The U.S. housing market is experiencing a pronounced divergence, according to a new report from Zillow. Demand for luxury homes is surging, while sales of starter homes are softening amid growing inventory and affordability challenges for entry-level buyers [1]. Zillow defines starter homes as those in the 5th to 35th percentile of home values in a region, with a typical value of about $202,000—an increase of 2.3% from a year ago. In contrast, luxury homes, defined as the top 5% of home values, now average $1.9 million, up 3.1% year over year [1].
Inventory trends further highlight the market split: starter home inventory rose 4.5% year over year in June, while luxury home inventory fell 5.2%. Price cuts were more prevalent among starter homes, with 25% of listings seeing reductions in June, compared to 20.6% for luxury homes [1]. Zillow's senior economist Kara Ng noted that the current environment offers more options and negotiating power for starter home buyers, as sellers are more willing to make deals. However, elevated inflation, low consumer sentiment, and a slowing job market are making it difficult for many would-be buyers to take advantage of these opportunities [1].
The divergence is most pronounced in San Francisco, where luxury home sales surged 21.6% year over year in May, accompanied by sharply falling inventory and fewer price cuts. Conversely, starter home sales in San Francisco declined 1.2% year over year, with 22.2% of starter home listings cutting prices in June compared to just 9.4% of luxury homes [1].
Some markets bucked the national trend for starter homes, with Louisville (19.3%), New Orleans (12.9%), San Jose (10.5%), and Miami (8.2%) seeing the largest year-over-year increases in starter homes sold as of May. For luxury homes, the hottest markets were Memphis (42.4%), Nashville (40.8%), Cincinnati (32.6%), Austin (27.7%), and Birmingham (25%) [1]. Gains in the stock market have bolstered the purchasing power of higher-income households, fueling demand for luxury properties [1].
CONCLUSION
The U.S. housing market is increasingly split, with luxury homes seeing strong demand and price growth, while starter-home buyers face affordability challenges despite increased inventory and negotiating power. Market conditions vary by region, but overall, economic pressures are limiting entry-level buyers' ability to capitalize on opportunities, while affluent buyers benefit from stock market gains and limited luxury inventory.