Many households
answered the second question with a "yes" last year, and others
are expected to do so again this year.
Vacation homes—of
which the U.S. Census Bureau identified 6.8 million at last count—accounted
for 12.2 percent of all homes purchased in 2005, and, at a record 1.02
million, such purchases were up 16.9 percent from 872,000 in 2004, a
recent survey by the National Association of Realtors reported.
Their median price—whether
detached single-family homes, cabins or cottages, or multi-unit buildings—was
$204,100, up 7.4 percent from 2004’s $190,000. Their median size: 1,480
square feet.
Vacation homes’
share of 2005 purchases lagged the 27.7 percent of homes which were bought
for investment—whether to generate rental income, diversify assets, or
both.
To David Lereah, NAR’s
chief economist, it was not surprising that the two categories of second
homes combined would constitute almost 40 percent of residential sales, up
from 2004’s 36 percent. (Although commonly used, the term
"second" home is a bit deceptive: about 6 of 10 second home
owners surveyed by NAR were found to own two or more homes—for vacation
and/or investment—beyond their primary residences.)
"The baby boom
generation is driving second-home sales," Lereah said in a statement.
"They’re at the optimum point in life when people become interested
in second homes. They’re at the peak of their earnings (and) interest
rates remain historically low."
Economic conditions
remain relatively strong despite inflationary pressures due mostly to
rising commodity prices and lower consumer spending. The resulting higher
interest rates have lead Lereah to expect a decline in purchases of
investment homes this year. "There are fewer incentives to speculate
in the market with price appreciation cooling in much of the
country," he adds.
"Vacation home
sales will remain strong for the foreseeable future, given the fact that
baby boomers are favorably positioned in terms of affordability, as well
as being at the stage in life when people are most interested in making
that kind of a lifestyle purchase."
That, to be sure, is
not to suggest that the vacation home market is going to be as firm
everywhere in 2006 as in 2005. As Barron’s concluded in its May
29 issue following a survey of the broad second-home market across the
country: "After a long string of double-digit annual price increases,
a number of second-home Meccas across the country are suddenly suffering
from plunging sales volume and burgeoning inventories of unsold
homes."
Though the official
figures on sales prices have yet to reflect the current round of cuts,
interviews with real estate pros and others strongly suggest that the
averages are deteriorating in a number of key markets.
An April 14 overview
of coastal resorts by its sibling, The Wall Street Journal,
reported not only price cuts ("offers that would have been an insult
a year ago are now being accepted," according to a Cape
Cod real estate
broker), but also other steps to promote sales: cuts in brokers’
commissions, increases in housing ads large enough to inflate a newspaper’s
size, and supplemental devices such as listings under glass tabletops at
an ice cream parlor.
Despite the weaker
prospects for 2006, the longer-run trends underlying the vacation home
market are expected to remain on track, mostly due to the aging of the
baby boomers.
"Vacation home
buyers are making lifestyle choices and purchasing primarily for their own
enjoyment," Lereah emphasized, citing NAR’s 2005 survey findings
for illustration: 72% percent of owners said they planned to use the
houses for vacations and family retreats. Moreover, 18 percent expected
their vacation homes to become their primary residences in retirement.
Economic motives
seem to have played a minor role. While one-third bought to achieve
greater diversification of their assets—well below the one-half of
investment home owners who had that motive—only 13 percent bought to
earn rental income vs. two-thirds of investment home owners. (Of vacation
homes which their owners rent out, the median number of nights rented is
only 12 per year, far fewer than the number of nights that owners of
investment homes rent out theirs.)
The typical vacation
home owner participating in the NAR survey was 59 and earned $120,600 last
year. As many as one-third had paid cash, commonly out of savings or from
proceeds of real estate sales, and of those who got mortgages, the median
down payment was 27 percent. Of the total universe, 82 percent owned their
vacation homes free and clear.
The median distance
between a vacation home and the owner’s primary residence was 220 miles;
34 percent bought within 100 miles of their primary residences, and,
ironically, another 34 percent bought 500 or more miles away, enough to
get them to an ocean, river, or lake (66 percent of preferences),
recreation or sporting activities (39 percent), vacation or resort areas
(38 percent), and mountains or other natural attractions (31 percent).
Among the leisure
activities of interest, beach, lake or water sports led the list at 57
percent of owners. Boating was next at 38 percent, followed by hunting or
fishing (32 percent).
Of course, it’s imperative that
those evaluating whether to buy or rent a vacation home should crunch the
numbers. Most financial planners would recommend a thorough quantitative
analysis showing the cost/benefit of buying or renting a vacation home.
June 2006— This column is
produced by the Financial Planning Association, the membership
organization for the financial planning community, and is provided by
McGuire & Co., LLC, a local member of the FPA.
(Back to
Financial Planning Page)
