Luxury home sales defy gravity — and the recession

The housing market continues to surpass records in 2021, with the volatility extending even to what is usually the most steady and (and slow) tier of sales: luxury homes.

Redfin breaks their home sales into five tiers, from the lowest, “most affordable” tier to the highest “luxury” tier of home sales, comprising the highest 5% of home sales. For reference, in Q1 2021, this luxury tier of homes experienced a median sales price of $3.3 million in Los Angeles and $4.7 million in San Francisco.

Editor’s note — firsttuesday regularly reports three tiers of home sales, as reported by Case Shiller. Tiered home sales provide more information, as different tiers of home sales move at different rates over time.

These types of extreme high-tier home sales typically sit for months on the market waiting for a wealthy homebuyer, and often experience price cuts. In contrast, low-tier sales are typically the most volatile. But in 2021, the luxury tier has exploded, with days on market falling:

• 14% to 78 days in Los Angeles;
• 45% to 55 days in Riverside;
• 57% to 33 days in Sacramento;
• 52% to 36 days in San Diego;
• 45% to 16 days in San Francisco; and
• 21% to 19 days in San Jose, according to Redfin.

Further, since Q1 2020, home prices in this luxury tier have increased:

• 3% in Los Angeles;
• 18% in Riverside;
• 18% in Sacramento;
• 13% in San Diego;
• 1% in San Francisco; and
• 9% in San Jose.

While low- and mid-tier homes have suffered from low inventory during the past year, luxury homes have not experienced the same shortage of available homes. The reason is related to the recessionary job losses that have left 1.7 million Californians still jobless as of April 2021. The majority of the jobs lost have occurred in low-paying industries, meaning the low- and mid-tier were most impacted by the recession.

However, the foreclosure moratorium has kept jobless homeowners secure in their homes since March 2020. Thus, a significant chunk of low- and mid-tier homeowners continue to hold onto their homes, despite losing their jobs, since the moratorium allows them to do so. This stasis has helped keep prices afloat, but it has also constrained inventory.

Unfettered by the foreclosure moratorium, luxury homeowners are free to buy and sell, according to Redfin. In fact, the U.S. for-sale inventory of luxury homes is 5% below a year earlier as of Q1 2021, compared to a dramatic 20% inventory cut in the mid tier.

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The rich get richer, but…

The recent successes of the luxury home sale market are more evidence of what many economists have coined as the K-shaped recession and recovery.

Like the shape of the letter “k” suggests, the 2020 recession has impacted different segments of the economy in divergent ways. Household wealth has declined for those who started off in the lower- or middle-income brackets, while it has jumped for high-income households. This is the result of job losses occurring disproportionately in low-paying professions. Further, high-income earners store much of their wealth in the stock market, which has outperformed all expectations following the 2020 crash.

While home prices have increased across all tiers of housing during 2020-2021, there is trouble on the horizon for low- and mid-tier homes when the foreclosure moratorium expires at the end of June 2021.

When the moratorium ends, jobless homeowners who rely on employment income will need to be in good standing in a forbearance program, or they will lose their home. When the distressed sales start to pile on, home prices will falter and dive.

So, while luxury home sales will feel very little effects from the moratorium’s expiration, please remember — luxury homes only represent 5% of the transactions that occur. Therefore, if you are one of the 95% of real estate professionals who rely on regular low-, mid- or high-tier sales to make a living, consider yourselves warned.

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