Second Homes Market Surges In 2004

The market share of buyers purchasing second homes primarily for investment has risen sharply, going from 20 percent of all second homes purchased in 1999 to 64 percent of all second homes purchased last year, showing that consumers believe housing is a good investment.

2004 was a record year for second homes, with sales rising 16.3 percent from 2003 to a total of 2.82 million units, according to a study by the National Association of Realtors�. The shift toward purchasing second homes primarily for investment led to a new examination of Census data and an understanding as to how much larger investment homes are as a share of the overall housing market.

Investment home sales rose 14.4 percent to 1.80 million sales in 2004. Vacation home sales surged 19.8 percent to 1.02 million.

The size of the second-home market is significant. NAR’s study shows there are 6.6 million vacation homes and 37.2 million investment units in the United States compared with 72.1 million owner-occupied homes.

Data covering transactions from mid-2003 through mid-2004 shows the median price of a vacation home was $190,000 compared with $148,000 for investment homes. In contrast with the last available full-year price data for 2001, vacation homes have appreciated 12.8 percent and investment home values have risen 25.4 percent.

The typical vacation-home buyer is 55 years old and earned $71,000 in 2003, while investment-property buyers had a median age of 47 and earned $85,700. Given the strong demographic demand from baby boomers, this market is expected to remain strong for many years to come. Boomers are still in their peak earning years, have both the wherewithal and the desire to purchase vacation homes and investment properties, and a desire to diversify portfolio assets into more secure investments. In fact, diversification of portfolio investments is the most frequently cited motivation for purchasing a second home, cited by 30 percent of buyers.

Ninety-two percent of all second-home buyers see their property as a good investment. In addition, 38 percent said it was very likely they’d purchase another home within two years.

NAR research shows a long-term rise in the second-home market with a strong appeal to baby boomers.

Although previous sales data is not directly comparable because second-home buyers were under-represented in previous surveys, sales have trended up since 1997. The increase in second-home sales coincides with tax-law changes that went into effect that year. The tax change essentially did away with the capital gains tax for most buyers wishing to trade down to a smaller primary residence and use some of their equity to purchase a second home.

The vacation-home market appeals strongly to baby boomers who are motivated by lifestyle considerations. When asked about the prime motivating factor for purchasing a second home, 29 percent said they wanted a family or personal retreat and 27 percent said it would be their primary residence after retirement, but there are other lifestyle and investment considerations.

Investment property also appeals to baby boomers, with 37 percent seeking rental income and 36 percent wanting to diversify investments; 14 percent said it would be a primary residence after retirement.

Buyers use real estate agents to find their second home.

In searching for a second home, 83 percent of buyers used real estate agents. The typical buyer searched seven weeks to find their second home and looked at six properties. Eighty-three percent financed with a mortgage and made a median downpayment of 22 percent. Although 45 percent used savings for a downpayment, 29 percent used equity from a previous home.

Vacation homes can be found in every state, with the most popular locations by the water or in the mountains. Most buyers prefer locations that are within an easy drive.

Most vacation-home buyers want their property for their own exclusive use, with 86 percent saying they never rent their properties, compared with 21 percent of investment buyers. Another NAR study of existing second-home owners shows they prefer to be close to where they spend recreational time or to natural attractions. Seventy-six percent want to be near an ocean, river or lake; 38 percent, close to the mountains or other natural attractions; and 37 percent, in a specific vacation area.

The study shows vacation homes are located relatively close to the owner’s primary residence, with a median distance of 185 miles. However, the distance varies widely, with one-third more than 500 miles and one-third less than 100 miles. By contrast, investment-home owners prefer to be closer to their property, with a median distance from the primary residence of 99 miles. However, 37 percent are less than 25 miles.

Among recent buyers, second homes were even closer � vacation homes were 49 miles away compare with 18 miles for investment property.

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