Are Luxury Homes an Indicator that the Economy Is Stronger than Expected?

luxury home

There’s a lot of data investor pour over in order to come up with a model for economic growth. Things like employment, manufacturing orders and inflation are some of the most critical things investors look at, but it’s often the little details that tell the true story.

Since the financial crisis of 2008, the housing market has been a black spot in investors minds. Many remember the disastrous results of the sub-prime mortgage industry and the slow recovery of housing prices. As such, the industry has been largely ignored.

But recent data shows that housing isn’t the black hole investors might believe that it is. Sales are improving – especially in the luxury market. That’s a key indicator because it means consumers are feeling more optimistic about the economy.

The Housing Gauge

Luxury homes are in high demand right now. The number of homes priced at $1 million or more fell by around 18 percent for the third quarter compared to the same time period last year. Supply for high-end real estate is expected to continue dropping as time progresses, as well. But the real estate market is local in nature – certain regions in Colorado and Florida have seen the largest price drops in luxury homes.

The reason for the sudden demand stems from a couple of factors. For one, the stock market is at record highs and profits are up. Secondly, there’s been strong demand from foreign buyers who tend towards the luxury market. With the decrease in the available supply of high end real estate, prices have jumped nearly 5 percent year-over-year, but still hasn’t impacted demand.

While luxury homes have seen the largest increase in price and demand, the market for middle and lower class housing has jumped, as well. A higher demand for housing indicates a healthy job market and a healthy economy.

Housing is important to the economy due to the fact that real estate is usually the largest single asset families own. It’s also the biggest investment and earner for savings. An increase in housing demand also means higher personal consumption, which accounts for nearly 70 percent of the United States economy. Looking back to the 2008 recession, the primary driver of economic collapse was a reduction in housing prices.

As housing demand increases, one critical thing investors need to keep an eye on is employment. If employment numbers drop, housing demand would be negatively impacted. That could spark another recession if housing prices fall far enough. With the luxury market in high demand though, that risk is far-fetched.