Even Deep-Pocketed Buyers Are Starting to Back Away From the U.S. Housing Market

Two years ago, Austin real-estate agent Amy Deane, of Moreland Properties, was working with so many wealthy out-of-state buyers that she showed one $15 million house five times in 30 days. Now, she might get one call every other week for showings in that price range. “That big buyer pool has slowed down,” she said. “The first movers committed and moved.”

After an epic two-year run—not just in Austin but in major cities around the country—the luxury real-estate market is finally cooling.

Real-estate agents in places like New York, Los Angeles, and the Hamptons say the frenzied deal making and record-setting prices that characterized the past few years has eased, thanks to a growing disconnect between what sellers want and what buyers will pay. Meanwhile, buyers are grappling with inflation, this year’s interest-rate hike and the volatile stock market. Gas prices and the war in Ukraine are adding to feelings of economic uncertainty, effectively throwing cold water on luxury sales.

More: For Luxury Buyers in California’s Bay Area, the Moment to Negotiate May Have Finally Arrived

The number of luxury homes—defined as the top 5{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} of the market—that sold during a three-month period from Feb. 1 to April 30, 2022, dropped 18{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} compared with the number of sales during the same period in 2021, according to a new report from the real-estate brokerage Redfin. That is the biggest decline since the pandemic started, when the number of luxury sales plunged 23.6{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} during the three-month period between April 1 and June 30, 2020, compared with the same period in 2019. Prices are still holding, but they are unlikely to keep reaching new heights as buyers retreat, according to Sheharyar Bokhari, a Redfin senior economist. Further, he said, deal volume is finding a new equilibrium after the number of sales surged 79.6{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} during a three-month period between March 1 and May 31, 2021, compared with the same period a year earlier.

“There’s a sense that prices are frothy in many markets across the country,” said Ryan Serhant, CEO of real-estate brokerage Serhant, who says the market is normalizing after a period of rapid appreciation, fueled by heightened demand. “You’re now starting to see buyers become a little hesitant to be caught at the top,” he said.

According to Redfin, the biggest drops in luxury sales took place in Nassau County, N.Y., where sales slid 43.5{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} for the three-month period between Feb. 1 and April 30, 2022, compared with the year-earlier period, followed by Oakland, Calif., with a 35.1{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} decline. During the same period in Dallas and Austin, where values skyrocketed during the pandemic, sales slipped 33.9{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} and 33{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9}, respectively, and West Palm Beach’s luxury sales were down 32.8{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9}, Redfin data show. “We had unsustainable, huge demand last year. Homes were just flying off the shelves,” Mr. Bokhari said.

At the highest price points, that is no longer the case. In April, Boston real-estate agent Michael Carucci, of Gibson Sotheby’s International Realty, listed a condo owned by car-dealership mogul Herb Chambers for $18 million. But Mr. Carucci said he’s only had a handful of showings. “I expected more,” he said, but the timing coincided with the Federal Reserve’s interest-rate hike and skyrocketing gas prices. “The high net worth are somewhat immune to this, but they’re looking at all these things and saying, ‘Do I want to wait or do this now?’”

Drew Meyers, of the Los Angeles brokerage Westside Estate Agency, said the uncertainty has led some sellers to rush to list properties to try to catch the tail end of the hot market. Mr. Meyers says he has three sellers with property that will be priced at between $6 million and roughly $50 million that are pushing up the listing dates for their properties. “They want to get this stuff done and get it listed while the market is hot. They don’t know what the future holds,” he said.

More: Some Rare Good News for U.S. Buyers: the Pace of Inventory Growth Has Hit Double Digits

In Manhattan, which was hit early by Covid, luxury sales were initially slow to rebound but by the end of 2021, contracts on properties above $4 million hit levels not seen since at least 2006, according to real-estate agent Donna Olshan, who tracks deals above $4 million. However, Ms. Olshan said her stats have been trending down since the first week of May. Of 43 contracts signed that week, none was above $10 million for the first time since September 2020, she said. In the week before Memorial Day, there were 21 contracts above $4 million, slightly lower than the 10-year average of 26 for that time period. “The sobering thing for New Yorkers is watching the stock market,” she said.

Nikki Field, of Sotheby’s International Realty, said although sellers aren’t cutting prices, some buyers are “throwing lowball offers again.” She recently listed a penthouse at 240 Park Avenue South for $25 million, but plans to advise her clients to pull it off the market for the summer unless buyer activity picks up significantly. “You don’t want days on market during a slow period,” she said, and neither sellers nor their agents don’t want a listing to get stale. “It’s not a panic market,” she said. “It’s just a corrected market.”

Despite properties being pulled off the market for the summer, typically a sluggish time of year for luxury sales, the slower pace of sales is easing the inventory crunch that has plagued markets like New York and driven up prices, according to Jonathan Miller, founder of real-estate appraisal firm Miller Samuel. “The narrative I’ve been talking about for a year—of sales being restrained by lack of supply—is not the story anymore,” he said. Instead, rapid price growth and higher interest rates are slowing the intensity of the market, he said. With fewer sales, inventory is starting to accumulating.

In May, contracts on Manhattan condos priced between $10 million and $19.99 million were down 41.2{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} compared with contracts in May 2021, while inventory jumped 42.9{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9}, according to Miller Samuel data. In the Hamptons, contracts on single-family homes in that price range in May dropped 83.3{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} year-over-year while listings were up 20{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} compared with the year prior.

More: An Unbeatable Gift for Every Type of Dad This Father’s Day

“It’s a hard fall from grace,” said Cody Vichinsky, president and co-founder of Bespoke Real Estate, who said that in the Hamptons’ previously frothy market, some C-quality properties hit the market with A-quality prices. But at a certain point, buyers won’t pay double the prior sale price in a short period of time, Mr. Vichinsky said. He cited a newly-built house in Watermill, listed in the $30 million range, that has been on the market for a year. He said the seller turned down his client’s offer of $28 million. “I bet he’s kicking himself now for not taking it,” Mr. Vichinsky said. “He was hypnotized by what the headlines were saying.”

According to the Redfin data, sales prices for the top 5{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} of the market nationwide aren’t dropping, although the meteoric growth of the past couple of years is slowing. The median luxury sale price rose 19.8{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} for the period Feb. 1 to April 30, compared with the same period in 2021. The median price grew 27.5{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} during Feb. 1 to April 30, 2021, compared with the same three months in 2020. Mr. Bokhari said he expects the numbers to slow further.

Mr. Serhant noted that many big-money spenders have already snapped up homes and now the market is regaining balance. “I don’t think it’s normal—or healthy—for a house to sell in an hour,” he said. “It’s OK if it takes a little longer than a day.”

Richard Steinberg, a luxury real-estate agent at Compass, said he has been having “the price-reduction conversation“ with clients on at least 50{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} of his exclusive listings. Without offers or the promise of deals, many of them will have no choice but to listen, he said.

More: Hugh Jackman Lists Sprawling West Village Triplex for $38.9 Million

Mr. Steinberg said he sees the greatest reduction in activity on properties priced between $2 million and $5 million, a price range in which he says buyers typically rely on mortgage financing and are dealing with increased interest rates. Above $5 million, buyers are less concerned about interest rates, but they are expecting that the shifts in the financial markets will result in bargains on the real-estate front.

Susan Breitenbach, of the Corcoran Group, said she recently got two Hamptons properties under contract after modest price adjustments. One was a house in Southampton that was first listed for $27.99 million in 2020. Ms. Breitenbach took over the listing and adjusted the price, which was most recently asking $21.995 million.

Cities like Austin that experienced Covid booms are primed for a painful return to reality, said Nicholas Gerli, founder of Dallas-based Reventure Consulting, a real-estate data analytics firm. The influx of buyers boosted home prices higher than underlying market fundamentals like job and wage growth. “Austin is the biggest housing bubble in America,” he said. Between January 2020 and April 2022, wages in Austin rose nearly 9{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9}, while home values shot up more than 72{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9}, said Mr. Gerli, using data from the U.S. Bureau of Labor Statistics and Zillow. “If the prices of homes adjusted to match wealthy San Jose or Los Angeles [buyers] moving in, that growth aspect was never going to sustain itself,” he said.

So far, prices that skyrocketed during Covid haven’t dipped, according to Ms. Deane, who said homes in Austin that sold for $4 million a few years ago are now on the market for $9 million. But she said wealthy buyers are more cautious. Recently, she sold a roughly 3,000-square-foot house, listed for $6.5 million, which last year would have been snatched up in minutes. This year, it took about five months to sell but Ms. Deane said she didn’t cut the price. “I had a patient seller waiting for the right buyer,” she said.

In Palm Beach, one of the most expensive real-estate markets in the country, where there were at least 22 sales above $40 million during the first 16 months of Covid, the usual economics don’t necessarily apply. There are still record-breaking deals taking place, but there also have been some price cuts, said agent Margit Brandt of Premier Estate Properties. Some listings have been pulled off the market for the summer, she said, not just because it is a slower season, but also because of global economic headwinds.

More: U.S. Second-Home Locations See Disproportionate Price Growth for Both Sales and Rentals

In May, Ms. Brandt listed a non-waterfront lot, which includes plans for and construction of a roughly 6,900-square-foot house, for $17.9 million. A month later, she reduced the price to $10.9 million for the vacant lot plus home plans already approved by the Palm Beach Architectural Commission, but no construction. She said the new strategy is designed to encourage a deal, but she noted there are no fire sales happening. “The craziness we’ve been experiencing can’t go on forever,” she said. She recently sold another non-waterfront property, with a 5,400-square-foot home, for $13.5 million, slightly under the $14 million asking price. But the seller still saw a high return, having paid $5.5 million for the property in 2020.

Across the Intracoastal Waterway in West Palm Beach, which has experienced a flurry of investment, Redfin data show the number of luxury sales slipped 32.8{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} year-over-year for the three months ending April 30. But agent Erin Sykes, of Nest Seekers International, said prices in West Palm were so undervalued before Covid that even a drop wouldn’t hurt the market. She described the last few weeks of economic turmoil as a “reality check” for sellers who want 20{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} to 30{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} price appreciation on their property in just a few months’ time. When prices were rising, people saw real-estate investing as a way to get rich quick. “They saw it as a game that could never be lost and we all know that real estate is not invincible,” she said.

—Additional reporting by Katherine Clarke