The U.S. housing market is trending in two different directions as a new report from Zillow finds that while demand for luxury homes is surging, starter home sales are softening with growing inventory.
Zillow's data defines starter homes as those in the 5th to 35th percentile of home values in a given region, whereas luxury homes are in the top 5% of a region's home values. Around the country, the typical starter home is worth about $202,000, an increase of 2.3% from a year ago, while the typical luxury home is worth about $1.9 million, up 3.1% from last year.
Inventory for starter homes is up 4.5% year over year in June, while it fell 5.2% for luxury homes. Price cuts were also more common for starter homes, of which 25% had price cuts in June, while 20.6% of luxury home listings had price cuts.
"The best time to buy a home is when nobody else wants to," said Kara Ng, senior economist at Zillow. "Starter home buyers today have more options, more negotiating power, and sellers who are more willing to deal."
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Would-be buyers of starter homes are facing a difficult economic environment, with elevated inflation squeezing household budgets, low levels of consumer sentiment and the job market slowing.
All of those factors tend to cause households to delay major financial commitments, like purchasing a new home, despite the opportunity available to buyers, Zillow's report noted.
"The challenge is that the same financial pressures making it harder to save for a down payment are also making it harder to take advantage of that opportunity," Ng said.
THESE AMERICAN CITIES ARE TRENDING TOWARD A BUYER'S MARKET
The situation is very different for higher-income households, as gains in the stock market have bolstered their purchasing power and helped stoke demand for luxury homes.
The divergence between the two ends of the market is the most significant in San Francisco, which saw luxury home sales surge 21.6% year over year in May, with inventory falling sharply and fewer listings cutting prices.
STARTER HOME AFFORDABILITY IS CRAWLING BACK. THESE REGIONS ARE BEST FOR FIRST-TIME BUYERS
By contrast, starter home sales in the San Francisco metro area declined 1.2% year over year in May, while more than twice as many price cuts were recorded – with 22.2% of starter home listings cutting prices in June compared with 9.4% of luxury homes.
Markets which saw the largest year-over-year increases in starter homes sold as of May were Louisville (19.3%); New Orleans (12.9%); San Jose, California, (10.5%); and Miami (8.2%).
The hottest markets for luxury homes sold year over year as of May were Memphis (42.4%); Nashville (40.8%); Cincinnati (32.6%); Austin (27.7%); and Birmingham, Alabama (25%).
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