Second-Home Sales Hit New Record in '05

NAR: REALTOR® Magazine Online
Sales of vacation homes and investment homes set new records in 2005, with the combined total of second-home sales accounting for four out of 10 residential transactions, according to the NATIONAL ASSOCIATION OF REALTORS®.

The annual report, based on two surveys, shows that 27.7 percent of all homes purchased in 2005 were for investment and another 12.2 percent were vacation homes. All together, there were 3.34 million second-home sales in 2005, up 16 percent from an upwardly revised total of 2.88 million in 2004. The market share of second homes rose from 36.0 percent of transactions in 2004 to 39.9 percent in 2005.

Vacation-home sales increased 16.9 percent last year to a record 1.02 million from a downwardly revised 872,000 in 2004, while investment-home sales rose 15.7 percent to a record 2.32 million in 2005 from an upwardly revised 2.00 million in 2004.

David Lereah, NAR’s chief economist, says 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,” Lereah says.

There are significant motivational differences between vacation-home buyers and investment buyers, he adds.

“Vacation-home buyers are making lifestyle choices and purchasing primarily for their own enjoyment,” he says. “Investment-home buyers are seeking rental income and portfolio diversification, although vacation-home buyers also mentioned diversification.”

What factors are driving second-home purchases? For vacation-home buyers, 41 percent plan to use the property vacations, 31 percent to use as a family retreat and 28 percent to diversify investments, according to an NAR survey. For investment-home buyers, 55 percent are seeking rental income and 35 percent want 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.

NAR President Thomas M. Stevens from Vienna, Va., says that not all second-homes sales are necessarily a second home: “Some of these purchases may be a third, fourth or fifth investment property, showing that housing is a good investment,” says Stevens, senior vice president of NRT Inc. “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 home owners 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 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 say 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 that their son or daughter can occupy while in school.

In describing characteristics that vacation home buyers value about their property, 40 percent want to be 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.

The largest concentration of vacation home buyers are in the Midwest, accounting for 33 percent of vacation home sales, although the property may be located in another region. Buyers in the South accounted for 30 percent of vacation home transactions, the West, 20 percent, and the Northeast, 17 percent.

Most investment home buyers are in the South – 38 percent of the total. Buyers in the Midwest and Western regions each purchased 24 percent of investment property, and the Northeast, 15 percent.

One-third of 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.

Lereah says 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 says. “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.”

NAR survey data shows only 2 percent of homes are sold in one year or less, but investment homes likely are under-represented in that particular reporting sample.

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 says.

Currently, there are 36 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,” he says.

The second-home report is based on two surveys. One, to determine market share and to extrapolate sales data, was conducted in March 2006 of a panel of recent home buyers. That survey captured data for 3,406 home buyers in 2004 and 2005, with roughly equal samples for each year; data were weighted to correspond with demographic findings in an earlier mailed survey.

To determine median home prices, most of the demographics and buyer preferences, NAR mailed an eight-page questionnaire to a national sample of 145,000 buyers who purchased their homes between mid-2004 and mid-2005 based on county records. It generated 7,813 usable responses; the response rate was 5.4 percent.

Data in this report only includes data from respondents who indicated that they purchased a vacation home or investment property. A more extensive study, The 2006 National Association of Realtors® Profile of Second Home Owners, currently is underway and will be released in late spring. This study will be based on a large sample of existing owners and will update NAR’s benchmark study of second home owners that was published in 2002.