Vacation Home Comebacks
As the market continues to shift, one industry trend seems to be making continuous waves: vacation homes.
With low prices and mortgage rates still available in most parts of the country, affluent buyers—or those who have always dreamed of a cabin on a lake—are making their move and purchasing second homes in exotic locations to be used as vacation getaways.
According to the National Association of REALTORS® (NAR), sales of investment and vacation homes jumped in 2011, with the combined marketshare rising to the highest level since 2005.
NAR’s 2012 Investment and Vacation Home Buyers Survey, covering existing- and new-home transactions in 2011, showed vacation-home sales rose 7 percent to 502,000.
It’s easy to understand why the vacation home market would be on the rebound; not only is the overall real estate atmosphere brightening, but U.S. travel expenditures are picking up, too. In 2011, we saw an 8.8 percent rise in travel expenditures, and according to the October 2012 Traveler Sentiment Index™, traveler sentiment neared pre-recession levels, within 0.7 points of the October 2007 pre-recession high of 91.1.
People are getting away again, and as the economy stabilizes, many are looking for a standing vacation spot. But what does this rebounding market look like, and what does it mean for you as a real estate professional? Let’s take a look at the numbers, according to the 2012 NAR survey:
• In 2011, 42 percent of vacation-home buyers paid in cash, and 39 percent purchased distressed properties.
• Vacation-home sales accounted for 11 percent of all transactions in 2011, up from 10 percent in 2010.
• The typical vacation-home buyer was 50 years old, with a median household income of $88,600.
• Purchased vacation homes were located a median of 305 miles from the buyer’s primary residence. Thirty-five percent of vacation homes were within 100 miles, and 37 percent were more than 500 miles.
• Typical buyers plan to own their recreational property for a median of 10 years.
“There are lots of investors buying rental properties and second homes right now,” says Goran Forss, a broker in Temecula, Calif., whose company has had a consistently strong base of investors over the past several years—approximately one-third of all buyers—and has copious amounts of vacation rentals. In Forss’ market, a myriad of investors keeps the inventory scant.
Aside from a location that will allow them to enjoy their new home to the fullest, Forss notes that buyers are interested in maximizing their return on investment.
NAR’s survey showed that 91 percent of vacation-home buyers planned to rent their new home out within the next 12 months for at least part of the season.
Of this 91 percent, 40 percent plan to rent the home between one and eight weeks of the year, possibly to make a little extra money during the time they won’t be using the property. Thirty-two percent plan to rent their properties between nine and 26 weeks per year, and 27 percent plan to rent their homes between 27 and 52 weeks per year.
“Those (vacation properties) have become more and more popular for the savvy investor and stay booked year round due to our moderate temperature and abundance of sunny days,” explains Forss.
U.S. vacation home seekers aren’t solely staying within the country, either. The trend seems to be percolating worldwide. Shannon P. Murree, a real estate professional in Barrie, Canada, says she has seen an increase in U.S buyers looking for additional properties in her market as confidence in the economy grows.
“People are looking at (vacation homes) for their own use, and renting them out weekly during the times they won’t be using them, as well,” says Murree, who notes that she has seen an increase in this trend as of late.
When working with buyers looking for a vacation home, it’s important to understand that lending is different for non-primary properties. Get to know this financial arena so that you can help your clients as efficiently as possible. Lenders are stricter with vacation home mortgages than those for traditional homes, so your buyers must have immaculate credit—often 720 or greater—and be up-to-date with their primary mortgage.
Additionally, many lenders have been giving out “jumbo” mortgages for vacation and investment properties. Unfortunately, new mortgage guidelines put out by the Consumer Financial Protection Bureau will go into effect in 2014 and may put an end to these popular loans.
If you’re interested in working with vacation buyers, you should start by getting to know the niche market. According to Forss, the best way to do this could be to consider investing yourself. “The most successful agents working with investors are investors themselves,” says Forss, who owns nine rentals along with his wife and business partner, Lisa. “It’s very easy then to connect with the investors, as we know all the insights and best practices of handling investment properties.”
I was speaking to one of my past clients this week who asked me if could help her friend find a home. This particular buyer was initially looking in an area in a different county and I chose to refer that buyer to another Realtor who could better service them. I had initially found about 5 properties that met the basic criteria that were important to this buyer and I shared that with the agent I referred them to. The agent called me back in about 30 minutes and told me that all five of those properties were either in contract (pending) or they had 5+ offers on them already. To my Real Estate colleagues this scenario is no big surprise as we have been dealing with this shortage of available housing in some areas for over 6 months.
This shortage of available homes is a real issue and it is very good news for existing homeowners who are seeing the value of their homes increase rapidly. The driving factors are an abundance of qualified buyers eager to capitalize on upward trending home values, low interest rates, and a lack of new home construction. I have agent friends in the East Bay Area who tell me that buyers are offering $40,000 to $50,000 over the list price on their properties. Some people may think that this seems insane but the reality is even with the over bidding that is taking place we are still well under the peak (especially if you factor in inflation) of the Real Estate market of 2005.
Most Real Estate professionals will tell you that from the peak of the Real Estate market to its lowest point we witnessed a loss of home values somewhere between 50-60% in most areas of California. This caused an abundance of housing inventory which brought on one of the largest and longest blow out sales on homes that I think any of us has ever seen. In the words of Daniel Jacuzzi, President of Select Group Real Estate Services, “that sale is now over”! In the past 6-9 months we have regained a portion of that loss which has allowed some homeowners who have been in a negative equity position to sell their home and move up or even downsize because of the increase in home values. The increase in home values has also allowed others to refinance and even leverage themselves to buy investment and or vacation properties. The current assessment by the most conservative forecasters tell us that until we surpass the home value peak that was achieved in 2005 there is little fear of a down turn in home values. In my opinion we may surpass those peak values because new housing construction is a little slow in getting going which means demand will continue to outpace supply until new housing constructions gains more traction.
The conversation that I had with the past client that I referred to at the beginning of this article continued with this question; “so are we back to that same market of 2005”? I think there are a few things that are different. The interest rates are lower than they were in 2005, financing requirements are tighter especially when trying to obtain a favorable interest rate, appraisal regulations are tougher, and the lessons learned from such a dramatic loss of capital seems to be keeping things from getting out of control. This doesn’t mean that we won’t repeat some of the mistakes made that led to Real Estate down turn but what remains true is that housing has rebounded and the blow out sale is over!
What really excites me and the reason I titled this article “The Housing Revolution” is what a robust Real Estate market means to our overall economy. The Real Estate market is going to be the engine that will drive our U.S. economy and it will create and bring back jobs to a strong and intelligent work force. Even the Industrial Revolution had several starts and stops but once it took off the sustained growth was phenomenal. Our history as Americans tell us that when we have an abundance of jobs, the cycle of increased opportunity perpetuates and sustains itself, which when fueled by American ingenuity and creativity, we always exceed our previous achievements.
I think we could all do ourselves a great big favor and spread the word that housing is back, prices are up, and the light at the end of the tunnel is not a train! I would like to think that we are not experiencing a housing bubble but actually a housing revolution!