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Vacation Home Sales Rise to Record Levels in 2006
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2 Comments ::  :: Investment, Second Homes |
Vacation Home Sales Rise to Record Levels in 2006
 Second-home sales were mixed in 2006, with the combined total of vacation- and investment-home sales accounting for 36 percent of all existing and new residential transactions – down from 40 percent of sales in 2005, according to the National Association of Realtors®.
NAR’s annual Investment and Vacation Home Buyers Survey shows vacation-home sales rose 4.7 percent to a record 1.07 million in 2006 from 1.02 million in 2005, while investment-home sales fell sharply, down 28.9 percent to 1.65 million in 2006 from a record 2.32 million in 2005. By contrast, primary residence sales fell 4.1 percent to 4.82 million in 2006 from 5.02 million in 2005.
Twenty-two percent of all homes purchased last year were for investment, down from a 28 percent market share in 2005, while another 14 percent were vacation homes, up from a 12 percent share in 2005.
David Lereah, NAR’s chief economist, noted the drop in investment homes was much greater than the decline in primary residence sales. “We expected the drop in investment sales because speculators left the market in 2006, which caused investment sales to fall much faster than the primary market, but the rise in vacation-home sales is based on strong demographic and lifestyle factors, with only modest interest in renting their properties to others,” Lereah said.
The typical vacation-home buyer in 2006 was 44 years old, had a median household income of $102,200, and purchased a property that was a median of 215 miles from their primary residence; 42 percent of vacation homes were closer than 100 miles and 32 percent were 500 miles or further.
“The demographics favor vacation-home sales because large numbers of consumers are in the prime buying ages, and buyers want recreational property for personal use – investment is a secondary consideration,” Lereah said.
Last year, in the 2005 second home buyer survey, NAR noted that there were 36.0 million people aged 50 to 59 in the United States, and the median age of vacation-home buyer was 52. However, Lereah said a larger group of people aged 40 to 49 in 2005 would be driving the market in the coming decade. “We see this happening now with 44.7 million people in their 40s, and the median age of vacation buyers has dropped close to the historical average, which is about 47.”
In listing the reasons for purchasing a vacation home,
- 79 percent of buyers wanted to use the home for vacation or as a family retreat;
- 34 percent to diversify investments;
- 28 percent to use as a primary residence in the future;
- 25 percent for the tax benefits;
- 22 percent for use by a family member, friend or relative;
- 21 percent because they had extra money to spend and
- 18 percent to rent to others.
In terms of location, 29 percent of vacation homes were purchased in rural areas, 24 percent in resorts, 22 percent in a suburb and 10 percent in an urban area or central city. Sixty-seven percent were detached single-family homes, 21 percent condos, 8 percent townhouses, and 4 percent other.
One-quarter of vacation homes were purchased in the Northeast, 13 percent in the Midwest, 38 percent in the South and 25 percent in the West. Investment-home buyers last year were a median age of 39, earned an income of $90,250, and bought a home that was fairly close to their primary residence – a median of 22 miles.
When asked about the most important reasons for their purchase of an investment home,
- 46 percent said to provide rental income;
- 43 percent to diversify investments;
- 23 percent for tax benefits;
- 18 percent to use for vacations or as a family retreat;
- 15 percent because they had extra money to spend;
- 13 percent for use by a family member, friend or relative; and
- 12 percent to use as a primary residence in the future.
Thirty-seven percent of investment homes are in a suburb, 22 percent a rural area, 18 percent urban or central city, and 7 percent in a resort area. Sixty-three percent are detached single-family homes, 26 percent condos, 6 percent townhouses or rowhouses, and 5 percent other.
Twenty-four percent of investment properties were purchased in the Northeast, 17 percent in the Midwest, 39 percent in the South and 20 percent in the West.
Twenty-five percent of vacation-home buyers paid cash for their property, as did 32 percent of investment buyers. An unusually high number of respondents in this survey report purchasing new homes: 44 percent of vacation-home buyers and 36 percent of investment-home buyers.
The median price of a vacation home in 2006 was $200,000, down 2.0 percent from $204,100 in 2005. The typical investment property cost $150,000 last year, down 18.3 percent from $183,500 in 2005.
“The drop in investment prices comes as no surprise, but for vacation-home prices to edge down in a record market is a bit puzzling,” Lereah said. “It may result from a large dumping of inventory on the market by speculators, especially in the condo sector, with long-term, second-home buyers taking advantage of the glut and buying at negotiated discounts. This underscores that housing should always be viewed as a long-term investment, providing solid returns over time.
“Anecdotally, part of the drop in the median investment price results from investors shifting away from pricier markets like Florida, Nevada and Arizona, and into affordable locations in New Mexico, Idaho, Utah, Georgia, Tennessee and the Carolinas,” Lereah said.
Vacation-home buyers plan to keep their property for a median of 10 years; 38 percent, the largest share of respondents, plan to keep their vacation home for 11 years or more. Investment buyers plan to hold their property for a median of five years, with 33 percent planning to keep for six years or more. Even with the cautions on speculative investment, 12 percent of investment buyers plan to sell in one year or less, although some may be adding value by renovating.
Most second-home buyers are married couples, including 78 percent of vacation-home buyers and 68 percent of investment buyers. Single men purchased 11 percent of vacation homes and 17 percent of investment property; all other household categories are in the single digits.
Caucasians accounted for 78 percent of all second homes purchased in 2006, both for vacation homes and investment properties. African Americans purchased 8 percent of vacation-homes and 10 percent of investment properties, Asians accounted for 6 percent of vacation-home purchases and 7 percent of investment properties, and Hispanics bought 9 percent of vacation properties and 8 percent of investment homes.
Sixty percent of vacation-home buyers and 54 percent of investment buyers purchased through a real estate agent or broker, but 20 percent of vacation buyers and 17 percent of investment buyers purchased directly from an owner they knew. Those latter transactions may contribute to a somewhat lower median price because open-market transactions historically obtain higher prices than do closed sales.
Eight in 10 second home buyers considered it a good time to invest in real estate, compared with 57 percent of primary residence buyers. A surprising 55 percent of vacation-home buyers and 66 percent of investment buyers said they were likely to purchase another property within two years.
“Second homes are really something of a misnomer because a fair number of respondents buy multiple properties,” Lereah said. Eighty-six percent of vacation buyers purchased one vacation home, 12 percent purchased two homes and 2 percent purchased three or more vacation properties.
Sixty-three percent of investment buyers purchased one investment property, 23 percent bought two properties, 9 percent bought three investment homes, 2 percent purchased four properties and 2 percent bought five or more investment homes.
The Profile of Second-Home Owners, described what current owners most desired in a vacation home.
- Two-thirds want to be close to an ocean, river or lake;
- 39 percent close to recreational or sporting activities;
- 38 percent close to vacation or resort areas; and
- 31 percent close to mountains or other natural attractions.
Leisure activities of interest to vacation-home owners included:
- beach, lake or water sports, 57 percent;
- boating, 38 percent;
- hunting or fishing, 32 percent;
- golf, 21 percent;
- biking, hiking or horseback riding, 20 percent;
- ski or winter recreation, 17 percent; and
- tennis, 9 percent.
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Thursday, May 03, 2007 3:59 AM |
As Boomers head into retirement, this market promises growth for brokers
Disposable income and significant assets, including access to lots of cash, characterize high-end and second-home buyers, who are generally unfazed by the ups and downs of interest rates or real estate prices.
In 2005, second home purchases accounted for 40% of all sales, according to the National Association of Realtors, a number that was expected to dip last year as investor-flippers backed off. But as Baby Boomers continue their inexorable march towards retirement, there remains enough wealth to keep the high-end, second home industry perking rather than peaking.
Strategies for reaching these asset-rich buyers vary widely, from heavy use of the Internet-with sophisticated Web sites providing virtual tours of luxury properties-to word-of-mouth referrals arising from a broker's personal sphere of influence.
Location is also a key factor in how properties are marketed, and to whom. Resort and vacation areas tend to attract second home buyers who don't need to be near jobs and schools, key concerns for younger homeowners. Those buying second or soon-to-be retirement homes like to be within driving range of children and grandchildren, but not too close to them.
"The bottom line is that the high-end, second-home buyer is looking for a gathering place for the extended family and a central location, because all the kids are grown up and scattered around," says Debra Savage, who relies largely on referrals to sell homes at Deep Creek Lake, Maryland, a four-season mountain lake resort area within a three-hour drive of 23 million people.
At the other end of the high-end, second-home market, Baird & Warner sells condos in downtown Chicago to suburbanites who also want a pied a terre. "They want the best of both, the ease and convenience of living in the city, and they also want the escape of the suburbs," says Rick Druker, the Chicago real estate firm's managing broker. Those whose primary residence is "a little bit further out," say 20 to 50 miles, "look at downtown as a vacation spot."
When these Baby Boomers reach retirement, they sometimes sell their house in the ‘burbs and move up to a larger condo in town, according to Druker. Typically, these buyers are doctors, lawyers and financial company executives.
But not all the firm's in-town, second-home clients come from nearby suburbs. One apartment unit on fashionable Michigan Avenue sold recently for more than $8 million as a second home to a downstate business owner. How do you reach such buyers? Druker says most start their property search on the Internet, where Baird & Warner displays eight photos with every listing.
Michael Saunders & Company, based in Sarasota, Florida, also places a high premium on Internet marketing. In an average week, according to Alexa.com, traffic to the high-end firm's Web site was 15 times higher than to Coldwell Banker's Florida site, 65 times higher than Prudential Palms, 142 times higher than Premier Properties and 900 times higher than RE/MAX Properties Sarasota.
"It's our biggest focus," says Tom Heatherman, a company spokesman. "As your income goes up, the likelihood you'll use the Internet also goes up. When you go to our Web site and you are a high-end buyer, you can click on videos we've purchased and take a virtual tour of some of our priciest listings."
Viewers who click on Saunders' "video magazine" are treated to more than a virtual tour. Here are Dick and Dawn Duques, owners of a Casey Key property listed for $20 million showing their house, and talking about their home and their lives. "We moved right as the kids went off to college," she says. "We wanted to have a place where they would still want to be with us."
Saunders does print advertising as well, in the Wall Street Journal, and with such high-end outlets as Christie's Great Estates, Luxury Portfolio, Veranda Magazine, and Leading Real Estate Companies of the World, of which Saunders is board chairman. "We have a lot of give and take referral-wise between those marketing partners," Heatherman says.
Many of Saunders' buyers are looking not just for second but for third homes. "You've probably heard about the bubble bursting in Florida, but it's the high-end, $3 million and above, that's really held up," says Heatherman.
"There's a lot of overlap between the luxury market and second homes," he adds. "As boomers retire, they are coming down and buying a luxury residence, in many cases the primary residence. A lot buy a second home and love it so much they use it more and more. The next you know, it's no longer a second home, it's the primary home, and very often they sell off the primary home or keep both and spend most of their time here."
While special financing programs may attract first-time home buyers-and brokers marketing to them may promote their firm's subsidiary financial services, obtaining a mortgage at a good rate is often not an issue for high-end and second-home buyers.
There are, however, other services that high-end buyers have come to expect. Sellers of such properties "get specific higher-end expanded advertising," says Lynn Kosner, who manages Baird & Warner's North Suburban office. "The property gets on two or three extra Web sites," such as luxuryportfolio.com and Baird & Warner's special luxury home site, which also links to properties in other "luxury destinations."
"We make sure that every one of our agents understands our luxury portfolio program, so they can distinguish which property goes where," says Kosner. In 2006, her office sold eight properties at prices ranging from $5 million to $17.6 million, and 108 properties between $2 million and $5 million. "Most of these homes were purchased as land value for" tear-downs, "or by end users maintaining the homes. Occasionally, some are purchased as second homes for city dwellers, which we find remarkable."
The method of payment also distinguishes the high-end market. "They are what we mostly consider cash buyers," Kosner says. "They very rarely add a mortgage contingency to their offers. They usually don't need to qualify for a mortgage."
Resort communities tend to generate their own markets, as families first rent vacation homes and then decide they like the area enough to buy. These "duty desk" buyers typically go directly to a broker's office to begin searching in earnest.
"We have so many visitors to Myrtle Beach, 13 million a year, we have a new audience every week," says Don Smith, president of Coldwell Banker Chicora, a prominent South Carolina brokerage. "Most of our marketing is targeted to those in town. We do some direct mail to those who've visited before. We use the Internet for our [broader] market presence."
Many visitors pick up the home guides distributed for free, take them home, and then look up properties on the Internet. Web searchers from the firm's "feeder market" to the north who are interested in the 60-mile coastal "Grand Strand" can click on the Coldwell Banker web site and, Smith says, "directly pass through to our web site, which is very functional and user-friendly."
Smith says his second-home market benefits from the older buyer's wish to be within easier driving range of their primary residence. "For a lot of folks who used to retire to Florida it's such a long drive down, while Myrtle Beach is centrally located, including almost even to New York. Twelve hours going north gets you a long way up the road, whereas Florida is two full days with an overnight stay."
Smith's firm trains its agents in the care and handling of high-end buyers since, he says, "the upper end buyer expects a higher level of service," when they buy a Mercedes or Lexus or a house. "They expect a greater level of attention. Communication is mainly the key. The preview-trained agent knows every single community failing into their price point."
Back at Deep Creek in the mountains of western Maryland, the owners of the Wisp ski resort last spring sold 60 "ski-in, ski-out" home sites for $25 million in one day, during what was billed as a "launch weekend." The owners worked with a Denver, Colorado marketing firm, which sent out 220,000 invitations to persons whose names appeared on various mailing lists.
The 120 people who showed up for these North Camp lots had purchased a "reservation" in the form of a $1,000 refundable deposit. They were treated to a Friday night party, a free hotel room and breakfast. The buyers were primarily boomers, many of whom had visited the area before, and most were from the Washington metropolitan area.
"They expect a .3 percent response rate, which is about what we got," said Karen Myers, managing partner of DC Development, which owns the Wisp resort. "It was good. However, it was really about six months of effort, mailings, talking to prospects." She is planning another launch weekend later this year for golf course home sites.
"What it boils down to," she says, "is families realize at some point that they need to be able to settle down from all the daily hustle and bustle and do some fun things together. It's primarily a second home market, but retirement is becoming a bigger and bigger facet of our business."
And then there's that cash access. "An average of 25 to 40 percent pay cash for properties they purchase here on any given year," says Myers. "That gives us a wonderful stability in our market. For the percent of home owners without any debt service, there is no incentive to sell at a loss. They just wait it out. There was no bidding on our ski-in ski-out sites. We just had a plat and a price list. Thirty-eight percent of our North Camp closings were cash."
For buyers and sellers alike, it's good to be rich.
By Eugene L. Meyer |
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Thursday, May 03, 2007 4:02 AM |
Why second home's a better investment than stocks. It's more than just the 'pleasure' component
Ted Jones never has tried to keep up with the Joneses. The senior vice president and chief economist for Stewart Title drags his own huge net to filter financial data and often offers opinions that are over the top compared to his housing brethren.
When it comes to second homes, he really heads back to basics and suggests potential buyers do the same.
"My definition of a second home is one that is purchased with no intention ever to sell it," Jones said. "If you sell it or even intend to sell it, it's an investment. Period. If you do, you've lost my definition of a second home.
"We plan to pass ours on to our daughters as a part of their inheritance. If fact, we don't want it to go up in value because then we would have to pay more property taxes."
Clearly, Jones' idea of value of a second home has little to do with wealth accumulation. His only value gauge comes from the ability to enjoy the property -- sunset over the lake, cocktails by the seventh fairway, a breathtaking mountain view just a short walk up the road, etc.
While it's easy to agree with Jones about the basic idea of a second-home investment, most potential shoppers can't afford to consider only the pleasure component; they are in need of a larger total package. So, let's consider investing in a second home versus common stocks to help explore the possibilities.
Conventional wisdom still holds that common stocks offer the best returns over time. If you measure cash-on-cash return, this may be true, but when you look at total return, the picture changes. The ownership of real estate offers four distinct advantages over stocks:
1. Real estate prices are less volatile in most areas. As we have seen in the opening years of this century, stocks can move a great deal in both directions. This makes ownership of stock a crapshoot, with profit solely dependent on timing. If you cashed out in December 1999, your returns were huge; if you waited a year, you probably lost a great deal. Since then, it's been up and down. House prices fluctuate, but within a lesser range. If real estate prices don't shoot up the way stock prices do in a bull market, real estate markets don't crash the way stocks do when the bull runs out of steam. In short, it's a less risky investment.
2. Real estate is a leveraged investment. You can own a second home with an equity investment (down payment) of no more than 20 percent. In fact, there are many programs that let you buy with a lot less. Most people can't do this with stock. You need to pay the entire price of the stock. So, when the price of a stock rises 5 percent, you make 5 percent on your money. If your real estate rises by 5 percent in value, your return is upwards of 25 percent.
3. Real estate is tax-advantaged. Any interest incurred for the financing of a second home is deductible from ordinary income for tax purposes. If your second home becomes an investment property, tax can be deferred and sometimes eliminated. You still pay capital gains tax on stock and you can't deduct the interest on any debt incurred for the purchase of financial assets.
4. And finally, here's the only return that drives the Jones camp: you can live in real estate. Stock certificates are pretty, with great colors, cool writing and embossed letters. Unfortunately, you can't go to sleep in them or stand on them to watch the sunset over the lake, or hold a party for your friends and family in them. They just (hopefully) make you money. Real estate provides many different kinds of satisfaction that money can't.
While I absolutely concur with Jones and about the pleasure power of a second home, I also believe deeply in its long-term wealth-building powers. In a nutshell, if you think a house is good enough to live in and enjoy, someone else will too, and they'll pay you for the privilege to rent it. The ownership of an investment, particularly that property you can personally enjoy, pays dividends on a variety of levels and can be a very profitable road.
By Tom Kelly Inman News
To get even more valuable advice from Tom, visit his Second Home Center. |
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