Luxury Second Home Demand Remains Above Pre-Pandemic Levels

According to data from Pacaso, rising mortgage rates, a weak stock market, and overall economic concerns, particularly regarding the housing market, combined to deter many buyers from purchasing a luxury second home or investment property in the third quarter of 2022, resulting in a 28% quarter-over-quarter decline in mortgage rate locks nationwide.

Luxury second home rate locks were 152% higher in Q3 2022 than they were in Q3 2019, the last reading for the same season before the pandemic.

"The pandemic unleashed unprecedented, unsustainable demand for luxury second homes," said Austin Allison, Co-Founder and CEO of Pacaso. "While market conditions deterred many buyers from making purchases in Q3, mortgage rate locks are still flowing at double the pace from before the pandemic. Remote work has become so prevalent that it's created a new normal for luxury second homes, and we should continue to see elevated demand in historical terms even as market conditions take the froth off."

Each quarter from the third quarter of 2020 through the third quarter of 2022 saw rate locks on luxury second homes clock in at more than double the level in the corresponding quarter of 2019.

Redfin recently reported that sales of non-luxury homes fell the most on record, decreasing 19.5% during the three months ending Aug. 31, slightly outpacing the 19% decline during the three months ending June 30, 2020.

“High-end-house hunters are getting sticker shock when they see the impact of rising mortgage rates on paper. For a luxury buyer, a higher interest rate can equate to a monthly housing bill that’s thousands of dollars more expensive,” said Redfin Chief Economist Daryl Fairweather. “Someone who was in the market for a $1.5 million home last year may now have a maximum budget of $800,000 thanks to higher mortgage rates. Luxury goods are often the first thing to get cut when uncertain times force people to reexamine their finances.”

Since the outset of the pandemic, the opportunity of “work from home” has grown in the United States, even after the pandemic has settled. According to the U.S. Census Bureau in 2018, just eight million people in the U.S. worked from home, or 5.3% of workers. Today, a recent McKinsey survey found that 58% of employed respondents, or 92 million reported having the option to work from home for all or part of the week, a trend which will continue to fuel second home demand for years to come.

"Market conditions are temporary, but remote work and the desire to spend time with your people in amazing places are here to stay,” said Allison. “That's why I remain bullish on second homes in the long-run, especially in the luxury tier and despite the short-term challenges.”

Regionally, Pacaso observed a steeper decline in rate locks in premium destination communities in Q3, and an increase in more affordable locales, suggesting that buyers are adjusting their second home purchases to account for market conditions by opting for less expensive destinations closer to home.

Redfin recently reported pullback from homebuyers as mortgage rates shot up to a 15-year high and mortgage purchase applications declined 13%. Meanwhile, ATTOM’s Q3 2022 U.S. Home Affordability Report shows that median-priced single-family homes and condos remain less affordable in Q3 of 2022 compared to historical averages in 99% of counties across the nation with enough data to analyze. Numbers continue to be far above the near 70% of counties that were historically less affordable in Q3 of 2021—marking yet another high point reached during the country's 11-year housing market boom.

Despite the decline in rate locks, luxury second homes maintained their value in Q3 2022. Prices have held up due to low inventory, as sellers who are also seeking to buy want to avoid trading a low mortgage rate for a high one, and as demand remains well above pre-pandemic levels.

Some parts of the housing market began to see price declines in Q3 2022, particularly the middle and lower tiers in pandemic boomtowns. While that may extend to luxury second homes in destination communities down the line, second home prices in those communities did not lose ground in Q3 2022.

Click here to read the full analysis of Pacaso’s Q3 report on luxury homes.