Second Home Purchases Soar in U.S. Thanks to Baby Boomers’ Equity, Favorable Tax Laws

If you are thinking about buying a second home this spring, or already have, in the past couple of years, you are most certainly not alone. In fact, you are part of a major real estate market trend, writes Kenneth Harney, a syndicated columnist, in the Los Angeles Times.

The annual number of second homes purchased in the United States doubled between 2000 and 2004 — a boom driven in part by demographics. As baby boomers become flush with large amounts of home equity, they have more opportunities to invest in a second residence. The other factor? Some unexpected tax law changes enacted in the late 1990s.

Keunwon Chung, an economist at the National Assciation of Realtors, has recently studied a vast pool of federal data on hundreds of thousands of second-home closings. When Congress amended the federal tax code in 1997 to allow tax-free gains of up to $500,000 (for married couples) and $250,000 (for single Americans) on the sale of a primary home, Chung observed that “homeowners did not have to buy expensive [replacement] homes anymore.”

Prior to 1997, the only way to avoid capital gains tax was to “roll over” sales gains to progressively larger and costlier homes. The amended tax code, by contrast, allows primary home sellers to buy smaller, less expensive primary residences, while using a portion of the tax-sheltered gain to buy or make a down payment on a second home. Whether it’s for their own use or for investment purposes, many people are doing so.

For example, a married couple making $500,000, tax free, from the sale of their longtime family home — not unlikely with the appreciation rates seen in the South Florida real estate market over the past few years — might use part of the proceeds to downsize into a condo unit, then use the balance to purchase a vacation home an hour or two away. The figures below show just how popular this option has become:

• In 2000, second homes represented just 8.6 percent of all residential mortgages (or 405,000 individual purchases nationwide).
• By 2004, the number of second-home purchases had more than doubled (to 881,000) while market share surged to 14.2 percent.

The primary buyers and sellers are baby boomers with above-average incomes, as purchasers often want to diversify financial assets. Second homes saw an average 55 percent gain in price appreciation between 2000 and 2004, according to Chung, whereas the Standard & Poor’s 500 index declined by 15 percent.
“As an investment choice, the housing market presented an attractive alternative to a stock market that sagged dramatically from its 2000 Internet-boom highs and has only recently begun to recover,” Chung said.

A dozen states have seen exceptionally high rates of purchases and cumulative growth during the last four years, with (you guessed it) the Sunshine State leading the way. Only Hawaii, where nearly one of every three purchases from 2000-2004 was a second home, surpassed Florida. The Florida housing market has been bolstered in large part due to 20 percent of all purchases used as secondary residences or investments.

Arizona (18 percent) and Nevada (17 percent) also saw significant activity, as did Idaho (13 percent), New Mexico (12 percent) and Utah (10 percent). So how long can the second-home boom continue?

“As long as boomers are still in their peak earning years and they can afford some homes for vacation purposes or investment, they will continue to drive housing markets,” Chung said.

So basically, at least another 10 years. While rising Florida home loan costs are likely to quell demand somewhat, don’t expect our state’s prices to plummet anytime soon. As a second-home destination, Florida real estate will likely stay among the nation’s hottest… with prices reflecting that fact.