Why People are Buying Second Homes
WHAT ARE SECOND HOMEBUYERS LOOKING FOR IN A HOME? This varies vastly. Here are a few desired selling points:
- Privacy – Mostly those looking at the home for vacation or retirement are looking for privacy.
- Location – Scenery, climate, proximity to nightlife or golf courses are often sought after locations. Six out of ten second-home investors are buying in metropolitan areas (National Associataion of Realtors®’ survey)
WHAT DO BUYERS INTEND TO DO WITH A SECOND HOME?
- Vacation – This is a prevailing thought that most people who own a second home simply have it for vacation. While this is common, only 37% of investment and vacation home buyers are looking for a vacation home!
- Rent – Charging rent is often what helps buyers afford their second home. It makes sense to make some income on the property while you aren’t there!
- Retire – A lot of people buying a second home intend to use it to retire in one day. Many of them will rent it out in the mean time to help pay for the property.
Galveston's Favorite is Multi Houses
South Padre's Favorite is Condos
Port Aransas' Favorite is Waterfront
HOW YOU DETERMINE WHAT TYPE OF PROPERTY IS THE BEST FIT?
KEEP IN MIND SOME OF THE HIDDEN COSTS
- Single Family Homes generally cost more, but have more space. Sixty to seventy percent of second home buyers opt for a single family home.
- Condo or townhouses are also a popular choice for second home purchasers. This option tends to come with less maintenance and cost, but also with less privacy.
- Multi-Family Homes are nice to rent out because you have multiple sources of income, but will require quite a bit of maintenance and management of tenants.
- HOA Fees
The National Association of Realtors came out with a research study showing that 40% of all homes sold in the U.S. were bought as second homes. Will you be one of them?
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Comment By Trulia
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Comment By The National Association of Realtors®
6 reasons Buyers aren't biting (and what Sellers can do to change that)!
Interest rates are at historic lows: less than 4.5% on a 30-year-fixed and below 4% on 15-year fixed rate loans. And prices are low, too - at or near bottom in most of the country. Together, these items mean that affordability is near an all-time high.
It's like a massive, pre-holiday sale on real estate!
Nevertheless, home sales are only "gradually" creeping up, according to the most recent data published by the National Association of Realtors. And sellers are clearly still feeling price pressures; on Trulia's October price reduction report, an all-time high 27% of American homes listed for sale had had their price cut at least one time!
So, what's stopping buyers from running out to grab up all these affordable homes at affordable rates? And what can savvy sellers (and listing agents!) do to offset these obstacles?
1. (Perceived) difficulties in qualifying for a mortgage. Mortgage guidelines have tightened up significantly over the last few years, now requiring good (but not perfect) credit, documented income, a proven stable job history and cash for down payment and closing costs. Some buyers find it difficult to scrape the down payment money up; others find that they can qualify, but not for a large enough mortgage to buy any home worth owning (banks have tightened up debt-to-income ratios, too). Many would-be buyers don't even consider themselves serious prospects, disqualifying themselves in their own heads because they heard somewhere that a 20 percent down payment is necessary - in actuality, many buyers can qualify for a 3.5 percent down, FHA loan. Between actual difficulties qualifying and perceived difficulties that don't actually exist, lots of buyers are not biting because of loan "issues."
Seller Solution: Ask your agent to have a mortgage broker colleague prepare flyers reflecting various loan options, to give open house attendees a reality check about what it would actually take - including down payment, closing costs and monthly payment - to buy your home. Also, consider offering closing cost credits or being willing to chip in for lender-required repairs to empower buyers who are struggling with mortgage qualifying to close the deal.
2. Fear of buying a foreclosure. The ongoing robo-signing/foreclosure fraud scandal and the resulting foreclosure freeze is beginning to play a role. If you haven't heard, two of America's largest mortgage servicers have frozen foreclosures and resales of foreclosed homes in 23 states, and Bank of America, the largest lender in the land, has frozen them in all 50 states, all because sweeping fraud and improprieties have been revealed in the way the banks are processing foreclosure documentation.
More and more, buyers are fearful that if they buy a foreclosed home, that sale could be reversed down the road if it comes out that the banks wrongfully foreclosed on the former owner. And that could be stopping buyers from, well, buying foreclosed homes.
Seller Solution: If your home is not a short sale, all of your home's marketing materials should be trumpeting this fact - especially if most of your home's competition (e.g., similar homes in the area and in the same price range) are bank-owned homes and short sales. Seeing 'Not an REO/Not a Short Sale' on a listing or flyer is quite magnetic to buyers right now.
3. Waiting for the shadow inventory to come out. The phrase 'shadow inventory' refers to the homes that have been (or will soon be) foreclosed on by the banks, which are not yet on the market; some estimate this inventory to be as high as 7 million homes! Many buyers who are actively house hunting -- and who are disappointed with the homes that are available -- are fearful of pulling the trigger because they believe the banks are going to start releasing their 'shadow inventory' soon, and that those homes will be better than what's out there on the market right now.
Seller Solution: Work with your agent to strategically stage your home and even do basic, inexpensive repairs, to make it stand out against the competition as a desirable property. Also, ensure that your pricing is in line - or even slightly below - similar homes on the market right now, to ensure that your home seems like a very strong value for the price.
4. Waiting for the bottom. Given the trajectory of home prices over the past couple of years, there's a large contingent of buyers who are afraid that after they buy, home price will continue to fall and they will lose their hard-earned investment in the home. These are folks who are still waiting for the bottom (although by some accounts, including that of the Case-Shiller Price Index, the bottom is here or has already passed, in many cities).
Human nature is always to wait too long for the bottom, miss it, and then end up wishing we had bought sooner. The behavioral economics theory of myopic loss aversion explains this phenomenon as being due to the fact that the pain of losing money generates a greater psychological fear and avoidance than the prospect of gaining the same amount of money. Buyers can set themselves up to gain over time, even if they lose equity in the very near term, by making smart decisions about the home they buy and how much they pay for it, and planning to stay in their home for a longer term than previous generations of buyers did.
Seller Solution: This is a difficult one to counter, because it's really more about the would-be buyer's interpretation of the market than about their reaction to your home. If you live in a market that has had recent increases in home values, include that data in your marketing - make sure buyers are aware that they may already have missed the very bottom, and create a sense of urgency to buy your home before prices go up even more.
5. Unemployment/underemployment. Take California, for instance. The national unemployment rate is 9.6%; California's is a whopping 12.8%. But right around the same number of Californians are underemployed, meaning they work part-time, but want full-time work. That's right, a quarter of Californians are unemployed or underemployed, and -- right again! - none of those people are buying homes. On top of that, many people who do have jobs lack job security, the confidence of believing they'll be able to keep their jobs in the future. Interest rates could be zero, and people will not buy homes as long as they have no jobs or job security.
Seller Solution: If there are major employers in town that are within an easy commute of your home, both you and your agent should consider marketing it directly to employees there. Share your home's listing with Facebook friends who work there or even send an email out to your own contacts, if you work there yourself! Major companies' Human Resources Departments might help you get the word out to their employees - especially if you offer some incentive to an employee who buys your home, like a year's worth of subway passes. If you have universities nearby, there are likely online bulletin boards that offer housing options directly to relocating professors and employees.
6. Need to keep options open. Because home values are so volatile, currently, there's no guarantee that you can resell today's new home tomorrow without taking a loss. If we've learned anything from this crisis, we all know that it just doesn't pencil, financially, to buy a home on today's market unless you plan to own the home for at least 7 years (give or take a year or so, depending on how your market has fared in the housing recession).
Many Americans don't want to be tied to one location, given the changes in the job market, because they simply don't want to be stuck in one place, geographically speaking. They want to be free to meet someone via online dating and move if the match sticks. They want the freedom to move across the country or even to the next city or state for a job, if that's the direction their career takes them. The more mobile the person, the less likely they are to buy a home.
Seller Solution: Price your home well - if it's been lagging on the market, make sure you get aggressive and cut the price below a common buyer search cut-off price point (see this post for more details: Sellers: 5 Signs It’s Time to Cut the List Price of Your Home). Even buyers who are seriously in the market, get nervous about buying a home when it seems a bit overpriced, because they fear the price will drop some more in the coming months and years, extending the period of time before they can sell it at a break even or (hope beyond hope) a profit! Don't let overpricing cause you to lose buyers who otherwise would have bitten the bullet, pulled the trigger and hopped off the fence in order to buy your home.
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Comment By Keunwon Chung, Statistical Economist
Vacation-Home Sales Up in 2009 but Investment Sales Down
(March 31, 2010) – Vacation-home sales recovered in 2009 while investment sales fell sharply, according to the National Association of Realtors®.
NAR’s 2010 Investment and Vacation Home Buyers Survey, covering existing- and new-home transactions in 2009, shows vacation-home sales rose 7.9 percent to 553,000 last year from 513,000 in 2008, while investment-home sales fell 15.9 percent to 940,000 in 2009 from 1.12 million in 2008. Primary residence sales rose 7.1 percent to 4.04 million in 2009 from 3.77 million in 2008.
NAR Chief Economist Lawrence Yun said, “The typical vacation-home buyer is making a lifestyle choice, with nine out of 10 saying they intend to use the property for vacations or as a family retreat,” he said. “Investment buyers primarily seek rental income, with six in 10 planning to rent to others, although one in five wants a family member, friend or relative to use the home.”
Only one in four vacation-home buyers plan to rent their properties to others, while one in five investment buyers plan to use their homes for vacations or as a family retreat. However, 26 percent of vacation-home buyers and 8 percent of investment buyers intend to use the property as a primary residence in the future.
The market share of homes purchased for investment was 17 percent in 2009, down from 21 percent in 2008, while the vacation-home share rose a percentage point to 10 percent. The total share of second homes declined from 30 percent of sales in 2008 to 27 percent last year. “First-time buyers were at record levels in 2009 with fewer sales of second homes,” Yun said.
The median transaction price of a vacation home was $169,000 in 2009, compared with $150,000 in 2008. “The higher vacation home price may reflect increased sales in higher priced markets, particularly in areas of Florida and California where prices became highly attractive for buyers over the past year,” Yun said.
Half of vacation homes purchased last year were in the South, 21 percent in the West, 17 percent in the Midwest and 12 percent in the Northeast. Seven out of 10 were detached single-family homes.
The median investment property sold for $105,000 last year, down 2.8 percent from $108,000 in 2008. There were more investment sales in the West in 2009, consistent with reports in California of a high share of all-cash purchases, notably in lower price ranges.
The distribution of investment sales was fairly close to the distribution of population: 35 percent in the South, 25 percent in the West, 24 percent in the Midwest and 16 percent in the Northeast. There was a higher share of condos in investment sales: 27 percent of investment homes were condos vs. 21 percent of vacation homes.
Similar to 2008, cash factored strongly in the second-home market: three out of 10 vacation-home buyers in 2009 paid cash for their properties, while half of investment buyers paid cash. Fairly similar ratios for each group indicated portfolio diversification or good investment opportunities were factors in the purchase decision.
The typical vacation-home buyer in 2009 was 46 years old, had a median household income of $87,500, and purchased a property that was a median distance of 348 miles from their primary residence; 34 percent were within 100 miles and 40 percent were more than 500 miles.
Investment-home buyers last year had a median age of 45, earned $87,200, and bought a home that was relatively close to their primary residence – a median distance of 24 miles. Roughly one in four investment buyers purchased more than one property in 2009.
Three out of four second-home buyers were married couples.
Demographically, the long-term demand for second homes looks favorable because large numbers of people are in the prime years for buying a second home. “Historically, people become interested in buying a second home in their mid 40s,” Yun said. “The large number of people who are now in their 30s and 40s will dominate the second-home market in the coming decade with a strong underlying demand, although sales in a given year will vary depending on the economy. Mortgage lending for second homes was extraordinarily tight in 2009 but it is likely to ease a bit in 2010.”
Currently, 40.1 million people in the U.S. are ages 50-59 – a group that dominated sales in the first part of the past decade and established records for second-home sales. An additional 44.4 million people are now in the primary buying demographic of 40-49 years old, and another 40.6 million are 30-39.
Buyers were more likely to purchase investment homes within a metropolitan area, while vacation homes were generally located in a rural area, small town or resort.
Vacation-home buyers plan to keep their property for a median of 16 years while investment buyers plan to hold their property for a median of 12 years.
NAR’s analysis of U.S. Census Bureau data shows there are 7.9 million vacation homes and 41.1 million investment units in the U.S., compared with 75.0 million owner-occupied homes.
NAR’s 2010 Investment and Vacation Home Buyers Survey, conducted in March 2009, includes answers from 1,930 usable responses. The survey controlled for age and income, based on information from the larger 2009 NAR Profile of Home Buyers and Sellers, to limit any biases in the characteristics of respondents.
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Comment By christina white
Vacation and Investment Homes are using fewer mortgages
According to recently released Home Mortgage Disclosure Act (HMDA) data, in 2009 89 percent of mortgage loans were used for owner-occupied home purchases, with the remaining 11 percent used for either vacation or investment home purchases.
According to NAR Investment and Vacation Home Buyers Survey figures, in 2009 investment properties and second homes accounted for 27 percent of total home purchases.
Given that these segments of the residential market accounted for 11 percent of loans, buyers were apparently finding other financing sources to complete their purchases:
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Comment By christina white
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Fear of buying a foreclosure. The ongoing robo-signing/foreclosure fraud scandal and the resulting foreclosure freeze is beginning to play a role.
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