Financial experts are warning that the luxury housing market is at risk of slowing down, due to higher mortgage rates that have also affected other segments of the real estate market.
This week, luxury homebuilder Toll Brothers reported that its seen a 13 percent drop in the number of signed contracts for homes in its fourth quarter, plus a 9 percent cancellation rate. Toll Brothers’ average sales price was $906,000, compared to the national average home price of just $294,000.
“In November, we saw the market soften further, which we attribute to the cumulative impact of rising interest rates and the effect on buyer sentiment of well-publicized reports of a housing slowdown,” Douglas Yearley Jr., Toll Brothers’ CEO, said in a statement.
Luxury real estate has previously looked immune to the wider housing slowdown, because buyers of these kinds of properties are generally less susceptible to the increases in mortgage rates, experts say. But Peter Boockvar, chief investment office with Bleakley Advisory Group, told CNBC that’s changing.
"We've been seeing a slowdown in housing all year, but this is the first time Toll Brothers really acknowledged it in a press release," Boockvar said. "I think up to this point they've felt like they're somewhat immune being on the upper end of the market where people are less sensitive to changes in mortgage rates. So that's what really stuck out to me is the acknowledgement of something we've known all year that it's now affecting their customer base."
There’s further evidence from real estate brokerage Redfin, which said that luxury home prices increased by just 3.2 percent in the third quarter of this year, averaging $1.7 million per transaction. While that’s still positive growth, the increase is the lowest since 2016.
Redfin Chief Economist Darly Fairweather said a decline in high-growth stocks—called the FANG tech stocks—is curtailing sales. “This impacts the belief that the overall economy will grow,” he told CNBC.
In markets where homes are the most expensive, sales are weakening significantly, notably in California, according to Yearley. “California has seen the biggest decline,” he said. “Significant price appreciation over the past few years, fewer foreign buyers in certain communities, and the impact of rising interest rates all contributed to this slowdown.”