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Understanding the Second-Home Market

System - Monday, July 21, 2014
Second and vacation homes have been one of the silver linings in the otherwise bleak, current housing market. This part of the housing industry was devastated by the housing crash. It is slowly beginning to show signs of improvements, particularly in places like Miami and Las Vegas, where bargain hunters are cherry picking some of the best deals in the country.

In order to clearly understand the drivers behind the second home sales, we have to go back to the mid 2000’s. This segment peaked in 2005 when approximately one million second/vacation homes were sold nationwide. The sales continued to decline for the next few years due to the chain of crisis and events that continued to plague the housing market. Also, most people who wanted a second home had bought one prior to 2005. Since then, there has been a glut of properties on the market. However, this sector started making a comeback in early 2009, and by the end of that year, about half a million second/vacation homes were sold.

So what’s behind the recent surge of second home sales?

Ironically, many of the sellers are second homeowners themselves. Most of these sellers bought their second homes at the peak of the real estate boom.  High mortgage payments and depreciated home values are some of the motives to sell their second homes.

Baby boomers, who have been dominating the U.S. real estate market for many years are the ones primarily fueling this new buying trend. Between 2005 and now, there have been five more years of baby boomers entering the market who under normal market conditions would have already purchased a second home.

Almost 4 out of 5 boomers own primary homes. Many are now regarding investment in a second home as a long-term strategy to diversify their portfolios. Conversely, the new generation of second home buyers now has multiple advantages such as low interest rates, abundant supply and choices, and home prices that are well below the normal market prices.

In 2009, vacation and second home sales outpaced the sales of primary residences and investment homes. There are several reasons for this. While the sales of primary homes have been declining over the past few years, the expiration of tax credits has slowed it further to a crawl. According to the National Association of Realtors (NAR), there are three factors benefiting the second and vacation home sales: increased interest from foreign buyers, improvement in the stock market and easier availability of jumbo mortgages.

Investors from Europe and Canada have been taking advantage of the current buying opportunities in droves. Analysts expect investors and institutional buyers of second homes from the emerging economies of China, India and Brazil to also stake a claim to the tremendous buying opportunities in the U.S.

Experts caution that it is too early to rejoice. While the market for second and vacation homes has certainly improved, any new wrinkles in the U.S. and European financial markets could derail this train.