MORTGAGE$: Outlook for vacation-home sector remains strong

By William Kugel

As spring unfolds and summer approaches, the real estate market typically begins to turn its attention to the second-home market. This past week the National Association of Realtors released what may be encouraging news concerning vacation homes: "The combined total of vacation- and investment-home sales declined with the overall market in 2007, but still accounted for 33 percent of all existing- and new-home sales, which is close to historic norms."To put this in perspective, the National Association of Realtors release states, "The total share of second homes declined from 36 percent of transactions in 2006.National Association of Realtors' annual Investment and Vacation Home Buyers Survey shows vacation-home sales dropped 30.6 percent to 740,000 in 2007 from a record 1.07 million in 2006, while investment-home sales fell 18.1 percent to 1.35 million last year from 1.65 million in 2006. At the same time, primary residence sales declined 10.0 percent to 4.34 million in 2007 from 4.82 million in 2006."Lawrence Yun, National Association of Realtors' chief economist, said the findings suggest different cycles for each of the sectors over the past two years. Investment-home sales declined sharply in 2006 as speculators disappeared, leaving the market to serious buyers, with the pattern continuing in 2007, he said. Vacation-home sales rose to a new record in 2006 because there was a pent-up demand from buyers who couldnt find a property as a result of tight supplies in preceding years. The overall sales decline in 2007 resulted from a combination of factors.Certainly, second homes are discretionary purchases and there is a natural tendency to pull back from big-ticket items in periods of uncertainty, Yun said.The other factor is the disruption in the mortgage market, with a significant tightening of credit during the second half of 2007.Some buyers simply adopted a wait-and-see attitude.Yun said lifestyle factors and strong demographics remain positive for the vacation home market. Investment considerations are secondary for vacation-home buyers, so there is some dormant underlying demand, he said. A peak of population is moving through the prime years for buying recreational property.It is welcoming to see investment sales returning to pre-boom sales activity.To understand how the second-home market still accounted for one in three transactions in 2007, let us review some of the underpinning motivations for second-home purchases. Population and migration trends. The baby boomer generation continues to be in the potential position to lead in vacation home sales. The trend to move from suburban areas to semi-rural areas should continue. Lifestyle. I do not have to tell anyone in this area about the powerful pull there is in having a residence in an area such as ours. The pull to live here affects people on many levels but they fall into two general categories: the recreational amenities and the quality of life. Tax savings. Not only do second-home owners enjoy the lifestyle that vacation homes provide, they also enjoy the tax benefits. The same tax deductions you take on your primary residence you can also take on one second home. That means that you can deduct the mortgage interest, the property taxes and even the "points" paid at time of purchase on your Federal tax returns. Economic gain. Now if these benefits are still not enough enticement, realize that many vacation-home owners also receive rental income. Since many vacation homes are vacant a good portion of the time, they can be rented. Often, second homes located in and around resort areas enjoy strong demand as rentals. Couple this with the potential capital gains income from holding real estate as it appreciates over the long term and you have very strong economic motivations behind second home ownership. This makes the vacation home a kind of triple play. It is fun to own, it reduces your income tax, and it can earn money too. Retirement planning. A portion of the boomer population is now at retirement age and another portion is nearing retirement. This accounts for the dramatic growth we have seen in more substantial second homes being purchased or built with the intention that they will become a primary residence after retirement. Second-home market declines are understandable given the volatility and uncertainty looming in the overall economic outlook. Nevertheless, with so many positives still in play for potential buyers of second homes, the outlook for second-home sales should remain strong. Yet, the same reminders apply to second-home buyers as for any other purchase. Namely, remember to plan your steps for financing before entering into any contracts. It may be even more important to be pre-approved for a second-home purchase for a number of reasons. Qualifying for a second home may be more difficult as debt-to-income ratios will now include your primary residence as well as your other obligations. So seek an experienced lender offering a number of financing options whose underwriting tends to favor second homeownership. The column MORTGAGE$ has been in continuous publication for 18 years. William Kugel is an author with over 31 years experience in the mortgage and real estate industries and a Mount Washington Valley resident. You may contact him c/o The Conway Daily Sun. All Rights Reserved. Copyright 2008, W. H. Kugel.