5 Reasons the Luxury Real Estate Market Is Booming

Like the broader real estate market, sales of high-end homes took a beating during the housing bust, but they’ve bounced back even faster since the recovery began.

In September, the value of homes in the top 5 percent increased nearly 10 percent over the previous year, while the broader market saw gains of just over 6 percent. Although experts don’t expect double-digit gains to continue, they still say strong fundamentals will continue to drive strong sales for high-end homes.

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“There is a slowdown, but the top 5 percent of the market is faring much better than the U.S. as a whole,” says Zillow economist Svenjya  Gudell. “But the sales are still very robust.”

Here are 5 reasons luxury home sales are still going strong:

1. The rich are getting richer. The uneven economic recovery has widened the income gap between the wealthiest Americans and poorest. Data published by economists Emmanuel Saez and Thomas Piketty show that the top 1 percent of households by income has captured a staggering 95 percent of income gains between 2009 and 2012, while the bottom 90 percent have seen income fall by 16 percent. High earners also tend to have larger stock portfolios, so they’ve benefited the most from the booming stock market of the last four years. Those lucky enough to have benefited in the downturn are looking for for homes that meet the needs of their lavish lifestyle. Wealthier homebuyers are also less sensitive to rising interest rates, and less likely to let a small increase in rates affect their buying decision.

2. Jumbo mortgages are historically cheap. While many luxury home buyers are happy to plunk down cash for their mansions, those who choose a mortgage will find an unusually friendly financing market. Jumbo loans (those for more than $417,000 in most of the country, and $625,500 in high-cost areas) generally have cost much more than conforming loans, and had more onerous requirements regarding credit and down payments. Plus, borrowers can write off the interest up to $1 million dollars borrowed for a home.

Today, there is no difference in rates for jumbo and conforming loans, and many banks have loosened some of their screening requirements. “Not only is there more credit available to jumbo borrowers, but the terms have really improved relative to smaller, government backed loans,” says Greg McBride, a senior financial analyst at Bankrate.com.

Related: Real Estate Red Alert: The Flippers Are Back

3. Foreign buyers are snapping up homes. The ultra-wealthy in the United States aren’t the only ones who have seen phenomenal growth gains in recent years. Foreign buyers with cash to burn are increasingly looking for a pied-a-terre in the states. Earlier this year, Trulia reported that real estate searches from outside the country comprised 4.3 percent of their traffic, and more than 10 percent of traffic to global cities like Miami, Los Angeles, and Honolulu. “The buyers from Europe and Asia have a sense of urgency when they’re looking,” says Beverly Hills realtor Jade Mills. “They think that the homes in our market are a good buy compared to where they are living.”

4. Luxury home builders are back at work. After years on the sidelines, luxury home builders are putting up new home and selling them at a premium, thanks to reduced inventory and increased demand among buyers. Signed contracts at Toll Brothers, the country’s largest builder of luxury homes increased 23 percent in dollars and 6 percent in units in the fiscal fourth quarter. The average price for a Toll Brothers home increased to $703,000, from $651,000 in the previous quarter, and $582,000 in the fiscal fourth quarter of 2013. “Due to a shortage of approved home sites, labor constraints in some markets, and a lack of available capital for small and mid-sized privately owned builders, the supply of luxury homes is still not meeting current demand, let alone the pent-up demand of the last seven years,” CEO Robert I. Toll said in a statement. “This supply constraint could lead to a further escalation in luxury home prices above and beyond normal trends until industry production returns to historic equilibrium.”

5. Trade-up buyers are making moves. It’s tough for today’s first-time buyers to scrape together cash for a down payment, but the market’s recent gains have given a leg up to current home owners looking to sell their house and move to a larger, more expensive abode. Many folks who had been underwater during the downturn are now able to sell their property and net enough money for a down payment on an upgraded house. More than 85 percent of homeowners with a mortgage in the second quarter have some equity in their home, up from less than 75 percent in the fourth quarter of 2011, according to CoreLogic. Move-up buyers are also having an easier time selling their home in today’s market, since inventory remains tight in most markets.