Vacation Home Market Taking a Beating

A new, 6,000-square-foot vacation home in West Hampton, N.Y., has been on the market for more than a year. After plenty of showings, but no offers, the investor who built the house recently cut the price twice — by a total of $600,000 — to $4 million.

Still nothing.

To be sure, the price reductions have created more interest, according to the real estate agent representing the owner, and he hopes it will be sold right after Labor Day, a prime season for home sales in Long Island’s famed Hamptons.

“My feeling is that everybody is waiting for the dust to settle before they make their big decision. There is a lot to choose from,” said the agent, Ira Birns.

It’s not just the most expensive vacation homes that are going unsold. The New York Times reports that the once-bustling second home market is going flat across the country, even in places where it seemingly booms endlessly.

From South Florida to the Jersey Shore and across the U.S. to Lake Tahoe, as well as the East End of Long Island, sales are in the process of slowing dramatically. Understandably, as the overall housing market weakens, the interest in vacation homes appears to be falling faster.

Everything, from mansions to modest condos, is falling hard. Unlike most metropolitan areas, where demand and turnover in primary homes as a result of job moves, new households and family changes provide a more solid backing, the vacation home market is dependent on factors that exacerbate booms and busts.

In second-home markets around the country, the number of sales is shrinking even as the inventory on the market increases.

In Florida, price declines have been most pronounced in areas dominated by second-home sales. In June, median prices fell 8 percent from 2005 in Naples and 10 percent in Panama City, according to the Florida Association of Realtors. By comparison, prices rose 3 percent statewide, 4 percent in Miami and 10 percent in Orlando.

In addition to the overbuilding factor, rapidly rising property insurance premiums tied to the greater risk of hurricane damage have hurt home sales in coastal areas of Florida.

Paul J. Ciotti, 60, a retired New York teacher, has had his two-bedroom beachfront condominium in Naples, Fla., on the market since late last year. He initially asked $999,000, but has since cut the list price to $799,000 — a big-time bargain, he says, because there is little undeveloped beachfront property left in Naples.

While the market’s strength will be tested this fall, there is no doubt that waterfront property has had a nice run in Naples and elsewhere. Mr. Ciotti’s apartment sold for $153,000 in 1987 when the building opened, and he bought it for $515,000 — in 2004.

During the real estate boom of the last five years, prices in regions with a heavy concentration of second-home sales rose higher and faster than elsewhere, an analysis by Moody’s Economy.com of national mortgage and housing data shows.

“These have been the most juiced-up markets,” said Mark Zandi, Chief Economist at Economy.com.

But this spring and summer, median home prices have fallen sharply. Many experts blame speculators for rapidly inflating and then depressing the market by trading in condominiums and oceanfront homes that they bought with low-interest Florida home loan options requiring only small down payments.

Elsewhere, increased worries about rising mortgage rates, energy costs and a slowing economy have left some prospective buyers queasy about investing in a second property.

Vacation homes, like other luxury items, are frequently caught up in booms that appear to defy gravity. But they depend on a relatively narrow slice of the population, mostly affluent baby boomers, leaving them vulnerable to sudden downturns.

While a number of vacation homes are bought with cash, data suggests that second homes made up about 14 percent of all home sales in 2004, up from 8.4 percent in 2001. Florida mortgage data would likely show even greater percentages of many markets comprised of such buyers.

• In 1989, some 13.4 percent of those responding said they owned a second home.
• That figure fell during the recession in the early 1990s and reached a low point of 11.9 percent in 1995.
• Such ownership rose to 13 percent in 1998, then fell back to 11.4 percent in 2001.
• With mortgage rates at record lows, second-home ownership rose back to 12.6 percent in 2004.

Experts note that second-home markets have a self-correcting mechanism, as destinations can quickly price themselves out of the market. Plenty of people are willing to pay for waterfront property, privacy and pristine vistas, but no region has a monopoly on those features.

“This is a very efficient market. When you don’t like the pricing someplace, you can go someplace else,” said Richard A. Smith, President of Realogy, the former real estate arm of Cendant that owns Coldwell Banker and Sotheby’s International Realty.

Although agents insist that nothing akin to the 1990s slump is setting in, they are spending more time promoting properties and hand-holding sellers. These exercises considered unnecessary when homes were moving in a week or so and bidding wars were common as recently as last year. Nowadays, however, openness to, and skill at home price negotiation is paramount.