A look at the luxury market at the dawn of 2022
With any new year comes the natural reflection on the past, as well as thoughts on what the future holds. And in the real estate world, it also heralds the release of Sotheby’s International Realty’s latest Global Luxury Market Report. Several points are shared below from the post, including my own contributions, as well as additional personal observations on the luxury market from our global advisors.
Real estate has proven to be the sector of the economy that has recovered the fastest from the economic crisis generated by the pandemic. The rebound was evident across all residential real estate categories, locations and price ranges, but the largest increase was seen in the resort and second home categories. Vacation home sales were up 57.2% year-over-year in the first few months of 2021, according to the National Association of Realtors, compared to the roughly 20% change in total sales of existing houses.
Both in the holiday home market and in the real estate market in general, one fact has emerged over the past eighteen months. The higher the selling price, the higher the percentage of year-over-year sales. The explosion in activity was arguably an acceleration of choices related to the pandemic and the concept of remote working, but was ultimately helped by the record level of household wealth in the United States, driven by the rise in the value of assets in an accommodating tax environment.
And while markets across the country enjoyed record activity, according to Sotheby’s International Realty CEO Philip White, Florida was “the hottest market in the country.” We certainly agree. Other trends or projections are noted in the report or emerge from our daily interactions with customers across the country and around the world.
Clearly, there are more movements among the wealthy influenced by national or state tax policies, with distinctions serving as either attractants or repellents. Most moves are simply from state to state in the country, an event that would no doubt be accelerated with the introduction of proposals for a true wealth tax on the full value of floating assets by some.
Across borders, however, there is increasing talk of wealthier people denouncing their US citizenship in order to obtain residency in one of the world’s many tax havens, such as the Bahamas or the Cayman Islands. In fact, the number of people choosing this path hit an all-time high in 2020 (2021 numbers are not yet known). On the horizon, the current top tax rate of 37% will rise to 39.6% in 2026. Considerable attention is paid to the tax implications of President Joe Biden’s proposed plans, but in reality the proposed surtax does not affect only 0.02% of Americans. Ultimately, these moves seem to be driven as much by political outlook as by economic risk.
Millennials make up an ever-growing share of the luxury market, with an estimated 4.8 million millennials turning 30 in 2021 and entering their early years of home buying. Some will be self-made, but most will use wealth transferred from parents or other family members. Third-party sources suggest a massive wealth transfer of over $70 trillion over the next twenty-five years, many of which will undoubtedly end up in real estate. Meanwhile, more young adults are buying with a co-borrower over 55. It is becoming increasingly common to see relatively young families buying many of the most expensive properties in the area.
The recent spike in inflation and the impact on Treasury yields and the stock market has yet to fully reveal housing sentiment, but interest rates should be at 4% by now. the end of the year on a 30-year fixed loan, according to the Mortgage Bankers Association. This rise will exacerbate challenges for many first-time buyers, who are already struggling to compete, but buyers paying in cash or using an equity-backed loan, a common strategy among the wealthy, will be largely shielded from this trend. Ultimately, high net worth individuals’ decisions regarding such investments are driven more by buyers’ assessment of the future environment than by their current bank balances. Most know, however, that luxury properties are generally safe long-term investments. “If you look over the decades and centuries, luxury real estate – with all of its ups and downs – has retained value and even increased in value,” according to Jonathan Woloshin of UBS Wealth Management.
This increase in luxury purchases has also translated into unprecedented growth in high-end residential construction projects in the most desirable markets. Expanding from traditional hotel management, companies such as The Ritz-Carlton, Four Seasons, St. Regis and others in the hotel space are expanding their iconic brands into more residential condominium communities in Florida and beyond. . Their success has spurred interest from non-hotel brands in the fashion industry and others to enter the ring as well. On the Gulf Coast, no less than four such branding projects are in the works, breaking traditional ideas of value limits in the respective markets.
In the more subdued resort home sector, the U.S. government reversed a policy to limit the ability of Fannie Mae and Freddie Mac to purchase loans for new investment properties, meaning lower rates on such transactions than otherwise in the short term. Undoubtedly, some of the demand for second homes has been pulled up over the past two years, but everything indicates that the attraction will remain strong in 2022.
Of course, in all other categories of real estate, buyer demand exceeds supply. Across the country, permanent stocks are at three months depending on the rate of sales. Along the Gulf Coast, from Marco Island to Tampa Bay, that number drops to less than a month. Never has there been such an imbalance in our markets, and there is little on the horizon to suggest that a change is coming. The result will be fewer total sales, and yet the simple economics of supply and demand does not imply any negative pressure on prices. Appreciation will slow but continue its steady march. As a result, an ever-increasing percentage of homes will fall into the luxury category, and therefore a greater share will be owned by the affluent.
With a possible return to normalcy, it was expected that many of those who fled urban areas for the suburbs or resort markets would return for the cultural pull of city life, which we are already witnessing. Yet most do not choose to sell their second property and instead keep it for seasonal use or rental. Therefore, this group cannot be expected to prove to be a significant source of additional inventory entering the market during the transition.
Many other areas are discussed in the report, such as the trend towards sustainability in luxury housing and the rise of cryptocurrencies in purchases. Ultimately, however, the key takeaway is that the explosion in the luxury market over the past two years is poised to continue into 2022 and beyond. Read the full report at: sothebysrealty.com/luxury-outlook-2022.
Budge Huskey is Managing Director of Premier Sotheby’s International Realty.