U.S. Housing Market Splits as Luxury Demand Surges and Starter Home Buyers Gain Leverage

High-earning real estate buyers are driving a resurgence in the U.S. luxury property market, while first-time buyers pull back amid rising inventory and widespread price cuts, according to new housing data from Zillow.

The divergence highlights a growing wealth gap across American real estate. A typical starter home—defined by Zillow as properties in the 5th to 35th percentile of regional values—is worth about $202,000, up 2.3% from a year ago. In contrast, luxury properties in the top 5% reached a typical value of $1.9 million, representing a 3.1% annual increase. However, listing inventory for starter homes expanded by 4.5% year over year in June, while luxury home inventory dropped by 5.2%.

The shift in supply has forced starter-home sellers to make concessions. In June, 25% of starter home listings recorded price cuts, compared with 20.6% of luxury listings. While persistent inflation, elevated mortgage rates hovering near 7%, and a cooling job market have stretched entry-level budgets, record gains in the stock market have bolstered the purchasing power of affluent households.

“The best time to buy a home is when nobody else wants to,” said Kara Ng, senior economist at Zillow. “Starter home buyers today have more options, more negotiating power, and sellers who are more willing to deal.”

Ng noted that economic factors continue to create a dual burden for lower-income households. “The challenge is that the same financial pressures making it harder to save for a down payment are also making it harder to take advantage of that opportunity,” she said.

San Francisco represents the sharpest gap between the market tiers. Luxury home sales in the San Francisco metro area jumped 21.6% year over year in May as high-end inventory tightened. Starter home sales in the area fell 1.2% over the same period. By June, 22.2% of starter listings in San Francisco had price reductions, compared to 9.4% of luxury listings.

Nationally, high-end buyers drove sharp sales growth in several key metro areas. Memphis led luxury home sales increases in May with a 42.4% year-over-year jump, followed by Nashville at 40.8%, Cincinnati at 32.6%, Austin at 27.7%, and Birmingham, Alabama at 25%.

Entry-level home sales posted gains in a smaller set of cities as of May, with Louisville leading starter home sales growth at 19.3%, followed by New Orleans at 12.9%, San Jose, California at 10.5%, and Miami at 8.2%.