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Second homes now mainstream

Vacation houses and rentals accounted for more than a third of home sales in 2004, study finds.
By Sarah Max, CNN/Money senior writer

SALEM, Ore. (CNN/Money) - Why have one house when you can have two?

According to a study released by the National Association of Realtors on Tuesday, second homes accounted for more than a third of residential real estate transactions in 2004.

Second homes typically fall under the category of vacation home or rental property, though many owners of vacation homes also rent out their property.

Still, about 23 percent of houses bought last year fell into the category of investment property, meaning that owners use the house primarily as a rental property. The number of sales in this segment increased 14 percent last year.

Vacation homes used primarily by the owners represented 13 percent of transactions last year, with the number of sales in this segment increasing nearly 20 percent.

"Our definition of second homes has changed with the buyer shift toward investment property," said the NAR's chief economist David Lereah. "In examining Census data to determine the number of investment units, we see that second homes are a much larger share than the conventional mind-set of them being mostly vacation homes."

Buying a Vacation Home

This is the first time anyone has come up with a methodology for capturing a representative market share for vacation and investment homes, he said.
Who's buying what?

The typical person buying investment rental property is 47 years old and earned about $86,000 in 2003, according to the NAR, while the typical vacation-home buyer is 55 years old and earned $71,000.

When asked why they bought a second home, respondents said they wanted to diversify their investments (30 percent), earn rental income (28 percent), have a personal retreat (14 percent) or place to vacation (6 percent.) About 5 percent said they bought a second home because they simply had the extra money to spend.

Most respondents said they consider the buy a good investment, so much so that 38 percent said it was very likely they'd buy yet another home within two years. (See "My three houses.")

The typical vacation home bought between mid-2003 and mid-2004 sold for $190,000 and is 1,290-square-foot single-family home about 50 miles driving distance from the owner's primary residence. The typical investment property was 1,700 square feet and sold for $148,000.

In the past, second- and third-homes required larger down payments and were financed with higher interest rates. Today, according to LendingTree president Anthony Hsieh, investment and vacation property is relatively easy to finance, assuming your credit is good and debt load within reason.

"Buyers have as much choice as they do buying their first home," he said.
Buying at the beach?

The NAR study supports what many real estate experts had suspected: The hottest segment of the real estate market is bubbling up in coastal towns, mountain towns and other vacation spots.

To get at just how strong vacation-home markets are, Fiserv CSW senior economist David Stiff paired 2000 Census Bureau statistics on seasonal housing units with price appreciation data for about 200 counties.

In the 14 counties where at least 10 percent of all single-family homes are seasonal, the median price appreciation was 59 percent between the end of 2001 and 2004. In counties where seasonal homes represented less than 10 percent of housing, meanwhile, the median appreciation was only 33 percent during that period.

In Monroe County, Florida -- the Florida Keys -- where about 24 percent of all houses are seasonal, property values increased 117 percent over that period. In Cape May, N.J., where 48 percent of all houses are seasonal, home prices increased 81 percent.