Economist's Commentary: April 2, 2008
Vacation and Investment Home Buying in 2007
By Paul Bishop, Managing Director of Survey and Marketing Research
While most home buyers purchase a home to use as their primary residence, a significant number also purchase vacation homes and residential investment properties. Although varying from one year to the next, NAR estimates that about one-third of homes are purchased for this purpose with the remaining two-thirds purchased for use as the buyer's primary residence.
The motivation to purchase an investment property or vacation home is influenced by a variety of factors. Vacation home purchases are largely tied to lifestyle considerations; that is, households seek to own an additional home in a desirable destination. While the potential financial benefits as an investment are considered, the purchase of a vacation home is largely discretionary and closely tied to the utility that households enjoy from unfettered access to a second home.
For buyers of investment properties, the potential financial gains are far more important; the purchase of a home is a dollars-and-cents decision resting in part on current cash flow from rental income and expectations of future price appreciation. As earlier surveys have documented, the increase in home sales in 2003 and 2004 was driven at least in part by investors counting on future price appreciation in an escalating market or through the quick purchase and resale of a property, otherwise known as "flipping".
The Investment and Vacation Home Market in 2007
In 2007, an estimated 67 percent of home purchases (including both new and previously-owned homes) were primary residences, up from 64 percent in 2006. The share of residential properties purchased for use as vacation homes fell to 12 percent in 2007 from an estimated 14 percent in 2006. Similarly, the share of residential investment property purchases fell to 21 percent from 22 percent over the same period.
Overall, the total number of new and previously-owned homes purchased in 2007 fell by 14.7 percent compared with 2006. Based on the survey results detailed above, sales of homes purchased as primary residences decreased by 10 percent in 2007 to 4.34 million. The market for primary residences was somewhat more resilient that the vacation or investment property market; many areas of the country posted sales gains while others saw declines. Even in a soft real estate market, households continue to purchase a first home or relocate to another home for a variety of fundamental reasons.
Vacation home and investment property purchases declined more steeply than sales of homes for use as primary residences. Vacation home sales decreased by 30.6 percent in 2007 to 740 thousand, dropping to a level consistent with the pace of sales earlier in the decade. Potential vacation home buyers may have chosen to delay a purchase given concerns about a weakening economy and uncertainties in the financial and mortgage markets. Weakness in the market was also reflected in a 2.5 percent decline in the median price to $195,000.
Investment property sales fell 18.1 percent to 1.35 million units in 2007, the second consecutive annual decline. The drop in investment purchases totaled more than 40 percent since peaking in 2005, no doubt a reflection of the greater difficulty in finding financially attractive investment properties to purchase in an environment of soft or negative price appreciation in some rental markets.
While it is not surprising that sales of vacation homes and investment properties declined in 2007 it is evident that each sector responds in a somewhat different way to the forces that influence the economy and the housing market. For the past two years, investors have confronted the dual headwinds of slowing sales and weaker prospects for price appreciation in some markets. Many vacation home buyers are on the sidelines concerned about the economy and reluctant to make a big-ticket purchase. Going forward, a reduction in the level of speculative buying will place the entire housing market on a more solid footing.
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