Starter Homes Are Piling Up While Luxury Homes Fly Off the Market

The U.S. housing market is splitting in two. Luxury homes are selling at a faster pace than a year ago, with shrinking supply and growing bidding wars. Starter homes are piling up on the market, sitting longer and drawing price cuts as buyers fail to show up. The pattern mirrors a broader economic divide, with stock market gains supporting demand at the high end while rising everyday costs weigh on potential starter-home buyers.

Starter homes are defined for this analysis as those in the 5th to 35th percentile of home values in a given region. Nationally, the typical starter home is worth about $202,000, up 2.3% from a year ago. Luxury homes are those in the top 5% of home values in a given region. The typical luxury home is worth about $1.9 million, up 3.1% from a year ago.

Across nearly every metric, conditions are moving in opposite directions in these two segments. Inventory for starter homes rose 4.5% year over year in June, while luxury inventory fell 5.2%. Price cuts were more common on starter homes: 25% of starter homes cut their price in June, compared to 20.6% of luxury listings.

Despite friendlier conditions at the more-affordable end of the market, sales are down, while the inverse is true at the top of the market. Starter-home sales fell 5.4% year over year in May, the latest month with complete data. Luxury sales grew 6.2% over the same period.

The divergence is sharpest in San Francisco. Luxury sales across the metro area surged 21.6% year over year in May, while luxury inventory fell sharply and fewer listings cut their price. Starter-home buyers are hanging back: sales slipped 1.2% year over year in May, while more than twice as many starter-home sellers cut their price in June (22.2%) to try to entice buyers off the sidelines than did luxury buyers (9.4%).

What’s holding buyers back

Starter-home buyers today have more options, more negotiating power and sellers who are more willing to deal. The challenge is that the same financial pressures making it harder to save for a down payment are also making it harder to take advantage of that opportunity. Hiring has slowed, inflation remains elevated and consumer sentiment has fallen to historic lows. In conditions like these, households tend to delay major financial commitments like a home purchase.

Higher-income households, however, are facing a very different set of circumstances. Stock market gains have bolstered purchasing power at the top of the income spectrum, keeping demand for luxury homes strong.

This doesn't mean death and destruction in the retail marketplace. It does mean that locally, you might be able to find opportunity using a niche YOU feel comfortable with.

I am 2/3 the way thru a 1031 exchange for example. Property one has sold to a first-time home buyer. Here if the place is truly move in ready, they move quickly. I had named three replacements. We closed on a ranch last week that was an estate.

This Friday or early next week we will close on Another ranch we picked up via in person auction. The place sold for 130K and will rent out for $1,100. So, the numbers are not a grand slam. Coupling those numbers however with the taxes that are getting kicked down the line and that is an extra $48,000 towards that $130,000 purchase price. The effective price is down to $82,000. That is real savings for this coupon clipper.

This week our largest seasonal tax bills start coming via the snail mail. I'll be sending out another 1,100 post cards over the next two weeks. Just out fishing for another future replacement property.

This report isn't a good thing for our little ol' seasonal vacation get away location where we call home. IT means local money isn't doing the trick as well as it should in tourism season. What will happen when that lake effect snow starts coming? So I am starting to collect some cash

If you look at housing starts, particularly at the low-end, they were off the charts the last couple of years. History repeats itself, this boom bust cycle in housing has been going on forever. Give it a few years and the market will absorb the low-end and we'll be back to McMansions on the chopping block again.

While I like to watch the trends, they only marginally affect me. I don't typically invest in MLS properties where these stats play out. I work the off-market properties which is where I find deals. This current trend helps a little because it devalues the little old beat-up starter home that has been my bread and butter over the years.

All I see in this is that the "starter home" people are still renting, so more tenants looking for rentals.

If you are a responsible lender, but your applicants are a "minority" or "Low Income Borrowers", then you have to throw away the strict standards and issue them the loan, with as little as 3% down payment and a FICO score no grater than 620. And you don't need 3 times the income to qualify, but a substantial amount less.

A friend tried to buy the house next door. With over 2 million in retirement investments, a house paid off and around 100 grand in certificate of deposit products, he and his wife were turned down. A couple coming into retirement within the next couple of years is considered a RISKY LOAN.

The family that purchased the house next door was Note Married, had a mixture to trouble maker kids, in and out of prison. Had almost no savings. Had less than $25,000 in retirement accounts combined and had poor credit. But got the loan under government program designed to help irresponsible borrowers become home owners.