If not in stock and bond markets, where are affluent consumers currently parking their wealth? The answer to that question can be a lot of things: art, handbags, jewelry. One should always check with their investment advisor, but in reality, luxury real estate is considered one of the safest long-term investments one can add to their portfolio.

This year, my team at Coldwell Banker put a closer lens on the habits and sentiments of the affluent to get a pulse on the top trends currently dominating the luxury landscape. We conducted a survey of more than 2,000 U.S.-based high-net-worth consumers, paired with our annual fall report newly dubbed, “The Trend Report.”

80% of the respondents agree that real estate is a safe investment. In addition, consumers are more than three times more likely to think that 2023 will be a better time to invest in real estate than was 2022—rising by a whopping 42% from only 11% a year ago.

Together, these insights help us better understand what else is driving affluent consumers’ desire to invest in real estate, where they’re purchasing properties, and their attitudes on the value of a trusted advisor.

Through the Coldwell Banker Global Luxury program, our affiliated agents sold $267 million in luxury homes sales every day during 2021—up 59% from 2020. With the guidance of our luxury specialists, clients have been able to reap huge returns on the sale of their homes by making property enhancements—in addition to installing chic furnishings and lush landscaping—paving the way for them to place those profits growing their real estate investment portfolio.

SEEKING STABILITY

Affluent consumers are gravitating towards real estate that gives them financial, emotional, and psychological security.

I spoke to industry legend Jade Mills, president of Jade Mills Estates and Coldwell Banker Global Luxury Ambassador, about her firsthand expertise in the luxury market. According to Jade, “luxury buyers still have leverage to purchase investment properties, with many of them taking advantage of lower prices in areas where the market is softer.”

Real estate has always been one of Americans’ favorite long-term wealth-building assets—and it shows in our survey. More than 77% respondents currently own an investment property, with nearly two-thirds of them owning two or more investment properties.

“Real estate is the best investment one can ever make,” noted Jade. “I don’t just sell property, I own property too, and it has done nothing but go up. For example, there are certain areas in California where prices never really go down. You just don’t make that kind of return on investment in the stock market.”

Not only can a long-term investment in real estate generate income to obtain financial security, but it also creates a path to generational wealth. More than 45% of survey respondents say they purchase real estate as an inheritance for their children.

SHIFTING LIFESTYLE FOOTPRINTS

Many wealthy buyers today are looking for smaller secondary homes and investment properties, particularly in traditional centers of luxury. 72% of survey respondents who are planning a home purchase in the future said that the new home would be a second residence, rental property, or vacation home.

“People want homes that are move-in perfect; there’s currently a sweet spot for homes priced between $3 to $4.5 million in Southern California,” Jade explained. “Not only that, but the neighborhood, schools, and community amenities are all major factors that buyers look at when purchasing a home. As real estate agents, we keep up with these insights to be ‘in the know’ for our clients.” Again, for true investment guidance, one should still seek the opinion of their investment advisor.

Interestingly, 25% of respondents who purchased a home during the pandemic were dissatisfied, and location was found to be one of the primary drivers of their discontent. Nearly 41% of respondents cited that their next purchase would be based on investment opportunity, eyeing prime locations like New York and California.

Among their reasons? 40% said that quality of life remained at the top of their priority list, underscoring the long-term strength of these historic epicenters of wealth.

PROFESSIONAL GUIDANCE

The unparalleled advice and white glove service of a trusted advisor when buying or selling a home has never been more vital than today. Nearly 90% of survey respondents have used a real estate agent to assist them in the purchase of their home, and plan to do so again in the future.

Star agents like Jade have quickly become the key to aspirational lifestyles. These agents understand luxury buyers’ unique needs for privacy and have the connections to access the other specialized amenities they desire.

“The deep connections I’ve built—both in real estate and across other luxury sectors within fashion, design, exotic cars, etc.—have helped me deliver incomparable service and expertise to my clients that keep them coming back,” Jade said.

GOING FORWARD

Despite the headlines, the trends tell a clear story about the resiliency of luxury market segments today and their value beyond the price tag. As buyers seek stability, safe-haven investments, and security, the demand for luxury continues to drive the resilience of the market.

To read the full Trend Report and learn more about Coldwell Banker’s exclusive luxury insights, please visit https://blog.coldwellbankerluxury.com/the-trend-report-2022.

Michael Altneu is vice president for Coldwell Banker Global Luxury. Follow Michael at @cbgl.michael on Instagram and @MAltneu on Twitter.

Buying • Market Trends • November 3, 2022

Yikes! Every Time Mortgage Rates Rise, Buyers Need To Make This Much More To Afford a Home

by Suzanne Volkman

For home shoppers who thought 2022 would be their year, a pervasive sinking feeling is taking hold. They’re realizing the monthly payment for a home they thought they could afford—perhaps just barely—is now hundreds or even thousands of dollars more than they would have paid earlier this year. Their dream home is getting further and further out of reach.

The pain these higher rates have wrought on the housing market is already showing up in the high numbers of buyers who can no longer qualify for a mortgage—or are simply giving up as their purchasing power continues to plummet. Sellers are slashing prices or pulling their homes off the market. Home sales are dropping, and homes are sitting on the market longer.

And sure, we all realized that rising mortgage rates were going to mean higher monthly payments. But how much, exactly? We wanted to give prospective homebuyers a real road map to what’s going on—and what’s going to happen in the coming weeks and months. So the Realtor.com® data team crunched the numbers to find out just how much turmoil each mortgage rate increase is having on homebuyers.

How much does the pool of homebuyers shrink with each percentage point increase in the mortgage rate? And how much more do households need to earn in order to make monthly payments on a new home?

“People are just stopped in their tracks, watching, waiting to see what happens next,” says Rocke Andrews, a mortgage broker at Lending Arizona in Tucson. “It’s basically a frozen market until prices come down more or rates come down, or both.”

The numbers tell the tale: Roughly 3 out of every 4 U.S. households can no longer afford the monthly mortgage payment on a median-priced home of $427,250 with a mortgage rate of 6.7%. (This was the median list price in September using the most recent Realtor.com data.) Mortgage rates have more than doubled since the start of the year, rising from the low 3% range to nearly 7% for 30-year fixed-rate loans, according to Freddie Mac.

That means buyers need a six-figure household income of about $124,000 to buy the median-priced home, according to our analysis. However, just one year ago, when rates were about 3%, buyers would have needed to earn only about $89,000. That difference equates to around 20 million U.S. households that are priced out of the median-priced home in the span of a single year.

“A lot of people are very frustrated. Their income has stayed relatively stable. Their savings are roughly the same. But through no fault of their own, the costs are going up,” says Shmuel Shayowitz, the president and chief lending officer at Approved Funding in River Edge, NJ. “They’re rightfully very focused on the monthly payment—and it just keeps rising.”

If rates go up to 8%, which some real estate experts are predicting, buyers would need an annual household income of $137,356 for a median-priced U.S. home.

At 10%, they would need to bring home nearly $160,000 a year. Also at 10%, the median-priced home would be accessible to only about 1 in every 6 U.S. households.

To come up with our findings, we calculated the monthly mortgage payment for a median-priced home with a 6.7% mortgage rate on a 30-year fixed loan. This includes taxes and insurance and assumes buyers put down 10%. It works on the assumption that homebuyers are spending no more than the recommended max of 30% of their gross income (what they earn before taxes and deductions) on housing.

Higher mortgage rates have cut into affordability much more than most folks realize.

“When you reduce or raise interest rates by 1%, it increases or decreases buying power by about 12%,” says Andy Walden, vice president of enterprise research and strategy at Black Knight, a housing analytics company.

The real-life version of that math: If someone can afford just a $500,000 home at a 3% mortgage rate, when the rate rises to 4%, the same buyer would be looking at being able to afford something closer to $440,000.

As mortgage rates have climbed, and buyers don’t have as much money to spend on homes, prices have slowly begun correcting. Sellers have been forced to reduce asking prices, and buyers are negotiating them down even further.

“Prices will respond, as they already have,” says George Ratiu, senior economist and manager of economic research at Realtor.com.

Though it’s not a quick process, he warns. “It will take a while to drop below where they were a year ago.”

Across the nation, home prices are either plateauing or dipping, especially in the markets that became red-hot in the past few years. These are places like Austin, TX, and Phoenix, which became ultrapopular during the COVID-19 pandemic.

It isn’t just higher rates that are problematic. The lack of homes for sale is responsible for sky-high home prices. There are far more people in the market than there are homes available for them. That keeps prices high—and the remaining buyers frustrated.

And because incomes have not kept up, there’s been a growing affordability chasm.

Low mortgage rates of the past decade conveniently masked that problem, to some extent. Since rates were lower, buyers could purchase more expensive homes and still have reasonable payments.

“The incredibly low rates in the 2010s allowed people to stretch their budgets,” says Ratiu. Today, “mortgage rates surging at 20-year highs are making it prohibitively expensive for many buyers to afford a home purchase, and compounding the challenge of rising inflation cutting workers’ wages.”

As challenging as the housing market is right now, it’s been worse. When it comes to mortgage rates, much worse.

Following the 1979 energy crisis, the global economy plunged and high oil and gas prices pushed inflation to double-digit highs. That spurred the Federal Reserve to raise interest rates far beyond any point since. Mortgage rates followed. At their peak, mortgage rates were nearly 19%, according to Freddie Mac data.

That’s more than 2.5 times the rates now. Yet, people continued to purchase homes.

Rates came down slowly, through the late 1980s and early 1990s. Rates hovered near 6% during the 2000s, then dipped below 5% and stayed there during most of the 2010s. It wasn’t until the pandemic that they dropped below 3% for the first time in Freddie Mac’s recorded history, fueling the rapid home price growth.

However, home prices were much lower in the 1980s, when mortgage rates were in the double digits

Buyers in the 1980s “love to remind us” how high rates were when they purchased homes, Ratiu says. But median home prices in the early 1980s were in the $60,000 to low $70,000 range, according to National Association of Realtors® sale price data for existing homes (excluding new homes). Home prices today are about six times higher.

Walden, of Black Knight, looks at home prices compared with median household incomes over time. This helps him to figure out how much of their income buyers need to spend to become homeowners.

In January 2021, buyers spent about 20% of their income on becoming homeowners. Now, it’s nearly 40%.

“That’s the highest it’s been since 1984,” he says. “That’s significantly higher than it’s been over the last couple of years.”

Since 2000 or so, home prices have outpaced incomes by so much that mortgage rates largely took a backseat to a home’s price tag.

“When you go from that 18% interest rate environment in the early ’80s, and you get it all the way down to 3%, obviously, that has massive impacts on the amount of home that you can buy with the same amount of income,” Walden says. “And so if you look at the last time home affordability was at the levels it is today, interest rates were actually at 13%.”

Walden says home prices are roughly 35% higher than what current incomes should support. For the housing market to truly come back into balance—a combination of home price adjustments and higher incomes—it could take years.

Rates could continue to rise—making it even more challenging for already stretched buyers—but not to the levels seen in the 1980s.

“I could see 7.5% or, in more extreme cases, 8%,” Ratiu says. “In the next six to eight months, I don’t see them coming down.”

This doesn’t mean that those who need to purchase homes won’t ever be able to do so.

Mortgage lender Shayowitz says his clients are getting more creative. They’re trying to increase their down payments so their loans, and therefore monthly payments, will be lower and bringing on co-signers to help them qualify for mortgages. They’re also exploring adjustable-rate mortgages, where the interest rate is lower for a set period of years in the beginning of the loan and then readjusts down the road.

“It needs to be a situation where buyers sit down with their agent. You talk about location, you talk about affordability, you have to strategize,” he says. “People who do that are still able to make it work.”

By Evan Wyloge

Oct 17, 2022

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PROFESSIONAL GUIDANCE

GOING FORWARD

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Get All the Help You Need Without a Wait

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Common Mistakes When Closing on a Home

7 Common Mistakes When Closing on a House

#1 Sprinting Through Documents and Emails

#2 Paying Too Little Attention to the Paperwork

#3 Leaving People Out of the Loop About Major Life Changes

#4 Using Inconsistent Versions of Your Name in Your Documentation

#5 Being in the Dark About the Home Closing Process

#6 Forgetting to Line up Your Wire Transfer or Cashier’s Check or Not Allowing Enough Time

#7 Asking Too Few Questions at Closing