- Luxury home prices are seeing the smallest gains in nearly two years
- High-end homebuilder Toll Brothers reports a sharp 13 percent annual drop in the number of signed contracts for homes in its fiscal fourth quarter
- Toll's CEO blames the slowdown squarely on higher mortgage interest rates and on the fact that negative housing numbers were being widely reported. Others blame serious weakness in affordability.
The heat in housing demand is cooling across the nation and across most price points, but luxury is really feeling the chill.
High-end homebuilder Toll Brothers reported a sharp 13 percent annual drop in the number of signed contracts for homes in its fiscal fourth quarter. It also reported a 9.3 percent cancellation rate, up from 7.9 percent one year ago. Toll's average sale price in the quarter was $906,000 compared with the national average price of $294,200 in October, according to the National Association of Realtors.
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Toll's CEO blamed the slowdown squarely on higher mortgage interest rates and on the fact that negative housing numbers were being widely reported.
"In November, we saw the market soften further, which we attribute to the cumulative impact of rising interest rates and the effect on buyer sentiment of well-publicized reports of a housing slowdown," CEO Douglas Yearley Jr. said in a statement.
He noted that the same thing happened in 2013, when the mortgage rates jumped due to the "taper tantrum" — the result of the Federal Reserve indicating it would reduce the amount of money it was funneling into the economy. Home sales fell when rates rose and only recovered, however, when interest rates fell back.
"We've been seeing a slowdown in housing all year, but this is the first time Toll Brothers really acknowledged it in a press release," said Peter Boockvar, chief investment officer with Bleakley Advisory Group. "I think up to this point they've felt like they're somewhat immune being on the upper end of the market where people are less sensitive to changes in mortgage rates. So that's what really stuck out to me is the acknowledgement of something we've known all year that it's now affecting their customer base."
The more recent housing reports to which Yearley alluded have come from every corner of the housing industry: homebuilders, Realtors, the U.S. Census and those who finance home loans. Most point to weaker affordability, which is now at a decade low according to several sources.
Fannie Mae's monthly housing survey in November showed housing sentiment among consumers falling to the lowest level in a year. Its chief economist pointed to overheated home prices from the last two years, when there was a critical shortage of homes for sale, amid very strong demand. Bidding wars were the norm. Those high prices, combined with higher mortgage rates in the fall, resulted in weaker affordability. Consumers, he noted, do not believe housing is as good an investment as it has been recently, because prices are pulling back.
"The contrast between the survey's findings of weak home buying sentiment and overall economic optimism mirrors what we're seeing in the broader economy," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "While economic growth posted the fastest back-to-back pace in four years in the third quarter, residential investment declined for the third consecutive quarter, a first for the current expansion."
Luxury home prices rose 3.2 percent annually in the third quarter of this year to an average of $1.7 million, according to Redfin, a real estate brokerage. That is the lowest gain since the end of 2016. Redfin defines a home as luxury if its sale price is among the top 5 percent of values.
The average sale price for the rest of the market nationally was $343,000, a 3.6 percent gain compared with the third quarter of 2017. That, too, was a decrease from the 5.1 percent annual price growth seen in the second quarter.
Redfin's chief economist blamed a decline in high-growth stocks that started in the quarter, specifically the so-called FANG tech stocks.
"This impacts the belief that the overall economy will grow," said Redfin's chief economist Daryl Fairweather.
Homebuilder sentiment also fell in November to the lowest level in more than two years, according to the National Association of Home Builders. Economists there did not cite widespread reports of weakness, but, again, weaker affordability.
"Builders report that they continue to see signs of consumer demand for new homes but that customers are taking a pause due to concerns over rising interest rates and home prices," said NAHB Chairman Randy Noel, a builder from LaPlace, Louisiana.
Builders themselves reported fewer buyers in their showrooms and fewer current sales. They therefore lowered their expectations for sales over the next six months.
Across all housing price points nationally, a strong 79 percent of consumers surveyed by the homebuilders association said they could afford fewer than half of the homes available for sale.
Toll's CEO pointed specifically to California, where homes are most expensive and sales have therefore weakened dramatically.
"California has seen the biggest decline. Significant price appreciation over the past few years, fewer foreign buyers in certain communities, and the impact of rising interest rates all contributed to this slowdown," said Yearley.
California home sales have fallen for six straight months and were down nearly 8 percent annually in October, the latest reading from the California Association of Realtors. Its president blamed weaker affordability as well.
"Homebuyers continued to put their homeownership plans on hold in October and wait out the market," said Jared Martin, the California association's president. "With mortgage rates at seven-year highs making homeownership more expensive and home prices beginning to flatten, this phenomenon will likely continue for the near term as buyers wait for further price adjustments and for interest rates to stabilize."
Of course all real estate is local, and that holds true even for luxury homes. In Manhattan, sale prices of luxury co-ops and condominiums fell 3.2 percent annually to $9,299, 635, according to Douglas Elliman's quarterly report by Miller Samuel Real Estate Appraisers. It defines luxury as the top 10 percent of the market's values. Luxury sales were down a steep 11 percent compared with the third quarter of 2017. Weakness in the New York City market, according to several experts, is due in part to the Republican tax overhaul that limited state and local deductions for real estate.