Second Home Market Flourishes in 2005

Record breaking second home sales

Looking for another Florida home loan? Buyers certainly were last year. According to the National Association of Realtors, sales of vacation homes and investment homes set new records in 2005, with the combined total of second-home sales accounting for four out of 10 residential transactions.The annual report, based on two surveys, shows that 27.7 percent of all homes purchased in 2005 were for investment and another 12.2 percent were vacation homes. All together, there were 3.34 million second-home sales in 2005, up 16 percent from an upwardly revised total of 2.88 million in 2004.

David Lereah, NAR’s chief economist, says all the factors at play in the second home market were favorable in 2005.

“To begin with, the baby boom generation is driving second home sales – they’re at the optimum point in life when people become interested in second homes, they’re at the peak of their earnings, interest rates remain historically low and boomers want to diversify investments,” Lereah says.

There are significant motivational differences between vacation-home buyers and investment buyers, he adds.

“Vacation-home buyers are making lifestyle choices and purchasing primarily for their own enjoyment,” he says. “Investment-home buyers are seeking rental income and portfolio diversification, although vacation-home buyers also mentioned diversification.”

Factors behind record breaking sales of second homes

What factors are driving second-home purchases? For vacation-home buyers, 41 percent plan to use the property for vacations; 31 percent to use as a family retreat and 28 percent to diversify investments, according to an NAR survey.

The median price of a vacation home in 2005 was $204,100, up 7.4 percent from $190,000 in 2004. The typical investment property cost $183,500 last year, up 24 percent from $148,000 in 2004.

Meanwhile, a small minority of individuals are not satisfied with just one Florida home loan: Four percent of all home owners hold three or more properties; 11 percent own two properties.

Background of second home owners

More than three-fourths of vacation-home buyers have no interest in renting their property, and 21 percent say it would become a primary residence on retirement, compared with only 2 percent of investment buyers. Fourteen percent of investment buyers and 6 percent of vacation-home buyers purchased a property that their son or daughter can occupy while in school.

In describing characteristics that vacation home buyers value about their property, the results of this Florida home loan survey were as follows:

• 40 percent want to be close to an ocean, river or lake
• 34 percent close to family members
• 27 percent close to preferred recreational activities
• 27 percent close to their primary residence
• 26 percent close to mountains
• 24 percent close to a preferred vacation area
• 17 percent close to a job or school

Buyers in the South accounted for 30 percent of vacation home transactions, while 38 percent of those taking out a Florida home loan for investment purposes were located in this region.

Future of the second home market

“Vacation-home sales will remain strong for the foreseeable future given the fact that baby boomers are favorably positioned in terms of affordability, as well as being at the stage in life when people are most interested in making that kind of a lifestyle purchase,” he said.

“On the other hand, investment home sales are likely to decline this year, in part because of higher interest rates,” Lereah says. “There are fewer incentives to speculate in the market with price appreciation cooling in much of the country, and more oversight is being encouraged in the mortgage market. It’s hard to say how much speculation there may be in housing, but it’s probably a single-digit percentage of total home sales.”

NAR survey data shows only 2 percent of homes are sold in one year or less, but investment homes likely are under-represented in that particular reporting sample.

Lereah expects a soft landing for the housing sector in 2006 with existing-home sales declining 5.7 percent to 6.67 million, the third highest on record. “Long term, the outlook for second homes is favorable because more people will be moving into the prime years for buying a second home,” he says.

So go ahead and look into a Florida home loan today. You may be doing the same thing on another piece of property down the line!