Second-home Market Surges, Bigger Than Shown In Earlier Studies

A new study shows sales of second homes surged in 2004, and that investment property and vacation homes make up a significant portion of the overall housing market, accounting for more than one-third of residential transactions, according to the National Association of Realtors�.

The new study, based on two surveys, shows that 23 percent of all homes purchased in 2004 were for investment, while another 13 percent were vacation homes. In addition, there was a record of 2.82 million second home sales in 2004, up 16.3 percent from 2.42 million 2003. The investment-home component rose 14.4 percent to 1.80 million sales in 2004 from 1.57 million in 2003, while vacation-home sales rose 19.8 percent to 1.02 million in 2004 from 850,000 in 2003.

David Lereah, NAR’s chief economist, said earlier studies underestimated the number of second-home sales because a very small percentage of surveys mailed to second-home addresses were returned. “We found excellent results for studies looking at owner-occupied homes, but this is the first time anyone has come up with a methodology for capturing a representative market share for vacation- and investment-home owners,” he said. “In fact, given the size of the market, we can assume that many individual owners have more than one investment property.” Previous studies had indicated the total stock of second homes purchased for investment or recreation was 6.6 million units. “The lion’s share of second-home sales in earlier studies were vacation homes, and previously reported figures for the total number of second homes in the U.S. coincide with the current figures we have for the number of vacation homes,” Lereah said. “However, we’ve seen a shift over the last few years with a growing number of second-home buyers purchasing primarily for investment. This led us to a new examination and understanding as to how much larger investment homes are as a share of the overall housing market.” An examination of 2003 data from the Census Bureau shows there are 43.8 million second homes in the United States, including 6.6 million vacation homes and 37.2 million investment units, compared with 72.1 million owner-occupied homes.

“In essence, our definition of second homes has changed with the buyer shift toward investment property,” Lereah said. “In examining Census data to determine the number of investment units, we see that second homes are a much larger share than the conventional mind-set of them being mostly vacation homes.” NAR has no data to differentiate between individual or corporate investment-home owners of the existing housing stock. The sales figures shown in the study are for individual buyers, and the market share of investment purchases rose 1 percentage point in 2004 from 22 percent of transactions in 2003. An e-mail survey of home buyers, incorporating new methodology, was used to determine second-home sales data.

A second survey, conducted by mail and used for demographic and related data in the 2005 National Association of Realtors� Profile of Second-Home Buyers, underscores the e-mail findings.

NAR President Al Mansell, CEO of Coldwell Banker Residential Brokerage in Salt Lake City, said the market is evolving. “We’re finding that the distinctions between vacation- and investment-home buyers are such that we’re really looking at two very different markets,” he said.

For example, 86 percent of vacation-home buyers do not rent their property compared with only 21 percent of investment buyers. It appears that the majority of investment homes are actually a renter’s primary residence, and only 10 percent of investment buyers intend to use their second property for recreational purposes.

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. For properties purchased between mid-2003 and mid-2004, 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 in 2001, vacation homes have appreciated 12.8 percent from $168,500, and investment homes have risen 25.4 percent from $118,000.

Nearly one out of five second homes will become primary residences after retirement � 27 percent of vacation homes and 14 percent of investment property. “In addition, buyers were looking to diversify portfolio investments,” Mansell said. “This is now the most frequently cited motivation for purchasing a second home.” In listing the reasons why they bought second homes, respondents said there were some differences depending on the type of home. Overall, 30 percent of buyers wanted to diversify investments, 28 percent sought rental income (37 percent investment vs. 7 percent vacation homes), 14 percent wanted a personal or family retreat (29 percent vacation vs. 8 percent investment), 6 percent planned to use for vacations (16 percent vacation vs. 2 percent investment), and 5 percent had extra money to spend.

“Because the typical second-home buyer is a baby boomer, it’s likely over the next decade that second-home sales will remain historically high,” Lereah said. “The boomers are still in their peak earning years and have both the wherewithal and the desire to purchase vacation homes and investment properties.” 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, breaking down to 47 percent of investment buyers and 16 percent of vacation-home buyers.

Investment properties of recent buyers tend to be located close to the primary residence of owners, with a median distance of 18 miles, while vacation home buyers were at a median distance of 49 miles.

The typical vacation home purchased during the period was a single-family detached home, accounting for 83 percent, with a median size of 1,290 square feet. Half of all buyers said their vacation home was smaller than their primary residence, 13 percent said about the same and 37 percent reported it was larger.

The typical investment property also was a single-family home, 79 percent, with a median size of 1,700 square feet. Sixty-two percent of recently purchased investment homes were smaller than the owner’s primary residence.

In searching for a second home, 83 percent of buyers used real estate agents. When asked where they first learned about the home purchased, 31 percent said a real estate agent; 24 percent a yard sign; 15 percent from a friend, neighbor or relative; 8 percent knew the seller; 7 percent from a builder; 6 percent on the Internet; and 2 percent from a newspaper or TV ad.

Typical buyers 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 use savings for a downpayment, 29 percent used equity from a previous home.

Methodology The second-home study was based on two surveys. To determine demographics, price data and the process for buying, NAR mailed an eight-page questionnaire to a national sample of 100,000 recent homebuyers who purchased their homes between mid-2003 and mid-2004 based on county records. The survey generated 8,205 usable responses; the response rate was 8.2 percent. Data in this report includes only survey data from respondents who indicated that they purchased a vacation home or investment property; this data was underrepresented in the overall sample due to smaller return rates.

A second survey to determine market share and to extrapolate sales data was conducted in January 2005 by e-mail. That survey captured data for 3,371 home purchases in 2003 and 2004, with roughly equal samples for each year; data were weighted to correspond with demographic findings in the mailed survey. Because the findings showed a much higher volume of second-home sales than earlier believed, NAR examined Census Bureau data from the Housing Vacancy Survey and the Residential Finance Survey and found a strong correlation in comparing the differences between owner-occupied and renter-occupied housing, as well as data for occasional use and vacant housing.

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