. They may not expect a quick return on their investment over the next few years, but that’s not the point of these purchases. Whether they are going to be purchasing a rental property in a second-tier city as part of a retirement plan or a condo in a college town for their university-bound child, they have moved past the short-term lifestyle concerns of pandemic living and have now adopted a long-term view of setting up their families for the future.

“I’ve had at least four different families – with parents ranging in age from 35 to 60 – who sold their homes in the Chicago suburbs and moved to bigger homes in Naples, Florida, during the pandemic,” said Dawn McKenna, a Luxury Property Specialist affiliated with Coldwell Banker Realty in Illinois and Florida. “While they love the Naples lifestyle and the weather, it turns out that their Midwestern roots run deep and they miss their friends, family, and the culture. So, many have recently purchased smaller properties back home – a pied-a-terre in the city, a luxury townhome in the North Shore/western suburbs, lake houses in places like Lake Geneva or New Buffalo. The lake houses serve two purposes as they can be rented out when not in use. The work-from-home lifestyles were very relevant during the pandemic, but now that things are settling down people want to go into the office again and they want a change of environment. By owning multiple properties, they can feel like they have a little slice of home in a variety of locations.”

Returning to Work

Cities

At the height of the COVID-19 pandemic, people bought homes far from city centers, where they could get more space for less money. But now that life is returning to normal and more companies are requiring employees to go back to the office, having that extra square footage may seem less important.

Faced with the prospect of longer commute times, many buyers may be looking for smaller homes closer to the city, while others are returning to urban life and purchasing townhomes and condos, which also have a smaller footprint. Demand has not only returned to pre-pandemic 2019 levels, but in many metropolitan locations, it has exceeded sales year-over-year.

Despite the affluent consumer’s shift toward purchasing smaller properties, it is important to remember that home size desirability has fluctuated historically. For example, home size rose from 2009 to 2015 as entry-level new construction was constrained, per NAHB. Home size then declined between 2016 and 2020 as more starter homes were developed.

The expectation now is that home size may face “opposing determinants,” according to NAHB. Even though affluent consumers may actually prefer to have more space due to the changing role of homes as live-workplay-learn environments, tighter house budgets due to higher prices and interest rates – coupled with limited inventory for larger properties – may dampen sales of some large properties in the near future. Additionally, those consumers who don’t need to move and are not constrained financially will continue to look elsewhere for opportunities to grow their wealth through investments in smaller homes.

LIZ GEHRINGER, President of Affiliate Business, Coldwell Banker Real Estate LLC

RECONSIDERI

Fierce competition and hasty decision-making may have led to buyer’s remorse during the pandemic. Whether it was location, the wrong property size, or changing lifestyle needs, some buyers who purchased a home during 2020 and 2021 are now reconsidering their choices. As the tides of the market shift in their favor, they could be back in the market in the next one to three years.

A Two ‐Year Buying Frenzy

During 2020 and 2021, many affluent buyers jumped into the housing market looking for a home that solved problems created by the pandemic. The heated nature of the market, coupled with out-of-state relocations and pandemic-era practices like remote and sight unseen buying, prompted some buyers to act quickly without performing their due diligence.

and Long-Term Plans Collide

We have all heard the adage, “buy in haste, repent in leisure.” It seems that almost 25% of high-net-worth survey respondents who purchased a home in the last two years might fall into this category.

Their reasons for being dissatisfied with the purchase that they made during 2020 and 2021 are multi-faceted, and often depend on why they moved in the first place.

Changing lifestyle needs was among the top reasons for their discontentment. Urbanites who moved to a rural setting may be experiencing culture shock or missing the hustle and bustle of city life. Those who bought a home in the suburbs or exurbs may be second-guessing their commute time now that their employers are requiring they return to the office. Or maybe now that they are spending less time at home, they realize they don’t need that big house and big yard. Short-term considerations eventually bumped against the long-term.

Interestingly, location may actually be a primary driver of their discontent – which could be a byproduct of all of the frenzied moves that were taking place during the pandemic.

Around a quarter of respondents said the reasons for their dissatisfaction were either because the location was too remote, they went back to the office full-time, or there was a lack of community amenities. A sizable portion also said that the property they purchased was either too big or too small.

Regional Differences

Not every region is seeing the same degree of buyer dissatisfaction either. For instance, the most satisfied 2020 and 2021 buyers hail from the Pacific Northwest region while the least satisfied buyers are from the Southeast region, with states such as Alabama (62.3%), Kentucky (56%), Tennessee (52.9%), and Oklahoma (33%) showing the most dissatisfaction.

Southeast: Lifestyle Changes

Out of the respondents in the Southeast region who are no longer satisfied with their home purchase from 2020 and 2021, two out of five are most likely to cite their lifestyle needs changing as the reason for their dissatisfaction (25%).

They were also more likely to change their mind about buying a home or investment property in the future because there is more inventory (45.5%).

Northeast and Midwest: Size Reconsiderations

Meanwhile, respondents in the Northeast region (47%) and the Midwest region (38%) who are no longer satisfied with their home purchase from 2020 and 2021 are most likely to cite the property size being too big or too small as the reason for their dissatisfaction. Could Northeastern respondents’ discontent about their property size be attributed to the relocation pioneers who moved out of New York City as the first COVID-19 wave hit the city?

Buyers in the Northeast and Midwest also seem to be more open to making moves as market conditions shift in their favor. Over four in five dissatisfied respondents based in the Northeast region (83%) and Midwest region (82%) said current market conditions have changed their mind about buying a home or investment property in the future, compared to less than two thirds (62%) of respondents in the Southwest region.

West and Southwest: Location Woes

Location plays a bigger role in the West, where 43% of dissatisfied respondents said that they are no longer satisfied with their home purchase from 2020 and 2021 because of the community they chose.

About 29% of Southwestern-based dissatisfied respondents reported the same. Of these buyers who purchased homes in Arizona and Colorado over the last two years, about a quarter are planning a home purchase in the near future, and plan to do so within the next 11 months. About 41% of them said they are likely to change their mind about buying a home or investment property in the future because there’s less competition for homes.

Age Considerations

GEN-XERS

age group least satisfied with their pandemic move were Gen-Xers. They were the most likely to purchase a home during this time period for personal reasons, i.e. the growth of their family. So, what changed after 2021? Did their return to work come with a new, longer commute?

MILLENNIALS

the flip side, the age group that was most satisfied with their past homebuying decision were Millennials. They said that their No. 1 reason for purchasing during the last two years was for investment purposes.

Relocation

RebootDissatisfied buyers may now find more opportunity in the real estate market if they do decide to sell. Over two-thirds of survey respondents stated current market conditions, such as less competition and prices leveling out, may have changed their minds about buying in the near future. They may also be able to sell their current home for more than what they bought it for, although it might take longer to sell. Some discontented affluent buyers may ultimately decide not to sell their home, instead folding it into their real estate portfolio and simply moving to another location.

Nearly 41% of respondents anticipated that their next purchase would be based on investment opportunity. Interestingly, the locations they are most eyeing are in New York and California – two states that experienced a “wealth migration” of high-net-worth earners during the pandemic as they fled to lower tax locales such as Texas, Florida, and Arizona during the pandemic.¹

Among their reasons for choosing these locations? About 40% said that quality of life remained at the top of their priority list. This underscores the long-term cachet and strength of these two historic wealth epicenters.

PUTTIN G IT IN PE R SPECTIVE

It is important to note that a large majority – close to 72% – of respondents reported being satisfied with their home purchase during 2020 and 2021. However, with the insatiable buying frenzy and quick decisions being made, there were bound to be stories of regretful buyers who leaped too quickly into unknown environs.

These buyers may end up staying in place and renovating, or they may be encouraged by rising inventory levels in their local marketplace this year and relist their current home for a profit. Others, if they have the financial means, may simply choose to keep the home as part of their investment portfolio, convert it to a rental and make a lateral move to a different, more affordable market. What these buyers decide to do will most likely depend on not just personal factors, but local factors too. The varied nature of the current luxury real estate landscape makes it challenging to predict how their regrets could eventually manifest in the market.

DIANE HARTLEY, President, Institute for Luxury Home Marketing

SEARCHING FOR

Increasing numbers of the affluent appear to be gravitating toward real estate to create financial, emotional, and psychological stability. They view real estate as a proven long-term investment that can also generate income, as well as create generational wealth for their families. With the pandemic largely behind them, they’re primed to return to traditional luxury epicenters known to hold their long-term value. Some will also begin seeking out property in areas less affected by climate change in the years ahead.

An Investment Proven To Hold Its Value

behaving cautiously, the affluent have begun to signal that

are looking for more stable long-term investments to protect

wealth

Two Years of Yolo

a

fearlessness. Telling themselves, “Life is short…what are we waiting for?,” they were buying up big dream properties or second homes in dream locations for the present moment.

rising economic

and crypto market volatility, climate change, and two years of living through an unprecedented health crisis,

begun turning toward opportunities that give them longterm

and quality of

give them peace of mind. Real estate has always

one of Americans’ favorite long-term wealth-building assets –

it shows in our survey.

a third of survey respondents believe real estate to be the safest long-term investment, ranking it higher than company shares, stocks and bonds, cryptocurrency, and pensions. And they are willing to put their money where their belief is because over 75% of them own at least one investment property.

LONG-TERM SECURITY

reliability and stability for those investors

are able to play the long game: hold onto their asset when the

trends down and wait until prices start to rise again.

Low Inventory Meets Price Stability

Even though inventory is beginning to rise across many luxury markets this year, the increases are not expected to be enough to bring prices down significantly any time soon. Inventory levels in the U.S. are still below 10-year averages¹ reported prior to the start of the pandemic – and not likely enough to relieve the massive housing shortage. Land also remains scarce.

With home ownership so central to the American mythos and interest in owning property by newly minted millionaires so high, it is not likely that supply will meet demand in the near future in the luxury sector. The nation needs an estimated 5.8 million additional homes to meet demand, according to Realtor.com.²

Even if demand eventually plateaus next year, property prices are not likely to drop significantly.

Diversification & Multiple Home Ownership

With travel limited during the pandemic, the propensity for multiple home ownership grew substantially among the affluent between 2020 and 2021 as they sought secondary properties that were within an easy flight or driving distance from their primary residence.

Today, demand for second and third homes in multiple locations continues to drive the luxury market as affluent buyers take a long-view perspective of real estate. They are embracing multiple homeownership for a number of reasons, including: 1) real estate is considered a hedge against inflation, 2) lifestyle, or 3) generational wealth considerations.

The types of investment properties that they own generally reflect these varied reasons.

For investors who follow the buy and hold method, generating passive income and equity growth with an investment property could offer just the kind of stability that the affluent are looking for, if a recession does, indeed, materialize. These kinds of long-term investments could potentially sustain a family for a generation if they play their cards right.

In particular, adding a multi-family rental property to their investment portfolio could end up being very profitable over the next few years, given rents have recently soared to keep up with inflation. David Friedman, co-founder of WealthQuotient and the former Co-Founder and President of Wealth-X, noted that multi-family properties could represent the next evolution of diversification.

“Real estate is an effective hedge against inflation,” he said. “Interest rates are rising well. The wealthy are hedging their risk and exposure to these economic factors through the multi-family housing asset class, which offers multiple leasing parties within a portfolio for generating cash flow. Their graduation into multi-family housing as an asset class could represent the evolution of high-net-worth investors as they look to diversify and build their wealth.”

Looking ahead to their future plans, they remain especially interested in acquiring non-primary residences.

A Return to Traditional Centers of Luxury

After two years of looking in off-the-beaten-path locations, they may eventually return to traditional centers of luxury. U.S. cities such as New York City, Los Angeles, San Francisco, Chicago, and Boston have seen a resurgence in demand; inventory levels have declined and home prices have risen in all five markets over the last year. Global cities like Paris and London are also showing their strength, even in the face rising costs of living due to the war in Ukraine and the ensuing energy crisis. These locations tend to hold their value over time, and have maintained their reputations as safe havens for both foreign and domestic investors.

New York City

Despite more than 130,000 households fleeing New York City between March 2020 and June 2021 during the pandemic,3 the trend reversed in the second half of 2021. According to a recent survey by Bloomberg, more people are now moving into Manhattan than before the pandemic. Home prices reflect this shift.

Frederick Warburg Peters, President of Coldwell Banker Warburg, confirms the trend: “There is only one New York. 2022 has proven to be a year of population gains for the city, as many who left during the early months of COVID have returned, and many from all over the country and the world continue to recognize the city’s unique attributes. No matter who you are or what you believe, you have a constituency in this New York, the global town where everyone and everything co-exists.”

London & Paris

On the international scene, London and Paris haven’t lost their luster for investors. With the continued strength of the U.S. dollar, both cities are likely to see growing interest from U.S.-based highnet-worth property investors who may see opportunity for good investment return as these established metropolises rebound from the pandemic, inflation, and the energy crisis.

“Over the past five years, prices in London have risen by 10% – but the pandemic-fueled race for space since COVID-19 and current rising interest rates have dampened demand for London property, flattening prices,” said Alasdair Hedley, Head of International for Hamptons International. “We expect this trend to shift in 2024 and prices will accelerate by 2025 once rates stabilize. London has always held a worldwide reputation as a safe haven for property investment. If buyers can afford to buy and plan on holding their property for the long-term, London real estate will always hold its value.”

“The ‘traditional’ luxury cities and towns in France, as much from the point of view of their reputation among buyers as from the proportion of luxury properties available on the market, experienced a tremendous surge in 2021 and this continues in 2022,” said Laurent Demeure, President and CEO Coldwell Banker Europa Realty. “The sparkle has also begun to come back to Paris real estate.

After a considerable drop in the median price for luxury properties in 2020, three Parisian arrondissements – the 16th, the 2nd, and the 4th – posted double-digit gains in 2021. This upward momentum continues this year. There is no lack of investors who want to acquire property in France. Paris will always be Paris, with a strong international appeal.”

Properties Owned For Longer Periods

Given the shortage of homes for sale, sky-high home values, and older homeowners’ growing desires to age in place, the average tenure of home ownership has been increasing over the last few years. This will likely continue – especially if buyers made purchases in the last two years and are locked into low interest rates. It is unlikely that they would trade these homes for higher priced ones unless there was a major life impact.

“The replacement value is something that people are thinking about now,” said Ardel McKenna of the Dawn McKenna Group, affiliated with Coldwell Banker Realty in Naples, Florida. “If they had to replace today what they had bought two years ago, they would have to pay twice as much or they would get less. People are not going to move unless they are dead-set on switching locations or they’ve had a significant life event. One of the main reasons why inventory levels aren’t rising much is that sellers often don’t have a parallel move.”

As for those who are planning to purchase over the next few years, they are not making short-term decisions either – which could also lead to longer periods of home ownership tenure. For the wealthy who don’t need to sell, they may see opportunity in the market for building up their real estate portfolios.

Some real estate insiders expect that a fair number of these homes will eventually become inheritance or legacy properties, providing families with a lifestyle continuum should they ever need to shelter in place again.

Climate Migrations

Another emerging priority for many buyers – especially among younger demographics such as Millennials and Gen-Z – will be finding property in a location that is less affected by climate change and extreme weather.

For example, a 2021 survey conducted by Forbes Home4 found that almost a third of respondents cited worsening weather conditions as a reason to move. Another third of participants also cited “better weather” for their upcoming move or move within the last two years.

In the future, it is expected that increasing numbers of buyers will seek out homes in locations that are less prone to natural disasters, such as hurricanes, wildfires, tornadoes, hail or wind events, or severe winter storms. Out-of-state moves will be particularly driven by buyers willing to trade worries about property damage and rising costs of insurance for places that are perceived to be less exposed to these kinds of disasters.

As a 2020 New York Times article5 proclaimed, “the great climate migration is already here,” and another Times article6 noted, “climate migration will reshape America.” Climate-related moves are only expected to grow, according to anecdotal reports and a growing volume of academic research.7

PUTTIN G IT IN PE R SPECTIVE

Known to be cautious and circumspect, the affluent investor will likely be looking for a hedge against an economic downturn while fortifying their financial status in the immediate future. Their search for stability over the remainder of 2022, and possibly into 2023, will likely guarantee them a very comfortable lifestyle even in chaotic times.

Their shift from YOLO attitudes to a more conservative approach opens a unique window of opportunity for modern real estate agents. As clients are drawn to properties or places that bring them long-term financial or physical security, they will also be looking for not just places, but people they can trust. According to our survey, over four in five respondents who have used a real estate agent to assist in purchasing a home in the past will use a real estate agent for their next home. Clearly, trust in real estate agents remains strong. Since the majority of the affluent place a lot of value on their advisors, it is imperative that agents listen to their clients and truly hear their needs in this new era of stability-seeking.

DAVID MARINE, Chief Marketing Officer, Coldwell Banker Real Estate LLC

MOVING

Luxury property buying across the globe is heating up. American affluent buyers are seeing opportunity abroad like never before. International buyers have also come back to the U.S. For many, it’s not just a lifestyle play –but a long-term diversification play.

Restrictions and general caution tied to international travel during the pandemic caused affluent investors to look for luxury home purchases closer to home as opposed to abroad over the last two years.

In the United States, especially, “domestic home buying demand was exceptional and, therefore, boosted home sales nationally,” NAR Chief Economist Lawrence Yun once commented.

Now it appears that the affluent are returning to global property buying with renewed vigor.

All Cooped Up International Travel Opens Up

While it was possible to purchase a home outside of your home country during COVID-19 thanks to virtual tours, border closings and travel restrictions made it difficult for prospective buyers to visit different countries and shop for homes. This, in turn, dampened international homebuying both in the U.S. and internationally. But that’s beginning to change.

According to the latest UNWTO World Tourism Barometer,¹ international tourism saw a strong rebound in the first five months of 2022. This means that the sector has recovered almost half (46%) of pre-pandemic 2019 levels.

As travel has opened up so has international property buying. Pent-up demand – coupled with a search for investments, asset diversification, lifestyle reasons, economic factors, and even political uncertainty at home – will continue to drive the affluent to look at other parts of the world for their property needs.

While developed countries such as the United States² and those within the European Union are thought to offer the most investment security, affluent buyers are also looking at emerging markets or “frontier”³ markets – i.e. those that are transitioning to become more integrated with the global economy. Some of these emerging markets include Mexico, Costa Rica, Panama, Indonesia, Chile, and Dominican Republic.

Americans Look Abroad

Increasingly, American affluent consumers are looking beyond U.S. borders. According to the latest Wealth-X figures, the number of American high-net-worth individuals who purchased an overseas property in 2022 is projected to rise by 14% from 2021 and 29% from 2019. While the strength of the U.S. dollar against other currencies may be driving most of this demand, the wealthy also cite other reasons for looking abroad, including the rising cost of living in the U.S., surging home prices, and political climate at home.

The propensity for international property ownership is already high among affluent Americans. According to our survey, 67% of respondents already own investment properties outside of the U.S. Currently the age group with the largest share of ownership of foreign property is 55+.

Our survey also reveals that nearly 92% of respondents are now considering purchasing a property abroad, with Central America as their top preference (23%). Not surprisingly, Canada and Mexico came next (given their geographical proximity to the U.S.), followed by Asia, South America, and Europe. The 55+ age group still have the most propensity to purchase abroad, but it is the younger demographic (ages 25 to 34) who show the greatest change in their aspirations, moving up the ranking from last to second position.

Top Choice: Central America

In terms of where they are searching for their next international property, they’ve turned their sights to Central America. Belize, Costa Rica, and Panama.

From breathtaking beaches to pleasantly warm weather, and a low cost of living compared to the U.S., these countries have become popular spots for wealthy Americans. While Costa Rica is considered “tax-friendly,” Panama and Belize are better known for being traditional tax havens.

“We’ve seen tremendous growth in U.S.-based foreign investment over the last three years given the very low luxury property tax rates and recent incentives for digital nomads and tech companies,” said Daveed Hollander, President and CEO of Coldwell Banker Costa Rica. “Prices have doubled in some markets as the demand for luxury properties outpaces inventory. We expect this trend to continue over the next three to five years.”

Next Hot Spot: Europe

Interest among U.S.-based affluent buyers may increase for Europe,4 thanks to a surging U.S. dollar and a weakening Euro.

Italy, Portugal, Spain, Greece, and France are among the most popular European countries, according to Coldwell Banker Global Luxury Specialists. Second homes have become the “plat du jour” in European destinations such as Tuscany, Barcelona, and St. Tropez. Prices in these cities may be up year-to-year, but are still a far cry from the dramatic increases seen in the U.S. Italy remains one of the most attractive countries for foreign investors due to its flat tax, historically low home prices compared to the historically high home prices in the U.S., and favorable exchange rate.

“Both the commercial and the residential real estate markets provide numerous investment opportunities to international citizens coming to Italy,” said Roberto Gigio, President and CEO of Coldwell Banker Italy. “The government has also enabled

programs for high-net-worth individuals who want to obtain Italian residency by purchasing a property in the country. In the last two years, we have received many requests from potential buyers from the United States, but, due to restrictions, they could not travel here to Italy. Fortunately, things have changed in the last few months. This summer there were many U.S. clients who went to our agencies in Italy.”

Rising Demand for Golden Passports Interest in obtaining “golden passports” – either dual citizenship or residency in exchange for investing in the country – has gained popularity in the last few years among the wealthiest of Americans who view these programs as a sort of insurance policy. Their pursuit of such programs is as much about freedom of movement as it is about uncertainty about the future.

In the European Union, countries such as Portugal, Italy, Greece, and Ireland offer golden visa programs, which basically give the wealthy the opportunity to “buy” the right to residency either by purchasing a house in the country or making a large investment or donation. Passport firm Get Golden Visa predicts 2022 will be “its busiest year yet.” (Wealthy foreigners looking to obtain citizenship in the U.S. have long employed a similar method, the EB-5 visa,5 which lets those who invest over $900,000 in the U.S. jump to the front of an otherwise extremely crowded immigration line).

Wealth-X

The incredible disappearing international buyer returned to the U.S. this year, according to the National Association of REALTORS® (NAR).6 This signals a notable shift after three years of lagging foreign investment in U.S. residential real estate.

Eager to put their money in U.S. real estate, which has traditionally been regarded as a safe haven, international buyers purchased 98,600 residential properties last year, totaling $59 billion. This was an 8.5% increase from the previous 12-month period.

Even with real estate prices as high as they are in the U.S., many international buyers from high-cost cities view a U.S. property as a relative deal. According to NAR, a typical property costs $28,570 per square meter in Hong Kong, $26,262 in London, and $10,947 in Toronto. Meanwhile, it is $8,250 per square meter in San Francisco and just $3,170 in Miami. Even New

York is cheaper than Hong Kong and London at $17,191.

Top Countries

Traditionally, Chinese buyers have spent the most on U.S. real estate – and that did not change in 2022. China and Canada remained first and second in U.S. residential sales dollar volume at $6.1 billion and $5.5 billion, respectively, continuing a trend going back to 2013.

However, buyers from Canada and Mexico made up the highest percentage of overall international buyers in the U.S. marketplace. Chinese participation in U.S. real estate reached its peak in 2014 and 2015, but dropped starting in 2019 as the Chinese government cracked down on capital flight and overseas real estate transactions. In 2021 and 2022, presumably due to COVID-19 travel restrictions, the percentage of Chinese buyers investing in U.S. real estate sunk to half of what it was in 2020.

in

Chinese Investment Has Room to Grow

this suggests that Chinese demand for U.S. real estate has considerable room to grow this year and in the years ahead.

investors could be searching for an escape hatch from the country’s COVID-19 lockdowns and real estate crisis.7 The property sector, which accounts for about a quarter of China's economy, has struggled since the summer of 2020.

Top Destinations

Source: National Association of REALTORS® (NAR)

Top Destinations for International Buyers

For the 14th straight year, sunny Florida remained the top destination for international buyers. For Chinese buyers, however, California and New York are their top preferred spots, followed by Indiana and Florida, tied for third. At just over $1 million, Chinese buyers had the highest average purchase price, and nearly a third, 31%, purchased property in California, per NAR. Compare that to Canadians who had an average purchase price of $485,000.

Types of Properties

Investment properties and vacation residences are among the most popular reasons for purchasing a home for international buyers,

according to NAR data. Like our survey respondents, many international buyers plan to use their U.S. property for vacation or rental purposes. This, once again, highlights the wealthy’s propensity for multiple homeownership, investment, and lifestyle enjoyment.

This contrasts with Chinese buyers who appear to be mainly focused on purchasing primary residences.

BOTH.

National Association of REALTORS® (NAR)

IT

R

All-Cash Offers Set to Increase

All-cash offers are expected to rise with the number of international buyers returning to the market.

Given the hurdles involved with getting a loan from a U.S. banking institution, international buyers are generally more likely to pay cash than U.S. nationals. In 2022, the share of all-cash offers increased amid tight competition for limited homes on the market. All-cash sales accounted for 44% of international buyer transactions, nearly twice the rate (24%) of all existing-home buyers, according to NAR. Nearly 7 out of 10 Canadian buyers (69%) made all-cash purchases.

Luxury real estate has always been a global pursuit. The pandemic momentarily halted this by limiting global movement and slowing international property buying. Now the tides are changing yet again. The geopolitical events of recent years may cause the normally risk-adverse affluent to look beyond their home country’s borders for sunnier shores and a safeguard. Shifting mindsets toward stability, physical safety, family, wellness, personal enjoyment, and a pent-up desire for experiences could also put the wealthy on the move globally again. With the rapid embrace of technology increasing connectivity worldwide and more wealth at their disposal today, the affluent consumers' freedom to move about the world may be exercised to an even greater extent over the next few years than at any other time before.

Source:

CREATIVE

Rising interest rates are inspiring a new generation of high-net-worth buyers to get creative with their real estate financing this year and take a page out of the ultra-highnet-worth investor playbook.

Borrowing Boom

A surging stock market, home equity gains, rising incomes, historically low borrowing costs, and a desire for larger living spaces sparked a home buying and boom over the last two years.

With borrowing costs at historic lows, large U.S. banks ended up doubling down on wealthier customers who sought loans to buy primary or secondary homes during this period. The combined value of loans made by the wealth management arms of JPMorgan Chase, Bank of America, Citigroup, and Morgan Stanley surpassed $600 billion in the second quarter of 2021, up 17.5% from 2020, per the Financial Times.¹ This represented 22.5% of the banks’ total loan books, up from 16.3% in mid-2017.

This type of borrowing was on the rise for more than a decade. However, the pace picked up after the Federal Reserve cut interest rates in response to the pandemic.

Real Estate as a Hedge

Starting in March 2022, the Federal Reserve embarked on what’s been called “the sharpest round of rate hikes since the 1980s” to combat inflation.² The average 30-year fixed mortgage rate is more than double what it was last year, and could rise even further.

The expectation is that a new generation of millionaires – flush with the wealth gains they earned over the last two years – could turn to real estate as a hedge against inflation.

“I think buyers don’t mind taking some money out of the stock market right now and putting it into something more tangible like luxury real estate,” said Roger Pettingell, a Luxury Property Specialist affiliated with Coldwell Banker Realty in Sarasota and Longboat Key, Florida.

Wealth of U.S. individuals with a net worth over $5 million is expected to RISE BY 35.4% between 2019 and 2022.

Source: Wealth-X

Affluent buyers’ push to diversify their real estate assets will also likely come with a desire to lessen their exposure to higher interest rates in the short-term. As a result, cash transactions are expected to increase this year. Other creative financing options – like margin or stock portfolio loans and private bank loans – which are more commonly accessed by ultra high-net-worth investors – will gain more mainstream appeal among the mass affluent population, which grew in size during the pandemic. Additionally, adjustable rate mortgages and seller carry second mortgages could also see an uptick.

All-Cash Transactions

During the pandemic, cash transactions increased. The National Association of REALTORS® reported that the share of all-cash sales to existing-home sales surged to 25% in April 2021 – a notable increase from the 15% share in 2020 and 20% share in 2019. Cash sales also rose with more vacation sales and with a higher fraction of vacation homebuyers paying all-cash. By August 2022, all-cash sales accounted for 24% of transactions for the month, the same share as in July, but up slightly from 22% in August 2021.

The responses from our proprietary survey also support these findings. According to the majority of high-net-worth respondents, they are more inclined today to use cash vs. a traditional mortgage to finance a future property purchase.

Luxury Property Specialists across the country are reporting similar findings. “Almost all of our high-end buyers are purchasing with cash,” said Pettingell. “Buyers may be getting financing, but in the luxury market, offers contingent upon financing are still not enticing sellers. This is similar to last year. However, when interest rates were very low, buyers often borrowed against their investment portfolios and financed the property privately.”

The term “cash” can be misleading. Often times, an all-cash offer to a seller eventually turns into a loan prior to closing. Or, cash is really a loan from a private bank or investment firm, if a buyer is borrowing against their stock portfolio.

”During the pandemic, buyers would make all-cash offers that were non-contingent to try and make their offers more appealing to sellers,” said Jade Mills, a Luxury Property Specialist affiliated with Coldwell Banker Realty in Beverly Hills. “Many times, during their contingency period, they would still get a loan.” After all, it’s in their favor to use the loan payment as a tax write-off and keep their capital liquid for other investments. “They are always looking to leverage,” added Mills.

Still, many high-net-worth buyers prefer to use cash to buy homes, particularly Millennials or Gen Yers, if they have received a gift or inheritance and tend to not have the deep portfolio of investment assets that their older counterparts would have. They would also not want to pay the currently higher mortgage rates because the interest return on their cash is less than the cost of the mortgage interest rate.

Leveraging Portfolios

Ultra-high-net-worth investors have always had access to greater wealth building tools and tappable lines of credit with lower interest rates since their wealth makes them a lower risk to lenders. The difference now is that these practices are trickling down to the mass affluent population. Assetbacked lending – i.e. borrowing against portfolios – became increasingly popular during the pandemic when interest rates were low and the stock market was at a record high.

Typically, affluent buyers pledge stock as collateral and get what is considered a “margin loan” at a low interest rate and flexible repayment terms. This allows them to tap the cash they need without having to sell investments whose value could have kept rising. These loans also allow them to avoid capital gains tax if they were to sell the investment.

Even as interest rates have risen and the stock market has cooled, the benefit of these types of loans may still outweigh the disadvantages for some investors. “You can simply pay yourself back within the account and there is no monthly payment that you need to make,” said Shant Banosian, Executive Vice President of Sales for Guaranteed Rate.

In 2020, the share of originations by nonbank lenders leapt to NEARLY 70%.

Source: McKinsey.com

“The other advantage is that you can access the money quickly. You can act and feel like a cash buyer to a seller.” Additionally, investors don’t want to take a loss on a sale if

their stock is down. “People are banking on the fact that the market is going to recover as inflation gets under control in the next 12 to 15 months,” he added.

NonTraditional Bank Loans

Financing options have changed considerably over the last year with private banks and wealth management companies now offering more exclusive financing options, such as zero deposit mortgages, multiple loans, and interest-only mortgages, to target the aspirations of the mass affluent. According to McKinsey. com: “Five years ago, nonbank lenders accounted for roughly half of total originations; two years ago, that figure was nearly 60%. In 2020, the share of originations by nonbank lenders leapt to nearly 70%.”

Adjustable-rate mortgages, known as ARMs, have also seen an uptick in popularity recently as homebuyers try to secure a lower interest rate. “One of out of every five mortgages is an adjustable-rate mortgage, and on the luxury side, it’s much higher,” said Banosian. These loans are typically fixed for five, seven, or 10 years and then they adjust to wherever rates are in the market. He continued: “As rates have gone up, you’re taking into consideration how long you plan on owning the home so you can align it with your financial goals. My experience is that

very few clients get to the other side of these loans. They can usually refinance the loan before the rate adjusts higher. Or they will sell the house within that fixed period.”

Seller Carryback Financing and Rate Buy-Downs

Real estate agents report that some affluent buyers have negotiated seller carryback financing – where a seller acts as the bank or lender and carries a second mortgage on the property that the buyer pays down each month along with their first mortgage.

In Los Angeles, Mills has noticed more buyers asking sellers to carry back a portion of the sale at a lower interest rate. “They may try to get a traditional bank loan at 50% down, and the seller will carry a second for the additional 20% to make it a 70% loan. So, the buyer might end up with an interest rate that is in between the 3% and 5.5% rate. They are trying to balance out the interest rates.”

In Colorado's Steamboat Springs, buyers are asking sellers to buy down their interest rate during negotiations. This is a notable difference from the last two years when nearly every property sold for over asking price, said Robert Yazbeck, a Luxury Property Specialist affiliated with Coldwell Banker Distinctive Properties. “Instead of that $1 million property selling for $1.15 million, it might sell for $980,000,” he said. “The seller could take that extra $20,000 or $35,000 and buy down the rate for the buyer to get it back to the rate it was a year ago.”

PUTTIN G IT IN PE R SPECTIVE

Between the historic rise in interest rates this year and the growing population of high-net-worth buyers, the number of real estate transactions using tactics such as asset leveraging and other creative financing methods is only expected to increase.

While the idea of using debt as a strategy is not new for the world’s wealthiest individuals, more and more wealth managers are advising their clients to embrace this tactic. The more they can borrow, the longer they can hold appreciating assets. And the longer they hold, the bigger their tax savings. This strategy could help them in the short term, since it helps bridge the gap between rising interest rates and prices as the market slowly moves into a more balanced state for buyers and sellers. It could also help them in the long run, when it comes to building up their wealth over a lifetime.

SHANT BANOSIAN, Executive Vice President, Guaranteed Rate

PERSPECTIVE FOR THE FUTURE

Emerging from the pandemic and a historic homebuying boom, we have arrived at a key inflection point. The data through the end of August 2022 makes it clear that many luxury real estate markets are transitioning. As inventory levels rise across locations, property type, and price points, the expectation is that more luxury property markets will eventually shift toward balance or a traditional buyer's market.

However, not all indicators point toward a major downturn. If inventory remains tight, the seller's market trend that has dominated the luxury real estate world will likely continue. The vast amount of wealth that was created during 2020 and 2021, coupled with the affluent’s steadfast reliance on real estate for wealth building, also makes it hard to imagine a full-scale retreat from property buying. Despite affluent individuals losing some of this wealth to stock market declines this year, Wealth-X still forecasts a modest uptick in wealth allocation to real estate and luxury assets, predicting it will grow $1,050.8 billion globally and $438.1 billion in the U.S. by the end of 2022.

Instead, 2022 market comparisons are better understood in the context of stable years. Sales in the first eight months of 2022 are still 8.6% higher compared to this same time period in 2019. Looking back even further, today’s luxury single-family home prices have seen 60% appreciation since 2017 while luxury attached home prices increased nearly 41%. We know that a home does not just provide financial stability; as we discovered during the pandemic, a home can provide emotional and psychological security, a sense of wellness, and a better quality of life. It is this pursuit of the dream home – whether it is for investment or vacation purposes, or in the United States or abroad – that will always drive the affluent toward real estate as it fulfills both the intangible and tangible needs in their lives.

Wealth allocation to real

As the luxury housing market begins to reset and wealthy individuals pursue properties that provide them with a source of stability over the next few years, they will also be looking for stability in their trusted luxury real estate professionals.

Source:

Wealthy individuals consistently embrace real estate – four in five survey respondents agree that real estate is a safe investment and almost nine in 10 think that the 2023 real estate market will be better or the same as 2022. Even if some affluent clients choose to wait on the sidelines, they may not be doing so for long. Over 75% are planning a home purchase within the next one to six years, with more than 40% planning to move in the next one to three years.

While demand for luxury properties is widely expected to soften compared to last year, it is important to put the slowing of sales and increases of inventory in perspective: 2021 was a rare market occurrence brought on by a mass wealth creation event and a life-changing pandemic.

Agents will be their guiding source. Those who will rise to the top in this new buying environment will need to be deeply networked and able to service clients across multiple markets worldwide – while also keeping their clients’ long-term and short-term priorities in close focus. They need to have knowledge and expertise – not just on their local real estate climate, but also on financial markets, lifestyle, and global events – so they can properly advise clients with a balanced perspective.

The Coldwell Banker Global Luxury® program is committed to cultivating just this kind of agent. As a leader in luxury since 1933, we are uniquely positioned to help guide agents and their clients through this present moment of uncertainty – by always having our eye on the future.

and luxury assets is

to grow

GLOBALLY and

IN THE

by the end of

PAGE 7-8 | Market in Perspective

1. https://fortune.com/2022/09/21/fedseptemberinterestratehikefirsttimehomebuyers/

2. https://www.usbank.com/investing/financialperspectives/marketnews/isamarketcorrectioncoming.html

PAGES 12-13 | Trend 1: An Unconventional Buyer's Market

1. https://www.cbsnews.com/news/mortgageratefreddiemachomeprices/

2. https://www.statista.com/statistics/275159/freddiemachousepriceindexfrom2009/

3. https://www.realtor.com/research/august2022data/

4. https://www.statista.com/statistics/275159/freddiemachousepriceindexfrom2009/

5. https://www.realtor.com/research/august2022data/

PAGES 20-21 | Trend 2: Smaller Footprints

1. https://www.builderonline.com/dataanalysis/newhomestrendingsmallersincepeakofpandemic_c

PAGE 29 | Trend 3: Reconsidering Relocations

1. https://www.wsj.com/articles/irs-taxes-low-high-state-migration-moving-pandemic-remote-work-costofliving-11654289927

PAGES 33-37 | Trend 4: Searching for Stability

1. https://www.realtor.com/research/august2022data/

2. https://www.realtor.com/research/ushousingsupplygapexpands/

3. https://comptroller.nyc.gov/reports/the-pandemics-impact-on-nyc-migration-patterns/#:~:text=Since%20July%20 2021%2C%20USPS%20data,that%20experienced%20the%20greatest%20flight

4. https://www.forbes.com/homeimprovement/features/americansmovingclimatechange/

5. https://www.nytimes.com/interactive/2020/07/23/magazine/climatemigration.html

6. https://www.nytimes.com/interactive/2020/09/15/magazine/climatecrisismigrationamerica.html

7. https://www.wired.com/story/asclimatefearsmountsomearerelocatingwithintheus/

PAGES 40-44 | Trend 5: Moving Beyond Borders

1. https://www.investopedia.com/median-income-by-state-5070640

2. https://www.investopedia.com/medianincomebystate5070640

3. https://www.investopedia.com/terms/e/emergingmarketeconomy.asp

4. https://www.bloomberg.com/news/articles/20220720/ americansmovingtoeuropehousingpricesandstrongdollarfuelrelocations?leadSource=uverify%20wall

5. https://www.globaltimes.cn/page/202205/1265327.shtml

6. https://cdn.nar.realtor/sites/default/files/documents/2022internationaltransactionsinusresidentialreal estate07182022. pdf

7. https://www.reuters.com/world/china/chinas2022propertysectoroutlookworsenshomepricesseen falling20220905/

8. https://www.cnbc.com/2022/09/02/morganstanleychinesestockscouldplungeifrealestategetsworse

PAGE 48 | Trend 6: Creative Financing

1. https://www.ft.com/content/8a328af4b8f248c582a9d7dc1c345e1c

2. https://www.reuters.com/markets/europe/fedofficialsseeusinterestratesrisingfurther20220830/

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©2022 Coldwell Banker. All Rights Reserved. Coldwell Banker and the Coldwell Banker logos are trademarks of Coldwell Banker Real Estate LLC. The Coldwell Banker® System is comprised of company owned offices

information

implementation of

MASTERS of our CRAFT

Luxury is the difference between the expected and the exquisite. Between a song and a symphony. A work in progress and a work of art. Coldwell Banker Global Luxury® Property Specialists are masters of this craft.

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Affiliated real estate agents are independent contractor sales associates, not employees. ©2022 Coldwell Banker. All Rights Reserved. Coldwell Banker and the Coldwell Banker logos are trademarks of Coldwell Banker Real Estate LLC. The Coldwell Banker® System is comprised of company owned offices which are owned by a subsidiary of Anywhere Advisors LLC and franchised offices which are independently owned and operated. The Coldwell Banker System fully supports the principles of the Fair Housing Act and the Equal Opportunity Act.