It May Be Cheaper to Buy a Luxury Home Than a Starter Home — Here’s Why

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It’s no surprise that the housing market has been a difficult one recently, as inflation, soaring rates and short supply made for a bad combination for potential homebuyers. What may come as a surprise, however, is that buying a luxury home might be more affordable than buying a so-called starter one.

Indeed, a Realtor.com report found that while starter homes — which it defines as all two-bedroom listings — seem unaffected by the current correction in the housing market, luxury homes have been feeling the full effects. This is partly due to the fact that starter homes have been in constant demand, creating bidding wars due to their limited supply. According to Realtor.com, these homes have outpaced the price growth in other parts of the real estate market and ended 2022 with a staggering 15% year-over-year price increase.

The price trajectory for luxury homes — which Realtor.com defines as the most expensive 10% of homes in any given market — however, went the opposite way.

Their prices “skyrocketed as the stock market surged and buyers sought more living space” during the pandemic: in the middle of 2021, there was a  40% year-over-year price increase for luxury homes but by the end of the year, the luxury market receded as recession fears increased. And in 2022, luxury homes have seen modest-to-stagnant price growth, around 2.5%, ending the year close to flat.

For example, a luxury home in Salt Lake City, Utah, was priced at $1.15 million-plus in December 2022, and the change from the 3-year price peak was down 28.1%.
Meanwhile, a listing for a starter home in Denver, Colorado, was priced at $349,900 in December 2022, a 10.8% year-over-year price change and a whopping 43.7% increase in the 3-year price change.

“You see a correlation between the stock market and real estate, simply because stocks make up a greater portion of the financial portfolios of high-net-worth buyers,” Danielle Hale, chief economist at Realtor.com, said in the report.

As for starter homes, different factors are affecting that segment of the market. “If you think of luxury home purchases as discretionary, starter home purchases are almost the opposite,” Hale said in the report. “It’s more about timing and strategy.” These findings are also in line with a Redfin report, which found that sales of luxury homes decreased 38.1% year-over-year during the three months ending Nov. 30, 2022, representing the biggest decline on record.

[credit: Yaёl Bizouati-Kennedy, GoBankingRates.com]