As we’re sure you can tell, a lot has been happening in the world of interest rates in the last year and a half. Post-pandemic inflation—which hovered around 10% at its peak—influenced the Federal Reserve to order the biggest interest rate increases since 1994. The impact of rapid inflation and this decisive government action has become a regular topic of conversation nationwide. In fact, Jerome Powell, the Chairman of the Federal Reserve, regularly receives millions of views online for videos of his economic updates.
However, after a streak of 10 consecutive rate hikes, the Federal Reserve announced at its latest meeting in June of 2023 that it would pause raising interest rates for now.
Although hinting that there may be more rate hikes coming, this decision by the Fed seems to signal their conviction that their actions taken to curb the 40-year high levels of inflation are having their intended results.
Although changes in interest rates typically impact the mainstream market more directly, luxury real estate buyers are not unscathed.
According to Daryl Fairweather, Chief Economist at Redfin, luxury sales in 2022 fell 18% compared to 2021.
When it comes to interest rates, there are a few key points that influence luxury real estate in Silicon Valley and the Greater Bay Area:
Entering The Market: Whilst the Ultra-High-Net-Worth (UHNW) demographic may not feel the sting of the rising cost of borrowing money, those on the cusp of the luxury market may be deterred from making a big purchase. With mortgage payments potentially going up by thousands each month, those at the entry point of the market may choose to allocate their funds elsewhere. This could cause a decline in the buyer pool for properties at the entry point of the luxury market.
Where Should You Put Your Money?: Luxury real estate often involves high-value transactions, and buyers may require financing to complete their purchase. Even for those that could purchase with all cash, many choose to obtain a mortgage to lock in a consistent expense and/or to keep their capital more readily available. When interest rates are high, potential luxury buyers may choose to invest their capital in other avenues that they feel would bring them more favorable returns.
Stock Market Uncertainty: At a fundamental level, higher interest rates mean that borrowing capital becomes more costly. This can slow down economic expansion and the overall stock value of companies in growth-mode. Historically, higher interest rates and declining stock values often go hand in hand. With so many players in the luxury space heavily invested in the stock market, things can change quickly. A big stock price drop at a major company can pull a significant amount of buyers out of the market overnight.
Negotiation Power: Interest rates can also impact negotiations in luxury real estate transactions. If you are a seller with a low-interest rate mortgage and your home is your only residence, you would really need an “offer you couldn’t refuse” to sell. This is due to the fact that said seller would need to obtain new housing that would likely include a much higher interest rate if they would choose to buy. It’s simple—why take a 5 percent plus interest rate if yours is currently in the 2’s? With interest rates having been so low for so long, many current Silicon Valley homeowners have a lot of negotiation power in terms of what it would take to get them to sell.
Current Economic Conditions: Even though buyers and sellers of luxury properties are often less affected overall by general market conditions, they are still human and pay attention to the market’s general themes and tones. Beyond just the numbers, if market conditions seem down, many will reconsider their purchasing plans in favor of waiting to “time” the market.
Interest rates play a significant role in the real estate market, affecting both buyers and sellers. They determine the cost of borrowing money and can impact the overall affordability of luxury properties.
Silicon Valley is not only the cradle of innovation, but also home to the greatest creation of wealth in the history of the planet. Many in the Valley have built their wealth due to technology, business or in many cases, real estate. The luxury real estate market in Silicon Valley is quite unique because it fundamentally consists of a mixture of both “new money” folks who have built their wealth in Silicon Valley, and “old money” folks who have become incredibly wealthy due to purchasing a great home in a coveted location at just the right time. Some of the most desirable areas to live in include Los Altos, Los Altos Hills, and Atherton amongst others.
Understanding how interest rates play a role in the decision-making process of all parties is paramount for achieving success in the luxury real estate space here in Silicon Valley. The Kiersten Ligeti & Patricia Karoubi Team with The Agency Los Altos is always here to serve as your advocate and guide throughout your luxury real estate journey. We will provide you with the personalized advice and necessary resources to succeed, all while keeping your unique needs and aspirations top-of-mind. Together, we will navigate the complexities of interest rates, ensuring you make informed decisions and secure the best possible outcomes.
Please feel free to reach out to us with any questions or concerns. We look forward to being a part of your luxury real estate experience and helping you achieve your goals.
Kiersten Ligeti | 650.766.8319 | LIC. #01298631
Patricia Karoubi | 650.868.4565 | LIC. #01396914
The Agency Los Altos
