In 2023, the U.S. ultra-luxury real estate market experienced significant shifts in sales and financing for affluent homebuyers as well as investors, developers and short-term rental operators. Understanding these trends and challenges will help both commercial and residential mortgage originators navigate and capitalize on this complex, rapidly growing landscape.
Despite higher interest rates, the continued influx of personal wealth worldwide buoyed the ultra-luxury market of properties priced at $10 million and over nationwide. Additionally, international buyers continued to pursue property investments in warm-weather states including Florida and Texas.
While 2023 saw a 15.3% decrease in overall ultra-luxury sales, the 1,560 sales of homes priced at $10 million totaled $26.8 billion and outperformed the general housing market, which dropped by 19% in 2023 according to the National Association of Realtors (NAR). Overall, ultra-luxury housing demonstrated remarkable resilience throughout 2023 and the initial months of 2024, despite concerns about a sluggish economy and challenges posed by interest rates. The forecast for the remainder of the year remains susceptible to various factors, such as sentiment surrounding the presidential election and potential significant fluctuations in mortgage rates.
Exclusivity and desirability
Ultra-luxury sales set new records in certain markets, according to Compass Luxury’s 2023 Ultra-Luxury Report. Manhattan retained its position as the leader in ultra-luxury deals for the second consecutive year, followed by Greater Los Angeles and select Florida counties. Boston witnessed a remarkable surge in sales of $10 million or more, tripling from the previous year.
Other markets such as greater Palm Springs, California; Jackson Hole, Wyoming; and Martha’s Vineyard, Massachusetts, also saw substantial year-over-year growth. Some areas, like Los Angeles, experienced a significant drop in ultra-luxury home sales in 2023. Rising interest rates, the Hollywood strike, and the newly enforced 5.5% mansion tax on properties above $10 million created a perfect storm for luxury Los Angeles real estate. Additionally, in some pockets of the country that saw the greatest influx of remote workers during the pandemic area there are emerging indications hinting at a corrective trend. For example, in Austin and Phoenix where prices skyrocketed during COVID-19, Realtor.com data points to signs of pricing returning to more realistic levels.
Last year saw a big improvement over 2022, a challenging year for luxury home sales when the nation experienced the largest year-over-year drop ever recorded by Redfin. The luxury-home market saw a staggering 38.1% year-over-year decline in the three months ending Nov. 30, 2022.
Investors, developers, fix-and-flip, short-term rental and bridge lenders are also increasingly shifting capital to the ultra-luxury sector for several reasons. They are encouraged by the fact that ultra-luxury real estate has proven to be less volatile and more resilient than other types of real estate during economic downturns. Additionally, land prices and construction costs have skyrocketed, which makes developers less likely to invest in small, starter homes and aim for the high-end housing market instead. Investors have also successfully created cash flow opportunities from these unique properties by creating luxury vacation rentals.
Lastly, ultra-luxury homes appreciate faster than average properties, due to their scarcity, exclusivity and desirability. Looking ahead to 2024, the outlook for ultra-luxury homes remains positive, with a record increase in global personal wealth expected to drive purchases of the most expensive properties.
Collateral and liquidity
Financing options for luxury properties have evolved as well. Higher interest rates led to affluent personal homebuyers in the U.S. relying on all-cash transactions at a rate of one in four transactions, according to NAR data.
This trend underscores a market landscape heavily tilted in favor of buyers armed with immediate cash, as mortgage-backed transactions experienced a significant year-over-year decline, according to Redfin. Affluent Americans and investors can sidestep the impact of soaring mortgage rates by opting for all-cash purchases. Higher interest rates also led luxury real estate buyers to use margin loans, stock portfolio loans and private bank loans to fund their purchases.
Developers and investors, operating with more limited liquidity than affluent buyers and seeking to generate higher investment returns, typically rely on private financing. Private lenders often present specialized financing options for high-value properties, with tailored solutions offering advantages such as speed to closing, flexible terms and fewer regulatory controls. This can be crucial in competitive real estate markets where opportunities move quickly.
Commercial bridge lenders are increasingly willing to finance non-owner-occupied ultra-luxury properties. Their focus is more heavily weighted toward the value of the collateral rather than strict credit score requirements, making them more willing to lend on unique properties that may not meet traditional criteria.
While traditional lenders evaluate creditworthiness by looking into income, assets, debts and credit history, asset-based bridge lenders focus more on the value of the collateral as well as the strength and liquidity of the submarket. Are ultra-luxury home values in the area rising, falling or flat? Do these homes move quickly on the market or sit idle for several years? As a result, they can waive weaknesses in the borrower credit profile to achieve loan approval.
Given the more limited cash-flow prospects of these properties via short-term rental or rentals for the movie and television industry, leverage is usually limited to 65% to 70%. Terms can include flexible prepayment options to allow for investors opportunity to take advantage of opportunistic sales while providing a one- to two-year term with built-in interest reserves providing the necessary time and built-in cash flow to complete a project, execute the often-lengthy marketing process and identify the right unique affluent end buyer. Rates are commensurate with commercial bridge loans, typically in the high single to low double-digit territory.
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The luxury housing investment market offers opportunities for investors and developers and the mortgage originators who help them. Credit Suisse projects that personal wealth will increase by 36% to $169 trillion by 2026. The explosion in personal wealth has translated to an influx of luxury buyers and an increase in price points in high-end property markets Understanding trends, challenges and financing options is crucial for success in this dynamic landscape.
