Sotheby’s International Realty’s 2023 Luxury Outlook reports that the appeal of luxury real estate remains strong in spite of interest-rate hikes.
As the Federal Reserve and other central banks worldwide have raised interest rates in hopes of staving off inflation, they have created a drag in the housing market overall, according to the report. However, buyers are still eager for prime property, especially if they feel they are getting a deal, Sotheby’s found.
“If it’s priced in the right range, and it’s a special property, it’s still moving,” said Chris Klug, a broker and partner at Aspen Snowmass Sotheby’s International Realty, in the report. He said more buyers on the ultra-high-end had been taking out mortgages in the last couple of years because of “incredibly advantageous rates,” though now he’s seeing more cash buyers, private financing and portfolio financing.
According to Bankrate.com, the current national average interest rate is at 6.46 percent, down from a peak of 7.24 percent in November 2022, but still double what it was 12 months ago.
“The fear of missing out that was happening last year is now replaced by the fear of paying too much,” said Michael Pallier, the managing director of Sydney Sotheby’s International Realty. “While the rates are going up, [buyers] may feel they don’t have to rush because, in six months’ time, prices might present a better value.”
The National Association of Realtors reported that in September 2022 the number of $1 million-plus sales was 15.5 percent lower than it was during the same month in 2021. Sotheby’s said the decline could possibly be attributed to the “lock-in effect,” as homeowners who obtained a low mortgage rate in recent years are deciding to stay put rather than buying a different home with a mortgage rate that is 2 or 3 points higher. Another factor Sotheby’s observed is some luxury buyers holding back as they wait to evaluate the impact of increasing rates on prices.
A survey of leading agents across the Sotheby’s International Realty network found that more than 53 percent expect interest rates to affect their business this year. However, the report noted that because luxury buyers rely less on credit, their buying decisions may be less sensitive to spikes in interest rates and more influenced by the stock market or inflation.
“Bad headlines and stock-market corrections make for more cautious luxury buyers,” said Brian Ladd, the principal broker of Cascade Hasson Sotheby’s International Realty in Oregon.
Luxury buyers who may use their equities portfolio to purchase a home, either by selling some of their stock or taking a loan against their portfolio, can be scared off by a downward turn in the market, the report states.
“Every time we have stock-market corrections of more than 10 percent, our luxury buyers generally quiet down until the stock market finds stability and a partial recovery,” Ladd said.
The report notes that many investors still find luxury real estate to be a safer bet, even when interest rates are elevated.
“The reason for buying into luxury real estate as an investment is primarily that the capital values are expected to appreciate over the long-term, due to location and scarcity of supply,” said Steve Tay, a senior associate vice president at List Sotheby’s International Realty, Singapore. “This still holds true even in a high-interest-rate environment.”
Ryan MacLaughlin, the owner and principal broker of Island Sotheby’s International Realty in Hawaii, said that he is seeing buyers move from loans to cash, though he said they intend to finance the homes through a lending institution eventually, once interest rates have gone down.
The report offered good news for buyers, stating that inventory is growing, which can empower buyers to ask the sellers for more concessions, like a negotiable moving date or closing costs covered by the seller.
Dana Trotter, a senior global real estate advisor and associate broker at Sotheby’s International Realty–Bridgehampton Brokerage, encouraged sellers to work with their listing agents to compare their homes with others nearby that recently sold before setting a price.
“There’s only one chance at a first impression when launching a property, and it helps to be competitively priced,” Trotter said.
The report pointed out that the number of offers a seller receives may also depend on the time of year when they decide to list.
“The Hamptons market is typically very seasonal, so timing properties to launch in the spring or sell quickly before the winter is common,” Trotter said.
In the Hamptons, where rental and sale prices hit record highs during the pandemic, low inventory continues to bolster prices.
“The market is still very competitive because inventory is still at historic lows,” Trotter said. “But we expect the market will settle out as more listings come online.
“While there will be turnover, many owners will hold because they want an asset to use in the Hamptons regardless of fluctuations in rental pricing.”
Staff Writer on Jan 18, 2023