Second Guessing Second Homes
It may be a better time to buy a second home than it is to buy a primary residence.
The nation's second home market is repelling investors in droves and the blow is so crushing to the second home market, the nation's primary housing market downturn pales by comparison.
Second home sales plummeted last year, falling 18.56 percent to 2.72 million, compared to 3.34 million in 2005, according to the National Association of Realtors' annual "Investment and Vacation Home Buyers Survey".
Primary home sales fell only 4.1 percent to 4.82 million in 2006 from 5.02 million in 2005.
The second home sales plunge took a chunk of market share along for the fall. Second homes now represent 36 percent of all homes sold in 2006, down from 40 percent in 2005.
Blame speculators. Much in the way they were attracted to the second home market, finicky investors have left for greener pastures and the investment end of the second-home market is getting stiffed.
Investment home sales took a nose dive, falling 28.9 percent to 1.65 million in 2006 from a record 2.32 million in 2005. Twenty-two percent of all homes purchased last year were for investment purposes, down from the 28 percent market share in 2005.
Meanwhile discretionary spending was still available to vacation home buyers who boosted sales at the vacation home end by 4.7 percent to a record 1.07 million in 2006, up from 1.02 million in 2005, NAR reported. That garnered greater market share. Fourteen percent of all homes purchased last year were vacation homes, up from a 12 percent share in 2005.
"We expected the drop in investment sales because speculators left the market in 2006, which caused investment sales to fall much faster than the primary market, but the rise in vacation home sales is based on strong demographic and lifestyle factors, with only modest interest in renting their properties to others," said David Lereah, NAR's chief economist, in a prepared statement.
Prices in both categories fell, with investment properties hit hardest.
The median price of an investment property was $150,000 in 2006, off by 18.3 percent from $183,500 in 2005. The median price of a vacation home in 2006 was $200,000, down 2 percent from $204,100 in 2005.
Lereah speculated investors were fleeing from condos and pricier markets while vacation home buyers picked over the spoils in less expensive markets.
"This underscores that housing should always be viewed as a long-term investment, providing solid returns over time," Lereah said.
Investment homes
Investment property buyers purchased homes a median of 22 miles from their primary residence, as 46 purchased the property for rental income, 43 percent to diversify investments, 23 percent for tax benefits, 18 percent to use for vacations or as a family retreat, 15 percent because they had the extra cash, 13 percent for use by a family member, friend or relative and 12 percent to use as a primary residence in the future.
Most investment home purchases, 37 percent, were in a suburb, 22 percent in a rural area, 18 percent in urban or central city locations and 7 percent in a resort area.
Sixty-three percent of investment properties were detached single-family homes, 26 percent condos, 6 percent townhouses or rowhouses and 5 percent some other type of dwelling.
Investors purchased most of their properties in the South (39 percent), while 24 percent bought in the Northeast, 20 percent in the West and 17 percent in the Midwest.
Vacation homes
Vacation home buyers didn't mind a greater distance for their getaway and purchased homes a median of 215 miles from their primary residence, as 79 percent of buyers wanted to use the home for vacation or as a family retreat, 34 percent to diversify investments, 28 percent to use as a primary residence in the future, 25 percent for the tax benefits, 22 percent for use by a family member, friend or relative, 21 percent because they had extra money to spend and 18 percent to rent to others.
Most vacation homes, 29 percent, were purchased in rural areas, followed by resorts, 24 percent; suburbs, 22 percent and urban areas 10 percent.
Sixty-seven percent of vacation homes were detached single-family homes, 21 percent condos, 8 percent townhouses or rowhouses, and 4 percent other.
The South was also the top spot for vacation home buyers, where 38 percent purchased. The Northeast and the West each accounted for 25 percent of vacation home purchases. The Midwest accounted for 13 percent.
The downturn doesn't mean buyers have given up on the market.
Eighty percent of second home buyers considered 2006 a good time to invest in real estate, compared with 57 percent of primary residence buyers. Fifty five percent of vacation home buyers and 66 percent of investment buyers said they were likely to purchase another property within two years.
"Second homes are really something of a misnomer because a fair number of respondents buy multiple properties," Lereah said.
Eighty-six percent of vacation buyers purchased one vacation home, 12 percent purchased two homes and 2 percent purchased three or more vacation properties.
Sixty-three percent of investment buyers purchased one investment property, 23 percent bought two properties, 9 percent bought three investment homes, 2 percent purchased four properties and 2 percent bought five or more investment homes.
Written by Broderick Perkins
May 1, 2007