Saratoga News

Homes

Perkins on Real Estate

Second-home housing market leads in sales, price increases

By Broderick Perkins

Just as housing has become a cornerstone of the national economy, the second-home market is shaping up as a linchpin for the housing industry and a boon to small real estate investors' portfolios.

With second-home sales improving four times as much as other home sales and prices jumping three times as much, the breakout second-home market is cushioning the housing market against a hard landing.

Buyers grabbed 3.34 million second homes in 2005, up 16 percent from the 2.88 million in 2004, according to the National Association of Realtors in a preliminary second-home market report released April 5.

Meanwhile, the 7.1 million existing home sales in 2005 represented an increase of only 4.2 percent in 2004, NAR said. The National Association of Home Builders said the 1.3 million new home sales in 2005 represented an increase of 6.6 percent.

Among all home sales, approximately four in 10 (39 percent) were second homes in 2005, up from 36 percent in 2004, according to NAR.

NAR said nearly one in three, 27.7 percent, of all homes purchased in 2005 were for investment purposes, and another 12.2 percent were vacation-home buys.

The market gets its greatest boost from wealthy baby boomers and stock market refugees who fled the dot-com crash looking for better investment returns.

Baby boomers and others are also cashing in on the Tax Relief Act of 1997, which grants eligible homeowners up to $500,000 in tax-free profits on the sale of their home.

"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," said David Lereah, NAR's chief economist.

The investment has paid off.

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

Compare those increases with the increase in the median price of all resale homes (12.7 percent) and all new homes (7.7 percent).

NAR also said while 41 percent of vacation-home buyers said they purchased second homes to use for vacations and 31 percent to use as a family retreat, 28 percent also purchased a second home to diversify their investment portfolio.

For investment-home buyers, 55 percent said rental income was the primary factor for buying, while 35 percent wanted to diversify investments.

The baby boomer trend to retire in place rather than to move to a retirement community or institution is also fueling the purchase of second homes as vacation or investment homes now and "retirement homes" later.

More than 75 percent of vacation-home buyers told NAR they have no interest in actually renting their property, and 21 percent said the second home would become a primary residence on retirement, compared with only 2 percent of investment buyers.

Some 14 percent of investment buyers and 6 percent of vacation-home buyers purchased a property their son or daughter can occupy while in school.

More domestic travel due to post-9-11 security concerns has also helped boost the investment potential of second-home buys, as well as subsequent purchases. Vacation rentals have given a new, more homey dimension to travel accommodations both here and abroad.

NAR said in describing their second home's most valued characteristics, 40 percent said ocean, river or lake proximity; 34 percent said proximity to family members; 27 percent said proximity to preferred recreational activities and proximity to their primary residence; 26 percent said proximity to mountains; 24 percent said proximity to a preferred vacation area; and 17 percent said proximity to a job or school.

"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," said Thomas M. Stevens, NAR president and senior vice president of NRT Inc.

NAR also reported:

* The typical 2005 vacation-home buyer was 52 years old, earned $82,800, and purchased a property a median of 197 miles from their primary residence. Some 47 percent of vacation homes were less than 100 miles away and 43 percent were 500 miles or more away.

* Investment-home buyers had a median age of 49, an income of $81,400, and bought a home that was a median of 15 miles from their primary residence.

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

The statistics were released as preliminary data in advance of a more detailed second home study, "The 2006 National Association of Realtors Profile of Second Home Owners," to be released in late spring as an update of NAR's benchmark second-home study published in 2002.

Real estate writer Broderick Perkins, executive editor of San Jose-based DeadlineNews.Com, writes regularly for this newspaper.