The escalating trend of soaring home prices isn’t just impacting first-time buyers; even the most affluent individuals seeking luxury properties are feeling the pinch in today’s formidable real estate market. The latest report from Zillow, unveiled on Tuesday, paints a stark picture of the growing ubiquity of million-dollar cities across the United States.
According to Zillow’s findings, a staggering 550 cities in the U.S. now boast a median home value of $1 million or more—a notable surge from the 491 cities recorded just a year ago, representing a substantial 12% increase. What’s more, the median year-over-year price growth in these cities stands at a formidable 4.6%, indicating a relentless upward trajectory in the cost of high-end homes.
Christopher M. Naghibi, Executive Vice President and Chief Operating Officer at First Foundation Bank, underscores the profound implications of this phenomenon, particularly for prospective homebuyers grappling with the unprecedented challenges of affordability. He highlights how the proliferation of million-dollar cities exacerbates the already dire housing affordability crisis, arguably the most severe since the 1980s.
In Naghibi’s assessment, individuals eyeing properties in these affluent locales are confronted with formidable barriers to entry, necessitating exorbitantly large down payments and significantly higher income thresholds to even contemplate homeownership. The mounting financial hurdles posed by the escalating cost of luxury homes represent a formidable obstacle for aspiring buyers, underscoring the urgent need for innovative solutions to address the pressing issue of housing affordability nationwide.
Where are the most million-dollar homes?
California undeniably takes the lead when it comes to the prevalence of “million-dollar cities” in the United States, boasting a staggering 210 such cities within its borders. From the bustling metropolises of Los Angeles and San Francisco to the tech hubs of San Jose and Santa Barbara, California’s status as a hotbed of high-wage jobs and a correspondingly high cost of living makes it a natural epicenter for luxury real estate.
Maureen McDermut, a realtor with Sotheby’s International-Montecito, emphasizes the significant role played by tech giants in Silicon Valley in driving up housing prices across California. The presence of industry titans like Apple, Google, and Meta has not only fueled economic growth but has also intensified housing competition, exacerbated by a persistent shortage of available homes.
Echoing McDermut’s sentiments, Tate Kelly, a broker with Coldwell Banker Warburg, highlights the direct correlation between California’s robust economic expansion and the skyrocketing demand for upscale residences. As major cities in the state experience unprecedented economic prosperity, individuals with lucrative job opportunities are empowered to invest in pricier homes, perpetuating a cycle of wealth-driven housing affordability challenges.
However, navigating California’s luxury real estate market comes with its own set of challenges, as illustrated by the mansion tax imposed in cities like Los Angeles. Targeting property sales exceeding $5 million, this tax levies an additional 4% or 5.5% on properties surpassing $10 million, typically borne by the seller. According to Selling Sunset star Emma Hernan, this tax has proven to be a formidable obstacle for agents, dampening sales activity and complicating transactions.
While California remains the undisputed leader in million-dollar cities, other states such as New York, New Jersey, and Florida also boast a significant number of upscale locales. Nevertheless, the sheer magnitude of California’s dominance in this regard underscores the unique challenges faced by both buyers and sellers in the state’s fiercely competitive luxury real estate market.
How million-dollar cities affect housing affordability
Zillow’s latest report serves as a stark reminder of the formidable hurdles facing prospective homebuyers, particularly those aspiring to secure a residence in major cities where the median home value surpasses the $1 million mark. For many individuals, the mere notion of affording such a property seems like an unattainable dream, especially when considering the daunting prospect of accumulating a sizable down payment.
Even a modest 10% down payment would require a substantial sum of $100,000, a figure that is well beyond the financial reach of the average American household. According to a GoBankingRates survey conducted in January, nearly half of Americans have less than $500 in their savings account, underscoring the vast disparity between the cost of homeownership and the financial resources available to many individuals.
Moreover, the affordability crisis extends beyond luxury properties, rendering even starter homes increasingly inaccessible for a significant portion of the population. Maureen McDermut emphasizes that the concept of “starter homes” has all but vanished from most markets, eclipsed by soaring mortgage rates and escalating home prices that continue to outpace income growth.
The inability to afford a home not only exacerbates immediate financial challenges but also has long-term repercussions for individuals’ financial well-being. Homeownership traditionally serves as a cornerstone of wealth accumulation, providing homeowners with a valuable asset that can be leveraged to bolster their finances and pave the way for future investments.
Christopher M. Naghibi underscores the critical role of home equity in shaping individuals’ net worth, highlighting the adverse impact of delayed homeownership on overall financial stability. As aspiring buyers are forced to either explore more affordable housing options in distant locales or continue renting, they risk missing out on the opportunity to accumulate equity over time, potentially diminishing their average net worth in the process. Ultimately, the widening gap between housing affordability and income levels poses significant challenges not only for individual households but also for the broader economy, underscoring the urgent need for comprehensive solutions to address the housing affordability crisis.