As Starter Home Prices Soar, the Luxury Market Is Cooling
For the past several years, first-time buyers and luxury house hunters have navigated opposite ends of a volatile housing market, and a 2023 correction is creating a new set of hurdles for both real estate sectors. Starter homes were the target of an early 2020 housing boom that saw cash-strapped buyers competing for a limited supply of affordably priced properties. As a result, starter homes, defined as two-bedroom listings, finished 2022 with 15% year-over-year price increases.
In contrast, recession concerns caused a once-booming luxury market to cool at a drastic pace throughout 2022. Luxury homes, defined as the most expensive 10% of homes in any regional market, ended 2022 with flat price growth, Realtor.com reports.
“Luxury purchases are more discretionary,” says Danielle Hale, chief economist at Realtor.com. After all, no one really needs a third or fourth home or a 10,000-square-foot abode with ocean views. So when market conditions are right, activity in that segment can change quickly.
“If you think of luxury home purchases as discretionary, starter home purchases are almost the opposite,” she says. “It’s more about timing and strategy.”
For people buying for the first time, or for those with tighter budgets, a home purchase is driven more by finding an opportunity to buy or sell that matches a need, not a whim. A rise in interest rates makes it more difficult for these buyers to gain a foothold.