Demand for Vacation Homes Is Tumbling: Is It a Good Time to Buy?

Missouri-Branson
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You’ve been thinking about buying a vacation home for a while, but you’re not sure whether now is the right time to buy. This is a big purchase, so you want to make sure it’s a sound investment.

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Demand for vacation homes tumbled in February, with mortgage-rate locks for second homes declining to their lowest levels since May 2020, according to Redfin. Demand was still 35% higher than pre-pandemic levels, but there was a notable decline from the 87% increase realized one month earlier.

Some parts of the U.S. are more affordable to buy vacation homes than others. According to a recent Realtor.com study, these 10 cities are the best choices for a second home right now:

  • Branson, Missouri
  • East Stroudsburg, Pennsylvania
  • Whitewater, Wisconsin
  • Myrtle Beach, South Carolina
  • Cullowhee, North Carolina
  • The Villages, Florida
  • Lake Havasu, Arizona
  • Salisbury, Maryland
  • Claremont, New Hampshire
  • Sevierville, Tennessee

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Cash Is King in Vacation Market

Geordie Romer, managing broker at Windermere Real Estate/NCW, based in Wenatchee, Washington, said demand for vacation homes is also extremely high in his local area, despite increased fears of inflation and rising interest rates.

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“Our inventory of homes listed for sale remains at historic lows, which, coupled with massive demand, continues to lead to soaring price increases,” he said. “The average home price went up 13% here in 2021, and I expect we may see numbers much higher than that in 2022.”

He said some analysts are using mortgage demand as a proxy for homebuyer demand, but that isn’t helpful in the vacation home market.

“Cash buyers are a huge percentage of the buyers in a second-home market, and a lack of mortgage originations doesn’t mean much to me,” he said. “In a similar vein, rising interest rates will not affect the buyer pool very much, since financed homebuyers are often outbid by cash buyers in our hypercompetitive market.”

Ultimately, he said whether or not this is a good time to buy a vacation home depends on your local market, but he expects buyers looking for deals to be sorely disappointed.

‘Don’t Wait Too Long’

Zachary Staruch, a real estate agent with The Pelican Team, based in Southwest Florida, said he sees a lot of second-home buyers in his area — both as vacation and retirement homes.

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“I can’t comment on other vacation markets,” he said, “but our market continues to be hot and isn’t projected to slow down as demand is still very strong with locals, vacation homebuyers and retirees and/or snowbirds — or those that plan to retire in a few years but want to buy before prices rise even more.”

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He said sales in his market are approximately 65% cash transactions, so his area isn’t as impacted by rising rates as some other markets.

“I’ve had a few people say that they wanted to wait for prices to drop, but they are now priced out of buying a home altogether — both a vacation home and primary residence,” he said. “There (have) been a few predictions of a slowing market coming, a handful of predictions saying a plateau is coming and zero predictions of prices dropping or crashing.”

He said buyers realize this and don’t want to wait and risk having to pay higher prices.

“The good thing about buying a vacation home is that you can wait to find a place you like as you don’t need it right away, which is a much better position than having to find a home right away for a job transfer, divorce, etc.,” he said. “Just don’t wait too long or you could end up paying more or get priced out of the market.”

He said he’s even had a few clients — especially those who live in areas with a high cost of living — purchase a vacation home or investment property in the area while renting their primary residence up north.

Good Returns on Rental Homes

If you’re interested in buying a vacation home due to the post-pandemic travel boom, Kimo Quance, real estate broker and owner of The Kimo Quance Group in Santee, Calif., said you’re not alone.

“As a proactive real estate investor, you should consider purchasing a vacation home to earn some extra money,” he said. “Because the average cash-on-cash returns of vacation homes are nearly 10% per year in the short-term rental markets.”

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He said vacation homes are considered domestic leisure destinations, which makes them recession-resistant.

“As these are budget-friendly alternatives for domestic travel, historically these performed well during the recession,” he said.

It’s a Seller’s Market Nationwide

While a vacation home can be a good investment, Bill Gassett, a Realtor with Maximum Exposure RealEstate, based in Hopkinton, Massachusetts,” recommended considering whether you need to purchase a property immediately or you can wait a year or two.

Real Estate markets across the country are heavily skewed toward sellers at the moment. An extreme shortage of housing has driven home prices up to unprecedented levels.

“With interest rates having jumped already by a couple of percentage points, there is a strong possibility the craziness that exists right now could start to change by year end to the beginning of next year,” he said. “The first signs will be inventory starting to rise and fewer buyers in the market, if interest rates continue to go up.”

When the real estate market starts to change, he said the first segment impacted will be vacation homes — i.e., second homes.

“Those who own second homes will look to sell them first before their primary residence,” he said. “More inventory and lower demand will eventually translate into an adjustment in prices.”

Since so many factors go into the decision to buy a vacation home, it’s best to consider your unique situation. What’s best for you might not be the right choice for someone else; so, when making a choice, consider factors like local home prices, your financial situation and what you plan to do with the home.

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