Matt Purdue
04/01/2007
Our cover story this month parses the volatility—or lack thereof—of a subsector of the real estate market: homes priced upward of $3 million and located in what are traditionally vacation destinations. For simplicity’s sake, we often refer to these residences as "second homes," although for a large portion of buyers in this demographic, they may be third, fourth or even fifth homes.
Worth first covered this market in our June 2005 issue, speculating that many of these properties were particularly risky investments if they did not meet certain criteria—essentially, vacation homes in developments that can be easily replicated or in areas where new construction can continue relatively unchecked.
Fast-forward to this month’s issue. Current analysis seems to indicate this to be true. While hard data on second-home values is difficult to find, staff writer Elizabeth Harris discovered that developers, real estate agents and buyers are feeling the pain of stagnant or falling home values in areas that just a few years ago were on the must-inhabit lists of many shoppers. Once-trendy vacation regions in Florida and California, for example, saw home prices fall by as much as 40 percent in 2006.
Meanwhile, in other locations, where buyers know that new home starts are constrained by geography or the developer’s choice, demand continues unabated. In one vacation community in Montana, the first offering of 25 of a maximum 49 condominiums sold out in a single day, generating $50 million in revenue for the developer.
As we were putting this issue to bed, however, an intriguing data set crossed my desk. Hidden among all the clamor over the near future of real estate investments is a troublesome statistic: The percentage of owned homes in the U.S. that were vacant and for sale rose in the fourth quarter of 2006 to 2.7 percent. This equates to roughly 2 million residences. During 50 years of record-keeping by the Census Bureau, this rate has surpassed 2 percent only once, in the third quarter of 2006. By the end of last year, the percentage of homeowner vacancies had doubled the level seen in the first half of 2005.
Bloggers raced to their keyboards when these numbers were published in January. With tongues firmly planted in cheeks, some suggested that the rise in homeowner vacancies is due, at least in part, to the increase in the number of vacation homes recently built and sold—and occupied only occasionally—in the U.S. In reality, this marked increase suggests a potentially precarious oversupply of real estate. Meanwhile, developers and home buyers continue to build. Private-housing starts, for many the bellwether of the real estate sector, last December rose 4.5 percent over November. Good news in the short term, obviously, for investors in construction and related industries.
Given the glut of homes standing empty and for sale, one wonders if the nadir of the housing slump is truly behind us. However, there appears little reason to believe that continued softening in the overall real estate market will creep directly into the realm of exclusive, high-end vacation homes.
But our sources report that a falling market, while it may not deter affluent home buyers, does give them pause. After all, a vacation home may just be the ultimate luxury, and, thus, one that can be put off until the timing is right. As retired entrepreneur David Shopay tells us: "You don’t like to think you’re buying into a really, really weak market."