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What you need to know before investing in a luxury home
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·3 min read

Is Now the Right Time to Buy a Luxury Home?

A recent surge in luxury home values, coupled with higher mortgage rates, has left many potential buyers wondering if they should wait before making a purchase.

Our Perspective: Seize the Opportunity

Despite the higher prices and rates, we believe there is significant value in the luxury housing market across the U.S. The dynamics of this market have evolved in ways that aren't always well understood, presenting opportunities for savvy buyers.

Understanding the Luxury Market

The luxury housing market, defined as the top 10% of home values, operates differently from the overall market. While general housing prices are influenced by mortgage rates, luxury home values are driven by changes in wealth and total net worth. The post-pandemic period has seen substantial increases in the wealth of top-income households, alongside a rise in private aviation and remote work, all of which have contributed to significant gains in luxury housing prices.

Diverse Market Trends

Although non-luxury home prices have also increased, they have done so at a slower pace. From Q4 2019 to Q4 2023, luxury home prices surged by 65%, compared to a 40% increase in the non-luxury sector. These trends vary by location, influenced by factors like tax rates, regulations, and domestic migration. For instance, median prices in Miami, Florida, jumped by 56%, whereas New York City saw a 28% increase.

Sources: Miller Samuel, National Association of Realtors, Haver Analytics. Data as of December 31, 2023. *Note: luxury data and non-luxury data are calculated using the average of 4 metros (Manhattan, Miami Beach, St. Petersburg FL, Long Island NY). Luxury refers to the top 10% of homes by sales price whereas non-luxury refers to the bottom 90% of homes by sales price.

Luxury vs. Non-Luxury Market Dynamics

Our analysis reveals no significant correlation between mortgage rates and luxury home prices, unlike the non-luxury market where higher rates tend to suppress prices. For the luxury segment, wealth changes have a much more substantial impact. Data shows that changes in wealth affect luxury home values twice as much as non-luxury ones. Over the past decade, U.S. wealth has increased dramatically, further fueling luxury home prices.

Source: Federal Reserve Board, Haver Analytics; data as of December 31, 2023.

The Role of Remote Work and Private Aviation

The rise of remote work and increased use of private jets have transformed luxury home buying. Remote work, now accounting for 28% of full paid days, and a 22% increase in private jet flight hours since pre-pandemic times have made owning multiple homes more feasible and attractive. This shift means potential buyers are more willing to invest in properties they can access easily and work from as needed.

Enhanced Luxury Amenities

The luxury housing market is also driven by new, high-end amenities. Properties now often include features like Michelin-starred restaurants and private car elevators, pushing prices even higher.

Strategic Planning for Your Luxury Home Purchase

As luxury home prices continue to rise, having a well-thought-out strategy is crucial. Consider these key aspects:

  • Tax Efficiency: Ensure you’re using tax-efficient strategies to increase the deductibility of your mortgage and lower your effective interest rate.

  • Interest Rates: Plan for the likelihood of falling interest rates. This might influence your choice of mortgage product, such as opting for an Adjustable Rate Mortgage.

  • Ownership Structure: Choose the optimal way to hold title to your home and structure your borrowing to impact privacy, liability, and estate planning positively.

  • Estate Planning: Factor in how owning a luxury home will affect your estate, including tax implications and plans for property disposition.

Conclusion: The Time is Right

Despite higher prices, now is a good time to invest in a luxury home. The market dynamics support continued growth, and there’s no bubble in sight. Consult with your financial team to develop the best strategy for your luxury home purchase.

Source: J.P Morgan Private Bank