Home Front by Budge Huskey: Luxury market growth could continue in 2022
With any new year comes the natural reflection on the one past, as well as thoughts about what the future holds. And in the world of real estate, it also heralds the release of the latest Global Luxury Market Report from Sotheby’s International Realty. Several points are shared below from the publication, including my own contributions, as well as additional personal observations of the luxury market from our global advisors.
Real estate proved the sector of the economy with the most rapid recovery from the economic crisis generated by the pandemic. The rebound was evident across all residential real estate classes, locations, and price ranges, yet the greatest surge was present 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 with the approximately 20% change in total existing home sales.
In both the vacation home market and overall real estate market, one fact was evident over the last eighteen months. The higher the sales price, the higher the percentage in year-over-year sales. The explosion of activity was no doubt an acceleration of choices stemming from the pandemic and the concept of remote work, yet was ultimately fostered by the record-setting level of household wealth in the U.S. driven by heightened asset values in an accommodative fiscal environment.
And while markets across the country benefited from record activity, according to Philip White, the CEO of Sotheby’s International Realty, Florida was “the hottest market in the country.” We certainly agree. Other trends or projections are noted in the report or are evident from our daily interactions with clients from around the country and the world.
Clearly there are more moves among the affluent influenced by national or state tax policies, with the distinctions serving as attractants or repellants. Most moves are simply from one state to another in the country, an event which would no doubt be accelerated with the introduction of proposals for a true wealth tax on the total value of assets floated by some.
Beyond the borders, however, there is increasing talk of more wealthy people denouncing their U.S. citizenship in order to obtain residency in one of the many tax haven destinations around the globe such as the Bahamas or Cayman Islands. In fact, the number electing this path reached an all-time high in 2020 (2021 figures are not yet known). On the horizon, the current 37% top tax rate will increase to 39.6% in 2026. Considerable focus is on the tax implications under President Joe Biden’s proposed plans, yet in reality the proposed surcharge would affect only .02% of Americans. In the end, such moves appear to be driven as much by political perspectives as economic risk.
Millennials are representing an ever-increasing share of the luxury market, with an estimated 4.8 million millennials turning 30 in 2021 and entering their prime home buying years. Some will be self-made, yet most will utilize wealth being transferred from parents or other relatives. Third-party sources suggest a massive wealth transfer of over $70 trillion in the next twenty-five years, with undoubtedly much finding its way into real estate. In the interim, more young adults are purchasing with a co-borrower over 55 years of age. It is becoming ever so common to see relatively young families buying many of the area’s most expensive properties.
The recent spike in inflation and impact on treasury yields and the stock market have yet to fully reveal on real estate sentiment, but interest rates are expected to be at 4% by the end of the year on a 30-year fixed loan, according to the Mortgage Banker’s Association. This rise will exacerbate the challenges for many first-time buyers, who are already struggling to compete, yet buyers paying in cash or using a securities backed loan, a common strategy among the affluent, will be largely insulated from this trend. In the end, high net worth decisions regarding such investments are more driven by buyers’ assessment of the future environment than their current bank balances. Most know, however, that luxury properties are generally safe investments over the long run. “If you look over the course of decades and centuries, luxury real estate – with all its ups and downs – has held value and even grown in value” according to Jonathan Woloshin of UBS Wealth Management.
This rise of luxury purchases has also translated to unprecedented growth in high-end residential construction projects in the most desirable markets. Extending from traditional hotel management, companies such as The Ritz-Carlton, Four Seasons, St. Regis and others in the hotel space are extending their iconic brands to more residential condominium communities in Florida and beyond. Their success has spurred the interest of non-hotel brands from the fashion industry and others to enter the ring as well. On the Gulf Coast, no less than four such branded projects are underway that are breaking through traditional thoughts of value limits within the respective markets.
In the more moderate resort home sector, the U.S government rolled back a policy meant to limit Fannie Mae and Freddie Mac’s ability to purchase loans for new investment properties, which means lower rates on these transactions than otherwise in the short term. Undoubtedly, some second home demand was pulled forward over these last two years, but there is every indication the attraction will remain strong in 2022.
Of course, in every other class of real estate, buyer demand is outpacing supply. Across the country, standing inventories are at three months based on the rate of sales. Along the Gulf Coast from Marco Island through Tampa Bay, that figure drops to below one month. Never has there been such an imbalance in our markets, and there is little on the horizon to suggest a change is coming soon. The result will be fewer total sales, and yet the simple economics of supply and demand implies no negative pressure on prices. Appreciation will slow yet continue its consistent march. Accordingly, an ever-higher percentage of homes will fall into the category of luxury, and therefore a larger share will be owned by the affluent.
With an eventual return to normalcy, there was an expectation that many who fled urban areas for the suburbs or resort markets would return for the cultural attraction of city life, something we are already witnessing. Yet most are not electing to sell their second property and instead retaining for seasonal use or as a rental. Therefore, one may not anticipate this group proving a significant source of additional inventory entering the market during the transition.
Many other areas are touched on in the report, such as the trend toward sustainability in luxury housing and the increase of cryptocurrencies in purchases. In the end, however, the overarching takeaway is the explosion of the luxury market in the past two years is on course to continue in 2022 and beyond. Read the full report at: sothebysrealty.com/luxury-outlook-2022.
Budge Huskey is chief executive officer of Premier Sotheby’s International Realty.