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About That Dream Vacation Home....
With observance of Memorial Day behind us and vacation season
at hand, it's time in many American households for two perennial
questions:
- "Where shall we go
this year?"
- "Should we
pay rent in a hotel or resort again, or does it make more
sense to apply the money toward getting a place of our own,
which we will then have whenever we want to go there in the
future?"
Many households answered the second question with a
"yes" last year, and others are expected to do so
again this year.
Vacation homes — of which the U.S. Census Bureau identified 6.8
million at last count — accounted for 12.2 percent of all homes
purchased in 2005, and, at a record 1.02 million, such purchases
were up 16.9 percent from 872,000 in 2004, a recent survey by
the National Association of Realtors reported.
Their median price — whether detached single-family homes,
cabins or cottages, or multi-unit buildings — was $204,100, up 7.4
percent from 2004's $190,000. Their median size: 1,480 square
feet.
Vacation homes' share of 2005 purchases lagged the 27.7
percent of homes which were bought for investment — whether to
generate rental income, diversify assets, or both.
To David Lereah, NAR's chief economist, it was not surprising
that the two categories of second homes combined would
constitute almost 40 percent of residential sales, up from
2004's 36 percent. (Although commonly used, the term
"second" home is a bit deceptive: about 6 of 10 second
home owners surveyed by NAR were found to own two or more homes —
for vacation and/or investment — beyond their primary
residences.)
"The baby boom generation is driving second-home
sales," Lereah said in a statement. "They're at the
optimum point in life when people become interested in second
homes. They're at the peak of their earnings (and) interest
rates remain historically low."
Economic conditions remain relatively strong despite
inflationary pressures due mostly to rising commodity prices and
lower consumer spending. The resulting higher interest rates
have lead Lereah to expect a decline in purchases of investment
homes this year. "There are fewer incentives to speculate
in the market with price appreciation cooling in much of the
country," he adds.
"Vacation home sales will remain strong for the
foreseeable future, given the fact that baby boomers are
favorably positioned in terms of affordability, as well as being
at the stage in life when people are most interested in making
that kind of a lifestyle purchase."
That, to be sure, is not to suggest that the vacation home
market is going to be as firm everywhere in 2006 as in 2005. As
Barron's concluded in its May 29 issue following a survey of the
broad second-home market across the country: "After a long
string of double-digit annual price increases, a number of
second-home Meccas across the country are suddenly suffering
from plunging sales volume and burgeoning inventories of unsold
homes."
Though the official figures on sales prices have yet to
reflect the current round of cuts, interviews with real estate
pros and others strongly suggest that the averages are
deteriorating in a number of key markets.
An April 14 overview of coastal resorts by its sibling, The
Wall Street Journal, reported not only price cuts ("offers
that would have been an insult a year ago are now being
accepted," according to a Cape Cod real estate broker), but
also other steps to promote sales: cuts in
brokers' commissions, increases in housing ads
large enough to inflate a newspaper's size, and supplemental
devices such as listings under glass tabletops at an ice cream
parlor.
Despite the weaker prospects for 2006, the longer-run trends
underlying the vacation home market are expected to remain on
track, mostly due to the aging of the baby boomers.
"Vacation home buyers are making lifestyle choices and
purchasing primarily for their own enjoyment," Lereah
emphasized, citing NAR's 2005 survey findings for illustration:
72 percent of owners said they planned to use the houses for
vacations and family retreats. Moreover, 18 percent expected
their vacation homes to become their primary residences in
retirement.
Economic motives seem to have played a minor role. While
one-third bought to achieve greater diversification of their
assets — well below the one-half of investment home owners who had
that motive — only 13 percent bought to earn rental income vs.
two-thirds of investment home owners. (Of vacation homes which
their owners rent out, the median number of nights rented is
only 12 per year, far fewer than the number of nights that
owners of investment homes rent out theirs.)
The typical vacation home owner participating in the NAR
survey was 59 and earned $120,600 last year. As many as
one-third had paid cash, commonly out of savings or from
proceeds of real estate sales, and of those who got mortgages,
the median down payment was 27 percent. Of the total universe,
82 percent owned their vacation homes free and clear.
The median distance between a vacation home and the owner's
primary residence was 220 miles; 34 percent bought within 100
miles of their primary residences, and, ironically, another 34
percent bought 500 or more miles away, enough to get them to an
ocean, river, or lake (66 percent of preferences), recreation or
sporting activities (39 percent), vacation or resort areas (38
percent), and mountains or other natural attractions (31
percent).
Among the leisure activities of interest, beach, lake or
water sports led the list at 57 percent of owners. Boating was
next at 38 percent, followed by hunting or fishing (32 percent).
Of course, it's imperative that those evaluating whether to
buy or rent a vacation home should crunch the numbers. Most
financial planners would recommend a thorough quantitative
analysis showing the cost/benefit of buying or renting a
vacation home.
June 2006 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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