Is the Home Surplus Foretelling a Recession?
The housing market cooled at the beginning of the year, but the trend had more to do with a shift in interest rates than
“Historically, a slowdown in luxury homes sales is typically viewed as a precursor to a slowdown in the housing market as a whole,” Yin Ho, an associate in the real estate team of international law firm Withers, tells GlobeSt.com. “The housing market through 2019 has already cooled measurably, but this could have been attributed to the rising interest rates in the early part of the year—which have since lowered—the effects of the Tax Cuts and Jobs Act of 2017, and general skepticism surrounding economic growth.”
In addition, housing sales have slowed for luxury home in particular, and Ho reports a surplus of mansions on the market. “Luxury home sales represent only a small portion of the housing market, and the surplus issue in Los Angeles is so unique, that I would caution how this impact bears on the rest of the market,” he adds.
Overdevelopment has also contributed to the luxury home surplus on the market. Developers under construction on active projects are now rushing to finish quickly, and the construction pipeline has stalled. “For developers who have already financed their projects and have started construction, they have little option but to finish as fast as possible and bring their project to the market,” says Ho. “Experienced developers who forecasted and priced their projects conservatively and accurately are more likely to absorb the effects of a slowing market, or price reductions, which are now the norm. More speculative developers who entered the market after the peak or without sufficient experience are at a greater risk. Facing a slower market, these developers may be forced to adjust their budgets, scale back on offered amenities, or scale back on finish materials.”
Although construction activity has slowed down and interest rates have rebounded, Ho doesn’t expect the market for luxury homes to improve. “The pool of buyers looking to purchase luxury homes in Los Angeles has not changed, except that buyers are now in a superior bargaining position because of the surplus and cool or neutral status of the housing market,” he says. “I think we will continue to see the volume of luxury sales occur at slightly less as the previous year, but that gross sales will decrease due to unrealistic asking prices. The difference between sophisticated developers and inexperienced or speculative developers will be apparent and this competition will inevitably force the latter to reduce asking prices. I don’t see the surplus landscape changing anytime soon. There is going to be a higher than normal level of supply for the foreseeable future.”