Written by Breck Hapner
Industry analysts are reporting that the demand for vacation homes is dropping below pre-pandemic levels due to exorbitant prices, mortgage loan-fee hikes, stock market uncertainties, and of course, rampant inflation. On the flip side, giving the white-hot second-home market some time to “cool” off should increase overall supply, while gradually allowing significant price reductions as the economy works to rebound.
This is actually good news, because for the last two years, buyers have been battling to win vacation homes in and around prestigious locations. The competition has been fierce because so few properties have been available. Strong demand and very short supply in the real estate market are never good friends to the buyers pocketbook, or to overall stress levels. Buyers have had to pull out their boxing gloves and get into the ring to place a winning bid on a home, even when paying with cash.
Are vacation homes now viewed as a burden, or a good investment? In February this year, the technology-powered real estate brokerage Redfin announced that demand for vacation homes had fallen, with mortgage-rate locks for second homes hitting the lowest levels since May 2020. Qualifying this was the fact that demand was almost 35 percent higher than pre-pandemic levels, although it was a smack-in-the-face decline from the 85 percent increase the month previous.
What a roller coaster. But it gets better. Although there is still a juicy demand for vacation homes, sales during the pandemic-driven prize fight have plunged considerably, according to a June 24 report from Redfin. Buyers have hit the canvas, fed up with soaring prices, higher rates, and economic uncertainties. Redfin’s analysis of Optimal Blue data found that mortgage-lock rates for second homes were down 4 percent from before the pandemic in May. That’s down from a revised rate of 3 percent above pre-pandemic levels a month earlier, and 70 percent above pre-pandemic levels a year earlier.
Is this a knock-out for vacation homes?
Change from 2020-21 Record Low Mortgages
During the pandemic, vacation homes became a valued commodity because of remote work, and the desire to get away to a safe, contactless playground. In other words, the affluent could not indulge in normal day-to-day activities, so second home purchases became a way to release tension and produce a pleasurable sense of achievement while still being esoterically “locked up.”
What helped so many sign on the dotted line were the record-low mortgage rates, which made the temptation to buy irrepressible. However, second home sales have sputtered due to the Federal Housing Agency raising loan rates from 1 percent to 4 percent in April. That’s quite a jump, and a big chunk of change that could add between $13,500 to $400,000 to a second home mortgage.
Punched in the gut, buyers are gasping, to be sure, but according to Redfin’s chief economist, Daryl Fairweather, the second home market is being hit harder than the primary home market because vacation homes are an optional asset. Fairweather went on to admit that data shows buyers are still purchasing vacation homes 35 percent more than they were before the pandemic due to higher availability and less competition.
That being said, Redfin also said that in addition to higher mortgage rates, shrinking housing inventory could be slowing second-home acquisitions, but less activity will free up more properties for purchase. So, even with higher rates and costs economically, overall asking prices for properties should fall considerably.
Higher Prices & Mortgage Rates
We have already outlined how the rise in mortgage rates has caused the vacation home market to decline. According to Freddie Mac data on 30-year fixed-rate mortgages, rates have risen from 3.08 percent to 4.17 percent over the same year. Ouch.
For those of you with crossed eyes reading this, and who aren’t good at math, higher mortgage rates means larger monthly payments. Complicating matters is the fact that housing prices have surged 20 percent over the past year, so a second home would require a bigger down payment and hefty rise in monthly mortgage payments.
Stock Market, Inflation & Recession Fears
We hear it on the news every day: the stock market has fallen due to this issue or that concern, causing investor anxiety over economic commodity issues caused by the war in Ukraine, high gas prices, out-of-control inflation, etc.
It is troubling for people with money in the market, and puts buyers in turmoil when building decision trees. What should we do? Should we buy, or should we hold off? These words are mouthed, mumbled, and shouted to the heavens thousands of times per day. Uncertainty just breeds more uncertainty.
Of course, this is why the stock markets are on bended knee. “Sure-things” have become “well, maybe”, or “it ain’t gonna happen.” Buyers want to ante-up to the table and make a meal out of a second-home. But regardless, let’s face it: someone is responsible for paying the bill. It helps to know your money is safe, and your assets are still around to provide equity.
Realtors Say Vacation Homes Are Still Sought After
According to Windermere Real Estate, the inventory of homes for sale is low, and because of high demand and economic woes, prices have increased from 13 percent in 2021 to higher than 19 percent in 2022.
However, the demand for vacation homes has remained high due to the vast pool of cash buyers who can more readily deal with higher interest and mortgage rates. These wealthy buyers don’t mind stepping in and scooping up properties that would otherwise require intense competition with financed buyers, who have dropped out of the market for the time being.
A recent report from realtor.com states that demand is still higher than normal for vacation and retirement homes, and is not projected to slump considerably. As a matter of fact, 65 percent of recent transactions for second-homes have been cash. The reason is that these buyers who are affluent or plan to retire want to purchase immediately without a mortgage to tie them down before prices rise any higher.
It is important to remember that there is a silver lining: with higher interest rates already in place, and many buyers retreating from the market, inventory is starting to rise. More inventory and lower demand will also translate into cheaper vacation home prices.
Back In the Saddle Again?
Analysts like to point out that markets function and respond to economic factors in a cyclical fashion. This means that: yes, one day you’re up, and the next day on your back.
The vacation home market may have cooled—for the moment, but experts are confident these properties will grow in popularity again—with a vengeance. It’s time to get back on the horse. It’s time to get those gloves on, and get back into the ring.
According to industry professionals, the question to ask yourself is directly related to your particular financial circumstances. The common recommendation is even though prices and borrowing costs are rising, inventory is also rising, and with it, a great opportunity to lock in a mortgage before rates get any higher, and get that special second-home property.
As always, stay tuned to Haven for further home market analysis and insights.
