Desire For Vacation Homes Heats As Prices And Sales Lift

Investor's Business Daily

Demand for vacation home sales is heating up as a strong stock market, and improving economy and job market, have given more consumers the confidence to spend more freely on second residences, summer homes and getaway spots.

Real estate brokers in resort locales from the Mid-Atlantic to Lake Tahoe say second-home buying activity has picked up over the past year or so. Low interest rates and savory deals are a big draw, they say. And with lending and down-payment requirements still particularly tight for second single-family homes and condos, cash is still the preferred way to buy for many.

Nationwide, sales of homes intended for personal vacation use rose 10.1% in 2012 to 553,000 properties, according to the National Association of Realtors' investment- and vacation-home buyers survey.

The spring survey reflects a rebound in all segments of the housing market, including the vacation-home sector, says Paul Bishop, the NAR's vice president of research.

Why the strong lift in vacation-home sales? The economy is growing, the unemployment rate is generally ticking down (though initial jobless claims rose last week), and the stock market has done very well in the past year or so, Bishop notes.

"A lot of buyers, who were sitting on the sidelines, decided last year was probably a good time to take advantage of buying a vacation home," he said. "They were feeling pretty good about their own financial situation, given the growth in the market and in the economy.

Second-home buying activity has been brisk in New Jersey beach vacation spots such as Avalon and Stone Harbor, says real estate broker Allan Dechert, co-owner of Ferguson Dechert in Avalon.

Back At The Beach

The Avalon and Stone Harbor areas got hit by Superstorm Sandy, but nothing like up north in spots such as Long Beach Island, where a significant amount of inventory was lost, Dechert says.

"But we didn't have that," he said. "And we really didn't see any fluctuation in pricing.

Dechert says activity in his area, however, was a little slower the first month or so after the storm.

Interest in buying second homes has increased as people look to "get more bang for the buck" amid low interest rates, he says. He's seeing a pickup in new construction in Avalon for resale and owner occupancy.

"We just finished up a great April with a lot of activity in all price segments, from $300,000 to $3.8 million, with most activity around $1 million," he said. "The market has been very active even in higher-end properties ... a very good sign.

Among high-end homes his office has recently sold and placed under contract are a $6 million oceanfront property in Avalon in January and a $3.8 million home near the ocean in Stone Harbor last month.

Still, he says, underwriting standards remain very tough. Some buyers get so frustrated with the process that they end up paying cash rather than deal with banks.

"It's still a tight credit environment for every loan for primary, investment or second homes," said Fairfax, Va.-based lender Frank Donnelly, who's chairman of the Mortgage Bankers Association branch for metro Washington, D.C.

The level of scrutiny is very different than in 2007-08, but like 2010 and since, according to Donnelly.

"Every fact on the loan is checked and rechecked," he said.

The credit guidelines, he adds, are probably a bit looser than in 2010, but the documentation requirements are probably stricter.

In 2010, you needed a 20% down payment on a single-family vacation home, he says, while now you can put 10% down. But with the lower down payment comes a high credit score requirement. A lot of lenders require a 720 credit score for a second single-family home and for a condo many want a 740 score.

Financing Ins And Outs

Also, in some parts of the country particularly hard-hit by the housing slump, banks typically lend maybe 5% less than whatever the normal guidelines are, he says.

Overall, he says, most large lenders stick to the down payment guidelines of mortgage investors Fannie Mae (FNMA) and Freddie Mac (FMCC).

The good news, he says, is that interest rates on second homes are very similar to those for a primary residence and less expensive than for an investment property. He says you can get a 30-year fixed-rate loan on a second home for 3.625%.

But for a lot of buyers, mortgage financing isn't a factor, says Bishop. Forty-six percent of vacation-home buyers paid in cash in 2012, according to the NAR survey.

The median down payment for those using a mortgage was large — 27% of the price. And 44% of them financed less than 70% of the price.

Out West — around the California and Nevada resort area of Lake Tahoe — there has been an abundance of cash buyers for second homes, says Pamela Francis, a real estate broker at Century 21 At Tahoe Paradise. That's because buyers have figured out that paying cash gives them an advantage.

Activity is so brisk, her firm is seeing multiple offers with bidding wars becoming more common.

"The last 12 months have been significantly stronger than the year before, and both were very good years," Francis said.

Nationwide, vacation-home prices are ticking up. The median was $150,000 in 2012 vs. $121,300 in 2011, reflecting a greater number of more expensive recreational property sales in 2012, the NAR says.

"The overall real estate market continues to strengthen," Bishop said. "There will be more and more pressure on prices because there's not a big inventory of homes for any purpose.

The price picture is looking solid in all segments, he says, and there's a level of confidence for real estate that hasn't been seen in a while.

"Growth in household wealth will help vacation home purchases moving forward," Lawrence Yun, NAR's chief economist, said in an economic forecast Thursday.

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