Although the second home mortgage market experienced a severe decline during the housing downturn, Americans still aspire to buy second homes and have contributed to the growth of the market consistently since it hit its bottom in 2009 Fannie Mae said today. While most mortgages are still originated to purchase or refinance owner-occupied primary residences, there is a significant market for mortgages to purchase second homes, those that are neither investment properties nor primary residences. Fannie Mae's new report issued today, Second Homes: Recovery Post Financial Crisis, is part of its Housing Insights series.
Second home mortgages have accounted for an average of 4.76 percent of the purchase mortgage market since 1998 and the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have been significant players, acquiring on average about 64 percent of the second home purchase mortgages by volume over that time period.
Fannie Mae uses information from the National Association of Realtors® (NAR) survey of second home buyers released last week to profile a typical second home buyer who is older, has a higher income, and is more likely to use a larger degree of cash to finance his purchase than the typical primary home buyer. At the time of purchase 70 percent of second home mortgages had loan to value ratios under 80 percent compared with 44 percent of primary residence mortgages.
Second home mortgage originations have historically moved in tandem with the boom-bust cycle of the real estate market. The share of second home mortgages more than tripled between the late 1990s and the peak year of 2006 then declined through 2009. In every year since however the second home share of the purchase-money market (PMM) has increased. During this period, however, the GSEs share of the market has decreased as the share of whole loans held by banks and other institutions has grown, suggesting that private lenders are becoming more willing to lend to these borrowers. Between them the GSEs and bank portfolios now hold nearly 100 percent of the market compared to 77 percent in 2006. Fannie Mae says one of the major reasons for this increase in market share is the exit of private label security (PLS) competitors from the larger playing field after the market collapse.
The boom years were good for second home mortgages which peaked at more than 15 times their 1998 volume during the housing bubble compared to around a 400 percent increase for other purchase mortgages. However, the PLS share of second home originations, which was as high as 17 percent in 2006, has not rebounded as second home sales have recovered.
Fannie Mae says that geography played a role in both the decline and resurgence of the second home market. Since January 1998, just over 1/3 of all second home mortgages have been originated on properties in Florida, California, and Arizona, three of the four states that then entered a multi-year foreclosure epidemic and witnessed huge price declines of over 40 percent each. The only state with a larger price drop was Nevada, which was not a popular second home destination, accounting for only 2.5 percent of those mortgage originations from 1998 forward. Those three Sunbelt states did not lose their popularity among second home buyers and accounted again for 34 percent of the second home mortgages originated in 2013.
While second home mortgages bubbled like all other purchase mortgages in the pre-2006 period, they did not perform as poorly as the others when the crisis hit. While both first home and second home mortgages saw delinquencies trend upward in the years immediately after the bubble the second home purchase series outperformed the all other purchases series, indicating that second home borrowers have been better able to meet their mortgage obligations.
Fannie Mae noted many factors that will affect the future direction of second home purchases and second home mortgage originations.
- Many buyers are affluent enough to pay cash and according to the NAR, between 2009 and 2013 an average of 38 percent of second home buyers did so. The remaining 62 percent who rely on a mortgage must have adequate income to qualify for those second home mortgage payments.
- During the recovery housing wealth appreciation has lagged financial wealth. The recovery in financial markets has allowed many second home buyers, who are typically older and more likely to own financial assets, to sell some of their assets to buy second homes or use income from these assets to cover second home mortgage expenses. As shown in Exhibit E, older age cohorts, who are more likely to buy second homes, tend to own more financial assets.
- The home price recovery rate in the three popular second home sites of Arizona, California, and Florida is another factor. The Federal Housing Finance Agency price indices comparing these three states to national averages show that two of the three have kept up with the national recovery, regaining about one third of their home price peak to trough losses but Florida lags far behind, having reclaimed only about 18 percent since bottoming out. Given this slow recovery and that Florida has accounted for the largest single share of second mortgage originations since 1998 (17 percent), home buyers have an opportunity to invest in Florida at bargain prices. That financial assets have recovered more quickly than home prices further increases this opportunity.
- Yet another factor is the aging of the American population. The age group most likely to purchase a second home, those between 45 and 64 years of age, will grow at a slower rate than that of the total adult population between 2015 and 2060. Thus, while demand for second homes will continue to grow, it will likely occupy a smaller portion of the total purchase market. However, assuming that Americans continue existing investment patterns as they age and that aspirations of second home ownership do not wane, second homes should still occupy a significant place in the residential real estate market.
Fannie Mae concludes that although the second home mortgage market was also hit hard by the housing downturn, Americans still want to buy second homes and have contributed to the growth of the market consistently since its bottom in 2009. The GSEs acquired roughly 60 percent of second home mortgage origination volume in 2013 and, barring rapid resurgence in PLS lending, should continue to be major players in the second home mortgage market. "As the population continues to age, we expect people to continue to use their savings to buy second homes, thereby contributing to a segment of the mortgage market that will continue to grow in the years to come."