Starter Home Prices Are Soaring and Luxury Is in a Slump—What’s Going On?

For those navigating America’s residential real estate market, it’s lately felt a bit like an out-of-control cargo train, ever threatening to veer off the tracks—stomach-churning price accelerations followed by interest rate hikes slamming the brakes. It’s little wonder that just about everyone seems to be searching for clues on where housing sales are going this year. But it’s not a one-size-fits-all market. Different kinds of homes—and the diverse people buying and selling them—have been affected in significantly different ways, especially when it comes to prices.

In fact, a deep dive into what’s going on with two of the nation’s iconic, bellwether housing categories—representing opposing ends of the price spectrum—might provide the clearest indications of what to expect for 2023 and beyond.

On one end are starter homes, traditionally smaller and more affordable, geared toward first-time homebuyers; on the other, luxury homes, the spacious mansions with every amenity imaginable marketed to the wealthy. Each market has faced its own highs, lows, and distinct challenges.

And their current price trajectories might come as a surprise.

Starter homes seem immune to the correction currently roiling the housing market, but luxury homes have been feeling the full effects. The Realtor.com® data team dug in to figure out exactly what’s going on in these very different segments of the housing market.

Starter homes, which Realtor.com defines as all two-bedroom listings, have been on a relatively steady and energetic upswing since early 2020 as cash-strapped buyers have competed for a limited supply of more affordably priced properties. These homes have outpaced the price growth in other parts of the real estate market: They finished 2022 with 15% year-over-year price increases.

Meanwhile, during the COVID-19 pandemic, prices for luxury homes—defined as the most expensive 10% of homes in any given market— skyrocketed as the stock market surged and buyers sought more living space. There was almost a 40% year-over-year price bump for luxury homes in the middle of 2021. But by the end of 2021, the luxury boom faded as the stock market struggled and recession fears grew. For most of 2022, luxury homes have seen modest-to-stagnant price growth, around 2.5%, ending the year close to flat.

So where are the metros where luxury home prices are stalling the most—and where entry-level home prices are rising the fastest?

To come up with these findings, Realtor.com compared the monthly year-over-year price changes for starter homes, luxury homes, and midprice homes to see how each segment of the real estate market has fared. Then we found five metropolitan areas where each segment tracked closely to the national trends. (Metros include the main city and surrounding towns and smaller urban areas.)

“Luxury purchases are more discretionary,” says Danielle Hale, chief economist at Realtor.com. After all, no one really needs a third or fourth home or a 10,000-square-foot abode with ocean views. So when market conditions are right, activity in that segment can change quickly.

During the early part of the pandemic, homeowners saw their equity rise as prices went up across the board. That gave high-end them a lot more cash for a next purchase, somewhat negating elevated prices. Rock-bottom interest rates made borrowing incredibly inexpensive. A migration of people who lived in coastal urban hubs, but who could newly work from anywhere, also meant buyers coming into markets with both high equity and high wages, driving up prices. And the bullish stock market performance resulted in more money in their pockets.

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“You see a correlation between the stock market and real estate, simply because stocks make up a greater portion of the financial portfolios of high net worth buyers,” Hale says. And the stock market has been down through 2022.

For starter homes, different forces are at work, Hale says.

“If you think of luxury home purchases as discretionary, starter home purchases are almost the opposite,” she says. “It’s more about timing and strategy.”

For people buying for the first time, or for those with tighter budgets, a home purchase is driven more by finding an opportunity to buy or sell that matches a need, not a whim. A rise in interest rates makes it more difficult for these buyers to gain a foothold.

When interest rates go up, the most affordable segment of the market gets squeezed. Homeowners who would normally sell their starter homes to move up to larger, nicer homes can’t sell because they would be trading their existing mortgages with a low rate for a new loan with a higher rate. It’s not financially viable, so many homeowners are staying put, limiting the number of starter homes for sale.

“When people in the market for a house are most looking for affordability, that’s challenging now,” Hale says.

What does it all mean in the current stressed-to-the-max housing market? Let's take a deeper dive into the U.S. cities that are most indicative of these trends.

Where luxury home prices are stalling

Salt Lake City, UT

Luxury home price in December 2022: $1.15 million-plus
Change from 3-year price peak: -28.1%

Salt Lake City became a pandemic destination for urbanites leaving more expensive, coastal population hubs, and the area’s luxury market shows it: Salt Lake City saw the highest highs of any metro on the list. Luxury home prices hit 52% year-over-year price growth in January 2021.

But the area’s meteoric price gains were destined to reverse, and just one year later, in January 2022, they were wiped out, with prices down 24%. That's led to some sellers cutting prices.

This enormous six-bedroom home in Holladay, a small town in the Salt Lake City metro next to the Wasatch National Forest, had been listed for $1.65 million. After sitting on the market for several weeks, it was recently marked down by $150,000.

Sacramento, CA

Luxury home price in December 2022: $1.35 million-plus
Change from 3-year price peak: -18.2%

Sacramento was another high-demand market during the pandemic, drawing buyers from the San Francisco Bay Area, as lots of people with newfound flexibility for where they could work looked for less expensive areas with more spacious homes.

The Sacramento luxury market tracked closely to the national trend, with 38% year-over-year price growth in January 2021.

"People came in with a lot of money down," says Tom Gonsalves, the broker and CEO of Gonsalves Real Estate Properties, in Sacramento. "They came from other cities with higher prices."

But in September of the same year, those luxury homes were losing value.

Gonsalves says there's still plenty of activity in Sacramentos' luxury segment, but he's seen homes that were bought and sold near $2 million at the peak of the pandemic pump now priced closer to $1.5 million.

Now, luxury home prices are 18% below that peak.

This large four-bedroom home near Folsom Lake is now priced at $1.5 million, down nearly $200,000 from the initial listing price.

Houston, TX

Luxury home price in December 2022: $799,000-plus
Change from 3-year price peak: -18.1%

In Houston, luxury home prices didn’t rise as high as in Salt Lake City or Sacramento. But after prices ramped up in 2020 and the first half of 2021, hitting almost 30% year-over-year increases, listings have been priced below where they had been the year before since September 2021.

Greg Nino, a Realtor® with Re/Max Compass in Houston, says he's not surprised to see higher-end homes stalled in the area.

"We've always said here that we don't have a lot of [home] appreciation, but we don't have big slumps either," Nino says. So it's expected that the demand-driven price increases of the pandemic are followed by a downturn.

Nino says he sees buyers taking more time—and being more cautious—making a luxury purchase.

"If someone is looking at a million-dollar home and it's more than 20 years old, I ask if they have $200,000 or $300,000 for pipes or foundation work," Nino says, noting that flood damage eventually affects a lot of the homes in the area.

That conversation wasn't even happening in 2021, as multiple offers for every home were the norm, and prices shot up to what buyers were willing to stomach.

For a lot of upper-echelon buyers, he says, the frenzy of pandemic-driven demand has died down, and they are becoming more thoughtful.

Where starter home prices are rising fastest

Nashville, TN

Starter-home price in December 2022: $349,900
Year-over-year price change: +10.8%
3-year price change: +43.7%

Nashville starter home prices have been higher than the national average, and they’ve been rising faster than in other housing markets since the middle of 2022. The city was one of the hottest real estate markets in the nation even before the pandemic.

"Nashville has honestly been an underpriced market for a long time," says Brian Copeland, a Realtor at Doorbell Real Estate in Nashville. "People would come here and be shocked at three-bedroom homes for under $200,000."

But Copeland says that in Nashville, lots are expensive, meaning new suburban construction is often geared toward higher-priced buyers. Where there are more multifamily homes, the price points are as high or higher than traditional standalone starter homes.

"Yes, Nashville is more expensive than it was 10 years ago, and it's going to be more expensive 10 years from now," Copeland says. "But it's still relatively affordable."

At the end of 2022, starter home prices in Nashville were up almost 11% compared with the year before, when Nashville’s median listing price growth was about half that.

For $350,000, a starter-home buyer in Nashville can get an 800 square-foot, two-bedroom home near Tennessee State University.

San Diego, CA

Starter-home price in December 2022: $678,470
Year-over-year price change: +13.5%
3-year price change: +29.9%

Housing prices, of course, are relative—which is why San Diego has the most expensive starter homes on the list, at more than a half-million dollars.

"There's no such thing as a starter home in San Diego anymore," says Norm Miller, a professor emeritus at the University of San Diego's School of Business. "They say here that you buy your third home first, because the prices are so high now."

With mortgage rates above where they've been for the past several years, Miller says, the supply of San Diego's starter homes will probably stay quite limited, as the homeowners who stretched their budgets to get into them see that selling and buying something different would mean paying more for the same home, because of the elevated interest rates, or paying the same for less home, for the same reason.

"If you have a mortgage below 4%, you have absolutely no incentive to sell and go get a 6% rate," he says. "Why take on a higher cost of ownership than you need to? So that’s going to keep supply down."

That limited supply adds up: A San Diego starter home costs nearly $90,000 more than it did one year ago.

A 1,000-square-foot, two-bedroom condo in a posh downtown San Diego high-rise will cost around $675,000.

Houston, TX

Starter-home price in December 2022: $255,200
Year-over-year price change: +4.5%
3-year price change: +25.3%

Yes, you're reading it right: Houston is a bellwether market in both luxury and entry-level homes.

Like its luxury segment, Houston’s starter home listing prices track with the national trend, continuing to rise through the end of 2022 at a faster pace than other segments in the market.

Houston's starter homes are less expensive than in other areas on the list, and price growth isn't as high as in Nashville or San Diego. But with prices rising about 4.5% annually, that's still higher than the 3% to 4% home appreciation that was the norm before the pandemic.

And it's squeezing buyers who have to swallow the huge price increases of the past few years, plus higher mortgage rates, rents, and inflation.

For $236,000, you can get this classic 1,500-square-foot, two-bedroom house in Houston's East End neighborhood that's walking distance to Buffalo Bayou.

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