The Vacation Home Explosion!

The same forces that created the housing boom for primary residences,including low mortgage rates, a growing economy, and strong demographics--have had a major impact on the vacation-home market.  Not surprisingly, the demographic trends are even stronger for the vacation market than they are for the primary market over the next decade because of our aging population.  Add to this a tight supply of vacation homes (particularly waterfront property) and you have the makings of a vacation-home explosion.

Below are the market factors that explain why the vacation-home market should continue to boom (barring an unforeseeable event such as a major war or a terrorist attack or, for some coastal shorelines, a heavy dose of hurricanes and tornadoes):

• Single-digit mortgage rates

Mortgage rates are expected to remain in single-digit territory for the remainder of this decade, providing relatively low-cost financing and therefore making vacation homes more affordable.

• A Growing Economy

The U.S. and Canadian economies are now in full expansion and promises to experience healthy, steady growth for the remainder of this decade.  A growing economy generates jobs, increases paychecks, and bolsters consumer confidence, all essential ingredients driving demand for vacation getaways.

• Healthy Home Price Appreciation

Home price appreciation has been robust throughout the past decade, creating an enormous amount of stored equity in our primary residences. In the past two years alone, price appreciation averaged about 7.5 percent per year.  And numerous metropolitan areas have experienced double-digit price growth.  Households are cashing out some of their stored equity through home equity loans and refinancing, using the proceeds as down payments for vacation homes.  If you believe, as I do, that the overall real estate expansion will continue into the next decade, home price appreciation will also continue, providing further opportunities for households to have the financial wherewithal to purchase vacation homes.

• Limited Supply

As demand for vacation homes continues to grow, thanks to the increasing number of retirees, the inventory of vacation homes continues to tighten.  For example, only a finite number of vacation homes can be built on the waterfront property available.  Vacation home construction has been slowing for lack of available space.  Demand now exceeds supply in the most popular vacation spots, driving prices upward in the hottest areas.  New vacation homes are being built farther and farther away from the most popular vacation locations.  By purchasing a home in the prime vacation location you are likely to see a healthy price appreciation into the foreseeable future.

• Baby Boom Demand

Aging boomers will create the greatest wave of demand for vacation property over the coming years.  Today, many households of the baby boom generation are in their peak earning years and, as their kids finish college, can afford a second home.  Boomers fall into an age group where their kids are getting older, their house is often paid off, and their incomes are high. And they are looking for a future vacation/retirement home.  I expect boomers to drive the vacation/resort marketplace for the next five to ten years.

• Retirees Are Living Longer 

Because of improved health care, the retiree population is living longer.  That means that retirees are staying in their homes longer, further depleting the inventory of available homes for sale in key vacation areas.

• Capital Gains Tax Incentives

The capital gains exemption on principal residences provide a boost to vacation-home buying. Once people have sold their city residence, their country residence will qualify as a principal dwelling. The exemption has prompted many empty nesters (boomers with children moving out) to buy a second home.

• Information Technology

Thanks to the miracle of technology, we are able to spend more time in our vacation homes while still working, via the phone, fax, the Internet, and e-mail.  Connecting with the office via high-speed modems and telecom service enables us to communicate with colleagues and customers and access company e-mail and voice mail systems, no matter where we are.

• Investment Opportunities

The historically strong performance of real estate as an investment has also helped to drive up demand for second homes.  More and more households are looking for ways to expand their real estate holdings, helping to increase demand for second homes.

• Safe Haven 

In a terrorist-sensitive world, the safety and security of real estate investments' risk/return ratio, as compared to the greater value fluctuations of stocks and bonds in an unpredictable time, is a factor that increases the demand for and the valuations of second homes.