Much like the American people today, the economy is divided, erasing the much-needed middle to hold it all together.
The phenomenon that has been emerging for several months now is what economists refer to as a “K-shaped economy,” where some sectors of the economy see strong growth after an economic shock, as others slip downwards — and there is little left in the middle.
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Sectors like AI and consumer spending have continued to grow along with the stock market, even as hiring has halted and inflation has significantly increased. That’s led to many consumers cutting back on creature comforts and frills, like the delectable guacamole at Chipotle, the company’s CEO said during an earnings call last week.
Federal Reserve Chair Jerome Powell also addressed the economic trend last week during a media briefing.
“If you listen to the earnings calls or the reports of big public consumer-facing companies, many, many of them are saying there is a bifurcated economy there and that consumers at the lower end are struggling and buying less and shifting to lower-cost products,” Powell said. “But at the top, people are spending at the higher income and wealth.”
But, the K-shaped split has also hit the housing market, as the divide between affluent homeowners and middle to lower-income ones has become increasingly exacerbated over the last several months. And the trend is hitting different real estate markets in varying ways.
Cash purchases are a driver
Higher-end homeowners hold a lot of leverage in today’s market, including by way of home equity, multiple properties and cash on hand. Many of these homeowners, therefore, typically never truly have to buy or sell and can pick and choose as they like.
Joel Berner | Credit: Realtor.com
“I think cash purchases are a big story here,” Joel Berner, chief economist at Realtor.com, told Inman. “In the luxury segment in some places like Miami, we saw a couple months ago that over half of the homes over $1 million that were sold were cash purchases. And as you went further up the price scale, it was just higher and higher shares as cash purchases. So the haves definitely still have and the have-nots are struggling. I think that’s kind of the K-shaped economy in a nutshell.”
Increased activity in the luxury market is also making that sector a bit more competitive, Zillow Senior Economist Kara Ng said in an email.
“Luxury listings are down 3 percent from last year, while inventory is up 17 percent for mid-tier homes,” Ng wrote. “Fewer luxury listings also cut their price in September (20 percent) compared to mid-tier homes (28 percent).”
Kara Ng | Credit: Zillow
At the same time that higher-end buyers are experiencing more flexibility because of their purchasing power, mid- to low-tier buyers are facing several barriers, Berner added. Not only are home principal and interest prices high, but other fees, including HOA and home insurance costs are on the rise.
“So if you have to take out a mortgage to buy a home, as most middle-income people do, that’s been pretty expensive in the last year, even though we’ve gotten some relief from mortgage rates in the last couple of months,” Berner said. “Just the need to finance puts you at a disadvantage already, versus having cash on hand to buy a home with a cash offer.”
That’s also one of the main reasons why the number of first-time homebuyers declined to its lowest point on record, Daryl Fairweather of Redfin told Inman.
“I think that’s the reason why the share of first-time homebuyers fell to a record low, that’s according to NAR, and the age of first-time homebuyers has gone up to 40,” the chief economist added. “In the real estate market, if you have cash or you have savings, you have a very large advantage over first-time buyers who probably don’t have as much cash or savings.”
Regionality
Different areas of the country are experiencing the K-shaped market in varying ways, due to regional differences in home prices, inventory and other market factors.
Well-to-do markets in the Northeast, plus California, are seeing healthy real estate market performances because those areas have robust job markets in finance, biotech and health care, and have larger concentrations of affluent buyers, a November report from Cotality states.
Jeff Tucker, principal economist at Windermere Real Estate, told Inman that it has been interesting to witness the trend play out in King County, where Seattle is located.
Jeff Tucker
“Home [sales] priced $1 million and up climbed 4 percent from last year [and] homes under $1 million were almost identical — it was 0.3 percent more year to date,” Tucker said. From 2023 to 2024, those $1 million and up sales grew by around 20 percent year over year. “So … we saw a pretty strong rebound in luxury home sales or higher-priced homes, $1 million and up, in 2024, and that sales pace has kind of held onto its gains.
“What that says to me is that in our state’s economy, a lot of the home sales activity has been supported by higher paying jobs. And here, it’s especially the tech industry, of course, a lot of the big tech employers. And when I talk to agents, I hear a lot about their clients running the numbers on their RSUs — their restricted stock units and their options — all part of their equity compensation package from the big tech firms. Amazon, Meta, Google are all big here.”
Even with those companies doing well now with the stock market up, recent layoffs still provide a dark shadow of insecurity, Tucker added, citing thousands of layoffs announced last week.
“It’s tricky how that’s balanced against renewed fears about employment prospects,” Tucker said. “So if the equity compensation package climbed in value 20 percent, that’s not too reassuring if several coworkers you know just got laid off. Suddenly, that makes it harder to have confidence to go ahead and buy a home.”
States like Florida and the District of Columbia, by contrast, are seeing some of the biggest price dips, Cotality said. And regions where migration patterns have changed in recent years due to fewer jobs, insurance woes or other factors are also seeing price declines, Compass Chief Economist Mike Simonsen told Inman.
Mike Simonsen
“I think the markets that [relied] most on inbound migration patterns, so long-time growth markets, those are the ones that will continue to be softer. So there’s fewer people moving in,” Simonsen said. “And in fact in places like Tampa, it’s actually net-outbound. So Tampa was growing for many years, but Tampa’s actually shrinking right now.”
Due to low hiring rates, Americans are less likely to leave their current job and move across the country for a new one, Simonsen added, which is also preventing some inventory from being placed on the market.
An unprecedented time
Comparisons could be made between the current economy and ones after the financial crisis of 2008, or potentially even earlier recessions, but the factors at play are not quite the same, economists said.
“In [the financial crisis of 2008], the lower tier of buyer and seller was more affected than the wealthy owners who were able to just keep their homes and not have the same sort of debt issues,” Berner said. “So you can maybe say it’s similar to that, but even going back further, it’s a little bit difficult because there’s not a very similar thing in that there was such an exogenous, external shock, like the COVID shock, and then this strange recovery that we’ve been in that looked okay for a little while and now it’s starting to sour on us.”
Going back even further, during the Great Depression and other economic downturns, government spending and recovery from significant global conflicts also played a big role in spurring economic divides between the haves and the have-nots, Berner added. But that’s not really the case today.
“I think it’s even more complicated by the things that the government is doing with regards to international trade,” he added, “jeopardizing the labor market even further. So the concentration of wealth in those who own businesses versus those who work for businesses is happening at a faster pace for a variety of reasons right now that are all kind of avoidable.”
Tucker also brought up the “Volcker Shock” of the 1980s when Fed Reserve Chairman Paul Volcker sharply increased interest rates to combat inflation, which then spurred a recession. But that also wasn’t really a like-for-like comparison to today.
“But [the 16 or 18 percent mortgage rates] actually went away pretty quickly and people were able to refinance down five points or something like a year later,” Tucker said. “But what was also very different about that time was that the whole country went into a very, very obvious, deep recession. So unemployment skyrocketed. And that just hasn’t happened yet.”
What agents can do
Agents who are assisting clients that are not in that upper tier of the market can still take some steps to guide them towards opportunities, economists said, even though many factors currently at play are out of their control.
Daryl Fairweather | Redfin
“I think the best way to reduce their debt burden when buying a home is to increase their down payment,” Fairweather said. “So guiding buyers towards down payment assistance programs could be really helpful.
“There’s also some opportunities in the condo market,” she added. “Condo prices have come down, there’s definitely a buyer’s market for condos, so agents can guide their clients towards these segments of the market where they will be able to negotiate better terms.”
New construction is another market segment where buyers may be able to find some deals, Berner said.
“Builders are much more motivated sellers than people who own a home that live in the home that they own and have to sell it to move along,” Berner said. “Builders have a lot of inventory and are trying to price it aggressively and offer incentives right now. So I would say, keep new construction in mind, even as those barriers to the existing-home inventory still exist.”
