Saratoga News

Homes

Home sweet home becoming homes sweet homes

Second home purchases set records in 2005

By Jean Newton

The purchase of second homes set records in 2005 with baby boomers playing a primary role and vacation and investment properties comprising four out of 10 residential transactions, according to an annual report from the National Association of Realtors.

The report, based on two surveys, shows 27.7 percent of all homes purchased in 2005 were for investment, and another 12.2 percent were vacation homes. Vacation home sales increased 16.9 percent last year to a record 1.02 million, while investment-home sales rose 15.7 percent to a record 2.32 million in 2005.

David Lereah, National Association of Realtors chief economist, said all the factors at play in the second-home market were favorable in 2005. "To begin with, the baby boom generation is driving second-home sales. They're at the optimum point in life when people become interested in second homes. They're at the peak of their earnings, interest rates remain historically low and boomers want to diversify investments," he said.

Lereah indicated there were significant motivational differences between vacation-home buyers and investment buyers. "Vacation-home buyers are making lifestyle choices and purchasing primarily for their own enjoyment," he said. "Investment-home buyers are seeking rental income and portfolio diversification, although vacation-home buyers also mentioned diversification."

In listing the reasons for purchase, 41 percent of vacation-home buyers said they would use the home for vacations, 31 percent as a family retreat and 28 percent to diversify investments. For investment-home buyers, 55 percent said rental income was the primary factor for buying, and 35 percent wanted to diversify investments.

The median price of a vacation home in 2005 was $204,100, up 7.4 percent from $190,000 in 2004. The typical investment property cost $183,500 last year, up 24 percent from $148,000 in 2004.

National Association of Realtors President Thomas M. Stevens said not all second-home sales are necessarily a "second" home, particularly for investment buyers. "Some of these purchases may be a third, fourth or fifth investment property, showing that housing is a good investment," he said. "The lion's share of investment homes is actually the primary residence of a renter. Most investment owners are seasoned buyers who understand the long-term benefits of ownership, but not everybody is cut out to be a landlord." Four percent of all homeowners hold three or more properties; 11 percent own two properties.

Typical vacation-home buyers in 2005 were 52 years old, earned $82,800, and purchased a property that was a median of 197 miles from their primary residence; however, 47 percent of vacation homes were less than 100 miles away, and 43 percent were 500 miles or more. Investment-home buyers last year had a median age of 49, an income of $81,400 and bought a home that was close by--a median of 15 miles from their primary residence.

More than three-fourths of vacation-home buyers have no interest in renting their property, and 21 percent said it would become a primary residence on retirement, compared with only 2 percent of investment buyers. Fourteen percent of investment buyers and 6 percent of vacation-home buyers purchased a property their children could occupy while in school.

In describing characteristics that vacation-home buyers value about their property, 40 percent said close to an ocean, river or lake; 34 percent, close to family members; 27 percent, close to preferred recreational activities; 27 percent, close to their primary residence; 26 percent, close to mountains; 24 percent, close to a preferred vacation area; and 17 percent, close to a job or school.

Activities of interest that affected the decision to buy a particular vacation home include beach, lake or water sports, cited by 37 percent of buyers; golf, 29 percent; theme parks, 18 percent; winter recreation, 16 percent; hunting or fishing, 12 percent; and boating, 9 percent. Smaller categories included gambling, biking, hiking or horseback riding and tennis.

One-third of vacation-home buyers and 36 percent of investment-home buyers said it was very likely they would purchase another home, in addition to properties currently owned, within the next two years.

Lereah said it is difficult to project where the market will go in 2006. "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," he said. "Discretionary purchases of that nature are more likely in a healthy economy, and that is looking positive as well.

"On the other hand, investment-home sales are likely to decline this year, in part because of higher interest rates," Lereah said. "There are fewer incentives to speculate in the market with price appreciation cooling in much of the country, and more oversight is being encouraged in the mortgage market. It's hard to say how much speculation there may be in housing, but it's probably a single-digit percentage of total home sales."

Lereah expects a soft landing for the housing sector in 2006 with existing-home sales declining 5.7 percent to 6.67 million, the third highest on record. "Long term, the outlook for second homes is favorable because more people will be moving into the prime years for buying a second home," he said.

Currently, there are 36.0 million people aged 50 to 59. However, there are 45.2 million people aged 40 to 49. "That younger segment will become a driving force in the second home market over the next decade," Lereah said.