The average sale price for luxury homes nationwide fell 1.6% to $1.55 million in the first quarter of 2019, according to a new report from Redfin. It was the first annual decline in nearly three years.

Redfin tracked home sales in more than 1,000 cities across the U.S. (not including New York City) and defined a home as luxury if it was among the 5% most expensive homes sold in the quarter. In the other 95% of the market, home prices rose 2.7% year over year to an average of $300,000 in the first quarter, following six straight years of increases.

Sales of homes priced at or above $2 million fell 16% year over year last quarter, marking the second consecutive quarter of declining sales and the biggest luxury sales decline since 2010. The supply of homes priced at $2 million or above increased 14% annually in the first quarter, the fourth quarter in a row of increases.

The combination of rising inventory and declining prices and sales suggests that demand for luxury homes is down from last year. While the stock market's shaky performance over the past six months could play a role in hindering demand for high-priced homes, tax reform measures that lowered the limits on deductions for mortgage interest and state and local taxes are largely to blame.

"Because homeowners can't deduct as much mortgage interest as they used to be able to, the calculus has changed when it comes to buying a home, especially an expensive one," said Redfin chief economist Daryl Fairweather. "Although the new mortgage rule applies to everyone in the country, high earners in states with high income taxes like California and Massachusetts saw their tax bills surge. Not only do the new rules make it less desirable to purchase a multi-million dollar home in high-tax states, it has also motivated some people—especially those with big incomes and big housing budgets—to consider moving to places like Florida, Washington or Nevada, which have no state income tax."

Despite the overall decline, luxury home prices fell in just one-third of cities in this analysis. Below are the major cities in the metro areas where most of the luxury sales in our analysis take place:

City Average Luxury Sale Price in Q1 2019 YoY Change in Luxury Sale Price YoY Change in Sales of $2 Million + Homes
Boston, MA $3,219,000 -22.4% -10%
Newport Beach, CA $7,910,000 -21.8% -33.3%
Miami, FL $1,627,000 -19.3% -12.9%
San Jose, CA $2,348,000 -2.7% -6.7%
San Diego, CA $2,516,000 -1.4% -8.3%
San Francisco, CA $4,936,000 -0.3% -10%
Los Angeles, CA $4,773,000 0.6% -17.9%
Naples, FL $4,159,000 5.3% -9.1%
Seattle, WA $2,307,000 6.4% 0%
West Palm Beach, FL $2,851,000 89.6% -23.1%

Among those 10 luxury-market driving areas, the city of Boston recorded the biggest year-over-year price drop in the first quarter (-22.4%), the fourth consecutive quarter of luxury price declines. In Newport Beach (-21.8%), Miami (-19.3%), San Jose (-2.7%) and San Francisco (-0.3%), last quarter marked the second consecutive quarter of luxury price declines. In San Diego, where prices fell 1.4%, this was the first quarter of declining luxury home prices in two years. Nine of the 10 markets listed above drove the national sales drop in the first quarter, with West Palm Beach posting a 23.1% decline in the number of $2 million-plus homes sold and Los Angeles posting a 17.9% decrease. In Seattle, sales of $2 million-plus homes were unchanged from last year.

Although luxury prices are down nationwide, some cities experienced significant increases. For the fourth quarter in a row, West Palm Beach saw the biggest increase in prices for homes in the top 5% of the market, up 89.6% year over year to more than $2.8 million last quarter. In St. Petersburg, Florida, prices were up 62.3% annually to nearly $2 million. Some less popular luxury markets also experienced price increases. In Charleston, South Carolina, luxury prices were up 42.3% annually to $2.3 million. In Boise, Idaho, prices rose 17.2% annually to $1 million.

"Home prices in Boise are going up at all price points, especially in the luxury market," said Paul Reid, the Redfin market manager in Boise. "We are helping a lot of home buyers move here from Seattle, Southern California, Denver and the Bay Area. Many plan to work remotely, bringing their big-city salaries to Boise. These buyers can afford high-priced homes, and what they get for their money is substantially nicer than what they could buy for the same amount of money in the cities they're coming from."