Diana Olick CNBC August 05, 2016
A larger-than-expected employment gain in July could boost the recovery in prices for luxury U.S. homes.
Stock market volatility caused a drop in luxury values in the first quarter of this year, but prices recovered slightly in the second quarter, rising 0.8 percent annually, according to Redfin, a real estate brokerage. Redfin defines a home as luxury if it is among the top 5 percent most-expensive homes sold in each city.
The second quarter didn't start very well for stocks and they plunged after the Brexit vote in June, but the market has rebounded quite significantly since then. Friday's employment beat could boost the market even more, adding fuel to the recovery in luxury home prices.
The luxury end of the housing market is much more sensitive to stock market moves, as higher net worth homebuyers are more invested in equities than the general population. Of course, as with everything in real estate, the sensitivity is local.
"For the most part, the housing market can stomach large swings in the stock market," said Redfin's chief economist, Nela Richardson. "But there are markets, like Silicon Valley, that become queasy when the equity market is this volatile. In these areas, homebuyers' wealth and down payments are more closely tied to stocks. In addition, foreign buyers who normally flock to these cities are also highly sensitive to global volatility."
Luxury home prices fell 11 percent in San Francisco and 4 percent in Bellevue, Washington, where wealth is more closely tied to tech stocks. Luxury prices in the Hamptons, New York's swankiest vacation venue, fell 2.3 percent in the second quarter annually, but sales rose by more than 20 percent, according to Jonathan Miller of accounting firm Miller Samuels for the Elliman Report.
The improving jobs picture, however, makes it more likely that theFederal Reserve will raise interest rates, which, while not directly correlated, could push mortgage rates higher. That is a negative for most homebuyers, but not necessarily for those on the highest end.
"Luxury buyers aren't motivated by mortgage rates. As evidence, luxury home prices were sluggish in the second quarter even though rates were near rock bottom levels. Even if Friday's jobs report makes a Fed rate hike more likely, it won't move the needle for high-end buyers," noted Richardson. "What matters to luxury buyers is a solid investment opportunity that pays off down the road. If the jobs numbers are a harbinger of a healthy economy in Q3, we could see a pickup in the luxury market that rates alone couldn't pull off by themselves."
Of course not everyone is so certain that the U.S. central bank will raise rates. There is also the possibility that bond yields, which mortgage rates loosely follow, could move lower, reacting to other global economic factors.
"Rate hike odds by year-end shifted from 32 percent to 40 percent after the jobs number. For September it went from 18 percent to 22 percent," wrote Peter Boockvar, managing director at The Lindsey Group. "I believe these modest expectations notwithstanding, (Friday's) data continues to point to the quote I took from a friend in referring to the Fed as the Boy Who Cried Rate Hike."
And politics will also play into luxury prices as the presidential election coincides with the housing market shift to the slower season this fall. Luxury prices in Washington, D.C., have been softening, and were down 4 percent in the second quarter, according to Redfin. Politics overseas, however, may be adding to prices in markets favored by foreign investors. Miami Beach, Florida, luxury prices soared nearly 22 percent in the quarter.