The luxury real estate market is like a funhouse mirror reflection of the general real estate economy. For example, it’s not affected by mortgage rates to the same extent as the general real estate market, since so many buyers pay cash. In fact, in last year’s fourth quarter, all-cash sales were almost fifty percent of all luxury home sales (46.6%), according to Redfin (which defines a luxury home as in the top 5% market value in its area). According to Kiplinger, this represented a massive 40% increase over cash sales from Q4 the year before. I’d like to pause to highlight how massive of an increase that is–all cash sales rose forty percent during a single year. Imagine a market where people just get bored of mortgages so they grab some cash. This is not typical behavior for the average homebuyer purchasing a median-priced home.
It is not entirely clear why there was such a massive increase in all-cash sales, but I have a few possible explanations. One partial explanation comes from a JPMorgan study, which found “no statistically significant relationship between mortgage rates and luxury home prices.” This study argues that changes in net worth among wealthy buyers, not mortgage rates, drive luxury real estate sales. This is very different from the general housing market, which is highly sensitive to even a 50-basis-point rate cut. 
In my opinion, the reasons for using a mortgage to buy a home in the market’s top 5% are often very different from the average motivation to borrow money for a home purchase. For example, the average home buyer must use a mortgage to buy a home, since they don’t have access to an immense amount of cash on hand. However, if you’re buying a $5 million home, it’s more likely that you have access to significant cash. Getting a mortgage might not be a necessity, but a convenience. If you have $5 million in a mutual fund that’s earning 7% interest, and mortgage rates are only 3%, then it makes way more sense to get a mortgage so your cash can continue earning 7% interest in the mutual fund. In this case, a mortgage frees up your cash to earn interest in the stock market rather than locking it into your home purchase. However, if your mortgage would be 7.5%, then you might lose money by not using cash to purchase your home.
This is one way that luxury real estate operates by different rules, and why there may not be a statistically significant relationship between mortgage rates and luxury home prices.
Another way that luxury real estate differs from average real estate is the amount of time it can stay on the market. According to Sotheby’s, the highest-end luxury homes spent an average of 506 days on the market way back in 2018. Though this was years ago, it is an example of how different the motivations for selling can be between expensive and average real estate. If you can wait for almost two years to sell your home, you aren’t selling it because you desperately need the money. You can also afford to hold out longer until you get the price you think the property deserves. As a luxury real estate agent, you have to remember these different rules. For very high-end properties, being on the market for a year isn’t necessarily a sign of failure, or a sign that something is wrong with the property. I’ve seen this where I live, where a house listed for $2.5 million sat on the market for over two years with no price cuts, and then sold for full price.
It’s almost like the high-end real estate market functions in a different space-time continuum. I’m so used to how the values of median-priced homes are estimated that I’m fascinated by the idea of removing time from the estimate of value. Generally, how long a property will take to sell has a huge impact on its pricing. However, if you can wait for two years to find the right buyer, pricing can be much less time-sensitive. It makes me wonder how general real estate pricing would be different without the sense of urgency–would homes sell for more on average? I’m getting a bit too philosophical here, I suppose….
Regardless of philosophy, it’s clear that the luxury real estate market functions in a world driven much less by necessity than the general real estate market. In this world, mortgages are more likely to be taken out for convenience or profit, and houses can sit on the market for longer because the cash from the sale is not essential for finding a new place to live. Because it functions under different economic rules, the luxury real estate market can be a good hedge against changes in the general real estate market if you’re a real estate agent. That is, a slowdown in the general real estate market may not be reflected in luxury real estate, so being fluent in both of these real estate economies can help broaden your earning potential, despite what’s going on with the economy.
If you’re interested in gaining expertise in luxury real estate and broadening your potential for income, consider finding a mentor in the luxury real estate market, or become an Accredited Luxury Real Home Specialist.
https://www.prnewswire.com/news-releases/luxury-home-values-are-rising-faster-than-typical-homes-for-the-first-time-in-years-302210847.html
https://oceansir.com/blog/how-long-does-a-luxury-home-stay-on-the-market
https://www.kiplinger.com/real-estate/buying-a-home/luxury-home-prices-at-all-time-highs-as-rich-buyers-pay-cash
https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/ideas-and-insights/what-you-need-to-know-before-buying-a-luxury-home
https://www.kiplinger.com/real-estate/buying-a-home/why-luxury-home-sales-are-at-an-all-time-high
https://robbreport.com/shelter/homes-for-sale/luxury-market-booming-despite-slow-homes-sales-1235425876/amp/
https://www.redfin.com/news/luxury-housing-market-q4-2023/
https://www.nytimes.com/2024/04/04/realestate/the-hottest-luxury-second-home-markets.html
Mortgages: Just For Fun
