Vacation home sales Hold Up to market

Tuesday, July 10, 2007

by Team Riley

By Amy Hoak, MarketWatch

Last Update: 12:10 PM ET Apr 30, 2007

CHICAGO (MarketWatch) -- A sharp drop in investment-home sales offset a record number of vacation-home purchases to bring down the overall share of second-home purchases in 2006, the National Association of Realtors reported Monday.

The share of second-home sales was 36% of all existing and new residential real estate transactions in 2006, down from 40% of all sales in 2005, the group said.

Vacation-home sales went up 4.7% to a record 1.07 million homes in 2006 from 1.02 million in 2005, driven largely by demographic trends. Meanwhile, investment-home sales dropped 28.9%, falling to 1.65 million homes in 2006 from 2.32 million in 2005, according to the group's annual survey of investment- and vacation-home buyers.

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The share of vacation-homes rose, making up 14% of all home sales, up from 12% in 2005. Of all homes purchased last year, 22% were for investment, down from 28% in 2005.

For comparison, primary-residence sales fell 4.1% during the time; in 2006, there were 4.82 million primary home sales, down from 5.02 million in 2005.

"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," David Lereah, the association's chief economist, said in a news release.

The median price of a vacation home was $200,000 in 2006, down 2.0% from $204,100 in 2005. Investment-home prices were also down, with the typical home costing $150,000 last year, down 18.3% 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.

"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."

Of second-home buyers, eight out of 10 thought it was a good time to invest in real estate; 57% of primary-residence buyers thought the same.

Vacation homes

Sales of vacation homes benefit largely from the country's demographics, because large numbers of consumers are in prime buying ages, Lereah said.

The profile of a typical vacation-home buyer in 2006 was someone 44 years old, with a median household income of $102,200. Typically, these vacation homes were a median of 215 miles from the owner's primary residence, though 42% of vacation homes were closer than 100 miles and 32% were at least 500 miles away.

While many of these vacation-home buyers are older than 50, those in their 40s may be driving the market in the coming decade, Lereah has noted.

According to the report, 79% of vacation-home buyers wanted the property as a vacation or family retreat, 34% wanted to use the property to diversify their investments, 28% planned to use it as a primary residence in the future, 25% were motivated by the tax benefits, 22% intended for a family member or friend to use the property, 21% said they bought because they had extra money to spend and 18% plan on renting the property to others.

The most popular location for the homes was in rural areas; 29% of the homes were purchased in the country. But 24% were located in resorts, 22% in a suburb and 10% in an urban area or central city. Most of the homes were detached single-family houses (67%), but 21% were condos and 8% were townhouses or rowhouses.

Investment homes

Investment-home buyers were younger and earned less than vacation-home buyers, with a median age of 39 and a median income of $90,250. The home bought for investment was a median 22 miles away from the owner's primary residence.

Forty-six percent of buyers said they purchased the investment for rental income, 43% bought to diversify investments, 23% wanted the tax benefits, 18% wanted to use them for family vacations or a family retreat, 15% bought because they had extra money to spend, 13% said that a family member or friend would live there and 12% said that it would become a primary residence in the future.

Also, unlike vacation homes, 37% of investment homes were in a suburb, 22% were in a rural area, 18% were in an urban or central city and 7% were in a resort area. While 63% were detached single-family homes, 26% were condos and 6% were townhouses or rowhouses.

Those buying for investment purposes also don't intend to hold onto the property as long as vacation-home buyers do, according to the report. While vacation-home buyers plan to keep their home for a median 10 years, investment buyers plan to hold the homes for a median five years. Twelve percent of investment buyers still plan on selling in one year or less.