One of the least affordable US housing markets in decades is freezing residential real estate sales and shutting out a generation of aspiring homeowners

One of the least affordable US housing markets in decades is freezing residential real estate sales and shutting out a generation of aspiring homeowners.

Despite the ongoing crisis affecting the housing market, one group remains largely unaffected: the wealthy.

Overall, it's been a challenging key selling season in the U.S. New home sales slightly declined in June and fell well short of expectations following a 15% drop in May. Transactions for previously owned properties also fell for the fourth consecutive month.

The only bright spot in the market is luxury homes, with sales of properties valued over $1 million increasing in June, according to the National Association of Realtors. This trend is easy to understand. With the 30-year fixed mortgage rate hovering around 6.8%—a significant increase from around 3% between late 2019 and early 2022—those who need to borrow are now paying much more for the same home than they would have just a few years ago.

However, affluent buyers aren't concerned because they can pay in cash.

“I can’t remember the last time I heard a buyer talk about financing,” said Lisa Rooks Morris, a luxury real estate agent at Douglas Elliman in Sarasota, Florida. “They all come in with cash.”

This has led to a boom in the high-end real estate market, pushing the stock price of the U.S.'s largest luxury homebuilder, Toll Brothers Inc., to new heights. The company reported stronger-than-expected orders in its fiscal second-quarter earnings report in May and raised its full-year delivery guidance. Toll Brothers' shares are trading near a record high, having risen about 160% since the beginning of 2023, making them one of the top gainers in the S&P Midcap 400 Index during this period and the second-best performing publicly traded U.S. builder in the past six months.

“Historically, higher-priced homes are the first to feel the impact when interest rates rise,” said Ali Wolf, chief economist for Zonda. “We aren’t seeing that today. High home equity and a strong stock market have provided a buffer against rising interest rates for wealthier Americans.”

As of the end of the first quarter, 45% of U.S. high-end homebuyers used all cash, the highest percentage in at least a decade, according to data from Redfin. Well-off buyers are tapping into well-padded stock portfolios, selling long-term commercial real estate holdings, and using newly inherited wealth to fund purchases.

In contrast, entry-level buyers rely on personal savings and income, which haven't kept pace with inflation. For lower-income borrowers, the challenges go beyond rising mortgage rates to securing loan approval, as delinquencies on credit cards and auto loans are on the rise.

“The bifurcation we’re seeing in the housing market is emblematic of the wider bifurcation we’re seeing in the economy,” said Ben Ayers, senior economist at Nationwide. Asset values in the U.S. are surging, and “while many folks are cashing in on that, on the other end of the spectrum, people are just getting by.”

Wealthy buyers are returning to Black Diamond, a pandemic boomtown more than 30 miles south of Seattle, Washington. At The Regency at Ten Trails, a Toll Brothers' active adult community in the former coal mining town, prices start at $600,000, but the most popular models, which have about 2,000 square feet (186 square meters), are priced above $1 million. More than half of the buyers are paying cash, according to Toll Brothers, and sales agent Kristi Brewer has noticed an uptick in demand in recent months.

In Florida, Morris sold a newly constructed home for $7.75 million earlier this year, just 72 hours after listing it. The difference between now and the frenzy during the COVID-19 pandemic, she said, is an abundance of quality inventory.

“Now you have the time to actually contemplate, shop, and negotiate,” Morris noted, which many buyers couldn’t do during the pandemic bidding wars.

The homebuilding industry recognizes the need for lower-cost housing, but the challenge lies in achieving this in an environment where the costs of land, labor, and materials have all increased.

For example, the active-adult segment is growing rapidly for Houston-based David Weekley Homes, one of the nation's largest privately held builders. However, the company is struggling to produce homes that can be sold for less than $400,000 due to rising costs, according to President Chris Weekley.