Second Home Sales Hit Record, as Market Share Rises

Vacation and investment-home sales both set records in 2005, with the combined total of second home sales accounting for four out of 10 residential transactions while boosting the prospects for kitchen and bath design firms.

According to an annual report released last month by the National Association of Realtors, 27.7% of all homes purchased in 2005 were for investment and 12.2% were vacation homes. All together, there were 3.34 million second-home sales in 2005, up 16% from an upwardly revised total of 2.88 million in 2004, the Washington, DC-based NAR announced. The market share of second homes rose from 36% of transactions in 2004 to 39.9% in 2005, the association noted.

Vacation-home sales increased 16.9% last year, to a record 1.02 million, while investment-home sales rose 15.7%, to a record 2.32 million.

“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 NAR chief economist David Lereah.

Lereah said there are 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% of vacation-home buyers said they plan to use their new home for vacations, 31% plan to use it as a family retreat and 28% to diversify investments. For investment-home buyers, 55% said rental income was the primary factor for buying, while 35% wanted to diversify investments.

According to NAR president Thomas Stevens, not all second homes sales are necessarily a “second” home, particularly for investment buyers. “Some of these purchases may be a third, fourth or fifth investment property,” Stevens said, adding that 4% of all homeowners hold three or more properties, while 11% 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% of vacation homes were less than 100 miles away, and 43% 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.

The median price of a vacation home in 2005 was $204,100, up 7.4% from 2004, while the typical investment property cost $183,500 last year, up 24% from a year earlier, the NAR reported.

One-third of vacation-home buyers and 36% 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 NAR added. Lereah said it is difficult to project where the market will go in ’06.

“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 observed. “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.”

However, 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 million people aged 50 to 59 and 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 concluded.