This past summer, luxury real estate sales saw the biggest decline in a decade. Sales dropped 28.1% year-over-year (YOY) from June to August 2022. And California, the state with the largest luxury home sales decline, dropped 63.9% YOY.
Clearly, there is a growing problem in real estate of too many big houses to sell. Large houses sit on the market for longer, have fewer interested buyers, and end up selling for less than they may be worth.
If you own a luxury home, you may have experienced these real estate issues first-hand. So, you may wonder: why is luxury real estate so difficult to turnover these days?
We created this guide to answer that question. Plus, we will explain the luxury home co-ownership model, which may be the solution you have been searching for to finally sell your big house.
Why Aren't Too Many Big Houses Selling in 2022?
After the 2008 recession, luxury homebuilding skyrocketed. Dubbed "ultraluxury," the highest end of the real estate market featured exclusive amenities such as in-home theaters, spas, and even hair salons.
But before the turn of the millennia, there were hardly any home sales valued at more than $50 million. The real estate trends quickly changed, and in 2014 alone, there were 23 home sales worth $50 million or more.
Since the middle of the 2010s, luxury and ultraluxury home sales have not dropped below 12. Yet, while the luxury market seems to be experiencing healthy sales, the market for large luxury homes has stagnated.
Historically, luxury home sales have been less affected by the economy. That is because the buyer pool consists mostly of independently wealthy individuals. So why have large home sales bottomed out over the last decade?
Experts point to millennial real estate buying behaviors, rising mortgage interest rates, and limited large home supply as the most likely culprits. Learn more about each of these factors below.
Millennials Have Different Preferences When Buying a House
Baby Boomers were the age group predominately driving luxury home building and buying after the recession. There are over 76 million baby boomers (1/4 of the total US population), according to the US Census Bureau.
Of this age group, the majority are of retirement age. And by 2029, the youngest of US baby boomers will turn 65.
As you can imagine, these individuals are looking to downsize. The large homes they built during the 2010s are now too large and too far away from city centers to maintain.
But at the same time, millennial buyers are not interested in these sprawling mansions. Why? For one, millennials are more money-conscious and practical, and often they are unwilling to shell out millions for space they just do not need.
Millennials prefer smaller homes that are convenient to local jobs, retailers, and parks. They like minimalist living spaces that have everything they need to live comfortably, but nothing more.
Secondly, millennials do not like the more traditional design and architecture styles boomers prefer. Traditional crown molding, contemporary Tuscan architecture, and closed-concept floor plans dominate boomer homes.
Meanwhile, millennials prefer clean lines and modernism. They want open-concept floor plans with little division between living areas. And most of all, millennials want new construction homes to avoid the repairs that come with age.
These two issues are compounded by the fact that millennials are on tighter budgets. This age group is not willing to compromise their practicality and interior design preferences, especially not for the large home price tag.
Mortgage Interest Is Too High to Justify a Vacation Home
Another reason for the cool luxury real estate sales of today is the rising mortgage interest rates. According to Redfin, the average 30-year fixed mortgage has an interest rate of nearly 5.6%.
Consider that the average luxury home costs $5.5 million. That means owners of large homes might see increases in the thousands of dollars range with today's higher mortgage interest rates. The higher a home's price, the greater the effect of interest rates, too.
For example, say you purchase a $10 million home and put 20% down. Your total mortgage would be $8 million. Paying 5.6% on an $8 million mortgage is approximately $45,000 per month.
Considering that only 13% of homebuyers make $200,000 or more per month, that makes for a very small buyer pool, many of whom are millennials who can not justify the price for a boomer-owned home.
Further, the majority of large homeowners purchase with the intent of turning the house into a vacation getaway. They may live in the home for only 46 weeks out of the year.
The homeowner then rents out the home for the remainder of the year. Short-term rental income can be highly lucrative. But the downside is that these renters may not pay the home the respect that the homeowner does.
If the large homeowner chooses not to rent out their second home, they have to justify the monthly mortgage and maintenance fees necessary to keep the home vacant. And many buyers today just can't justify it.
High-End Property Shortages Drive Less Demand
In 2021, luxury home sales saw a temporary surge of nearly 80%, but now, sales are back down. Why? Many experts point to the declining number of luxury homes coming on the market each month.
In Q2 of 2022, luxury home supply dropped by over 12%. Even homebuyers interested in large homes may not be able to find the right choice because of a limited selection.
The cities experiencing the biggest declines in luxury home listings are the California markets of Anaheim (down nearly 39%) and Los Angeles (down over 36%), as well as Miami, Florida (down 33.7%).
So, why are large homeowners so reluctant to sell? One reason is that many luxury homes are selling under asking. Often, large home owners are forced to accept offers that are up to 50% less than asking.
With so much to lose, many homeowners in the high-end real estate market are sitting on their homes and vacation homes. This phenomenon has further exacerbated the state of the luxury real estate market.
Luxury real estate may be a buyer's market in some areas. Yet, limited supply means many people looking to sell their primary homes can not find a new, similar house to move into.
The problem of large house shortages has led to decreased demand in the luxury market. Indeed, the average luxury home stays on the market for 24 days. That is an increase of 16 days from earlier this year in April and May.
Co-Ownership: The Solution to a Growing Problem in Real Estate
Are you trying to sell a big house in 2022? Co-ownership may be the solution to today's luxury housing market crunch. This model makes affording a second home more affordable and speeds up the luxury house sales timeline.
But what is co-ownership, and how does it work? We will answer your co-ownership FAQs next. And if we don't answer one of your questions here, head over to our full FAQ page to learn more about co-ownership and how it can benefit you.
What Is Co-Ownership?
Co-ownership is an increasingly popular home ownership model for people who want to invest in a secondary residence. At Lifestyle Asset Group (LAG), we make it more affordable to do just that.
Up to eight co-owners can decide to invest in one large, luxury home. Each co-owner splits the cost of the house and is allotted a percentage of time to spend in the home each year.
And if one co-owner plans not to use the share of time in the home for one year, LAG will rent the space out for them.
Can You Keep a Fraction of Your Home With Co-Ownership?
When a co-owner purchases their second home through LAG, they can also sell that share through LAG. Again, the fellow co-owners get the first choice to purchase your share. Otherwise, LAG will list the share on our marketplace.
The good news is that owners of large homes can keep a share in their second home. Whether you choose to co-own your home with one friend or multiple strangers, you can still spend time in the home you love for a fraction of the cost.
Who Are Your Fellow Co-Owners?
Another great thing about the co-ownership model is that you never have to worry about disrespectful renters. The co-owners own a stake in the home, meaning they will maintain it as respectfully as you do.
Plus, LAG offers maintenance as a complementary service for investing in one of our properties. That means even if you do rent your share out, you have extra assurance that your vacation home will always be in tip-top shape.
LAG Solves the Growing Problem in Real Estate of Too Many Big Houses
There is a growing problem in real estate of too many big houses sitting on the market for far too long. Millennial buying preferences, rising mortgage rates, and limited supply are all to blame.
The solution? Lifestyle Asset Group can help homeowners with large houses that have sat on the market for far too long. Contact us today to learn more about our innovative approach to luxury home co-ownership.