Second Homes - Vacation Homes and Investment Property Now 1/3 of Market

A friend, a social worker, has a bumper sticker:

"NO ONE SHOULD HAVE TWO HOUSES UNTIL EVERYONE HAS ONE."

Sorry, Susan, you have lost that battle. Lost it big.

A report issued last week by the National Association of Realtors (NAR) indicates that the second home segment of the housing market is much bigger than anyone had previously suspected. In fact, it is a stunner.

NAR cites two new studies showing that second home purchases are not only growing, but represent a different market segment than previously thought.

In real numbers, there were 1.80 million sales of investment properties in 2004, up 14.4 percent from 1.57 million in the previous year. Vacation home sales were 102 million last year and 850,000 in 2003.

Have purchasing patterns changed? More likely it is the research methodology.

David Lereah, Chief Economist for NAR said that earlier studies had underestimated the number of second home sales because the methodology was flawed. Surveys conducted by mail of home buyers resulted in a small percentage being returned by the Post Office, apparently from non-owner occupied properties. "...this is the first time," Lereah said, "that anyone has come up with a methodology for capturing a representative market share for vacation and investment home owners."

NAR's second-home study was based on two surveys. The organization mailed an eight-page questionnaire to 100,000 homebuyers who purchased between mid-2003 and mid-2004. The survey generated 8,205 usable responses. "Data in this report includes only survey data from respondents who indicated that they purchased a vacation home or investment property; this data was underrepresented in the overall sample due to smaller return rates."

A second survey was used to determine market share and to extrapolate sales date. This was conducted by email and captured data for 3,371 home purchases in 2003 and 2004. Data were weighted to correspond with demographic findings in the mailed survey. Because the findings of this survey showed a much higher volume of second home sales than anticipated, U.S. Census Bureau data were employed to extrapolate the information collected through survey research.

Citing Census Bureau statistics from 2003, NAR states that there are 43.8 million second homes in this country; 6.6 million are vacation homes and 37.2 million are investment properties. There are a total of 72.1 million owner occupied homes. That would indicate that 62% of the housing stock in the United States is owned by persons who own other homes or housing units

Earlier studies had indicated that 6.6 million housing units were second homes. Note that figure is identical to the number of homes the Census Bureau considers to be vacation homes. Thus, earlier studies may have overlooked the purchase and ownership of investment units. Census data indicates the latter may total 37.2 million units.

"In essence, our definition of second homes has changed with the buyer shift toward investment property," Lereah said. "...we see (now) that second homes are a much larger share than the conventional mind-set of them being mostly vacation homes."

There is probably an overlap between the investment and vacation home categories. For example, 14 percent of vacation home buyers rent their property as do 79 percent of investment buyers. Ten percent of investment buyers intend to use their second homes for recreational purposes. One does not know how the Census Bureau or NAR defined their terms in collecting information or how respondents may view their second home ownership. Like most surveys, conclusions may be somewhat at the mercy of respondent definitions and perceptions.

Regardless of the number of second, third, and fourth homes Donald Trump or Martha Stewart may own, second home buyers are not necessarily in the high roller category.

The typical vacation home buyer is 55 years old, earned $71,000 in 2003 and spent $190,000 on a single-family, 1,290 square foot get-away property. 37 percent said that their recreational property is bigger than their principal residence. Surprisingly, vacation homes have appreciated only 12.8 percent since 2001. (Just a guess, but this may represent the large numbers of mobile homes purchased as recreational retreats in Sun Belt states.)

Investment buyers are younger and a little more affluent. Their median age is 47 and they have a median income of $85,700. They typically purchased a single family home with a median square footage of 1,700. Their investment may have made them even wealthier: investment properties have increased in value 25.4 percent in the last three years.

30 percent of buyers cited as a reason for their purchase a desire to diversify investments while 28 percent were looking for rental income. Only 10 percent were looking for a personal or family retreat or a vacation spot. Nearly 20 percent of second home buyers intend to convert the properties to their primary residence after retirement.

Investment buyers, probably keeping all of those warnings about being an absentee landlord in mind, tend to buy properties within 18 miles of their principal residence. Vacation homes buyers ventured farther away, buying second homes 49 miles from their primary residence.

But, apparently, some people went a lot farther a field in search of a vacation home. A 2003 study conducted by California-based EscapeHomes named the top 10 emerging second home markets. They are not where one might expect. Only a few are near the ocean and ten it is the frigid part. Only about half are located in areas that can be considered even remotely temperate in climate. Apparently skiing and shivering are a lot bigger attractions that one might have thought,

The top five:

1. Burnside Kentucky (encompassing Lexington & Frankfurt, Kentucky; Nashville & Knoxville, Tennessee;)
2. Caribou Maine/Quebec, Canada;
3. Ely/Grand Rapids, Minnesota;
4. Island Park, Idaho (including Bozeman, Montana and Jackson, Wyoming;
5. Ketchikan, Alaska (including Juneau and Seattle, Washington.)

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Second homes constitute a much larger part of the housing market than anyone expected. Investors, apparently, have never been considered as a major piece of that market.