Back when the housing market was happily abuzz with sales, lots of buyers thought a vacation home would add to their happiness.
What’s happened to those owners since? And, in this downturn, is it possible to find happiness – personal and financial – from buying a second home?
We asked a few experts to assess the current state of the second-home market. While there are many sober observations, there are still reasons why a home-away-from-home can be a happy place.
Value Lessons
The National Association of Realtors’ research shows that the median price of a vacation home fell about 11 percent last year, more than double the drop (5 percent) in primary homes.
The reason for the bigger drop, relates NAR spokesman Walter Molony, is because there are more “distressed” sales – sales of homes in or at risk of foreclosure amongst vacation homes.
Looking at a map devised by the National Association of Home Builders, which charts the concentration of second homes in each county, it’s indeed likely that there are higher distressed sales, since states like Florida and Arizona, both with high foreclosure numbers, also are heavy with second homes, notes Daniel McCue, research manager at the Harvard Joint Center for Housing Studies.
But in upscale Naples, Fla., while there has been roughly a 50-percent drop in values from the peak last decade, the drop isn’t really due to distress, contends Tom Doyle of Sun Realty, in Naples. Rather, the drop stems from “an oversupply of housing built during the boom,” Doyle says.
The downward pressure on today’s second-home market offers lessons for tomorrow’s buyer.
For one, don’t think of buying a vacation home, “unless you really want one and can afford it,” relates Michael Dubis, a Madison, Wis., financial planner. “Affording” means that you can pay the second home’s mortgage and expenses while also easily funding retirement, education, and other necessary expenses.
Additionally, properties tend to hold value better in areas that have limited land for new building, notes Tom Kelly, co-author of “How A Second Home Can Be Your Best Investment” (McGraw-Hill, 2004).
Moreover, well-known vacation destinations, ideally offering four-season recreation, usually can be easily rented, adds Kelly, offering income to the property owners if they need it.
Taxing Matters
While second home values have declined to levels many believe are at or near bottom, Robert Dietz, an NAHB economist, worries about politicians talking about eliminating the deductibility of mortgage interest on second homes.
In tracking the concentration of second homes, the NAHB finds that 339 counties in the U.S. have at least 20 percent of total housing being second residences, and 26 counties have at least half their total composed of second homes. The leading counties are Hinsdale County, Colo., with 86 percent; Forest County, Pa., with 75 percent; Rich County, Utah, with 73 percent; and Lake County, Mich., with 69 percent.
Curtailing the interest deduction, says Dietz, could have a big negative impact on purchases, and heavily concentrated second-home areas would especially suffer.
However, not everyone agrees that the interest deduction is a big incentive to buyers. “It’s mainly personal – they want the home,” says Bob Waun, managing director at Americor Mortgage/Vacation Finance in Birmingham, Mich.
The 2010 NAR second-home research finds that 14 percent of buyers think tax benefits are important.
Good Timing
“Rates are super-low,” not financial planner Dubis. “Property values are down, and there’s tons of supply.”
Usually conservative about real-estate investing, Dubis relates that even he “has looked out of curiosity” at the many vacation homes now listed.
Buying now may mean your home’s value will increase, but only if you have a very long-term horizon, he believes.
Think of the home as a vacation opportunity, not investment, he cautions. And only buy if the fun is worth the possibility of losing money, Dubis concludes.
