Second look at Second Homes...

A lot has been made recently about the growing second home market and its relationship to Baby Boomer generation. The common premise is that, demographically, the Boomer generation is the driving force behind the second home sales by their newfound interest in leisure homes but taking a closer look at the numbers reveals a slightly different conclusion.

It’s certainly true that members of the Boomer generation (individuals born between 1946 – 1964) are currently the typical and even the predominate purchasers of second homes but the term “second home” needs to be put in a more precise context in order to gain a better understanding of what’s driving the upsurge in the market. Furthermore, a better examination of the statistics surrounding vacation home purchases may help to clarify the nature of these purchases.

The term “second home” seems to carry the implication “vacation home” (thus all the boomer coming of age articles) but the reality is that homes purchased specifically for vacation use are a small fraction of what are termed “second home” while homes purchased for investment purposes and rental income make up the majority of the market.

In its most recent survey of second home owners, the National Association of Realtors shows the following statistics for 2005:

1. Second home sales made up 39.9% of all new and existing home sales in 2005. Thats up (way up!!) from 7% in 2000.
2. 69.5% of second home sales were specifically investment properties with only 30.5% of second home sales going to vacation properties.
3. Of the 30.5% of second home vacation properties, 13% listed “rental income” as a reason they bought the property leaving only 17.5% as purely leisure properties.
4. Of the 30.5% of second home vacation properties, 40% were listed as detached single family homes while 31% were condos and the remaining 28% were listed as cabin, cottage, mobile home or other.
5. Of the 30.5% of second home vacation properties, 6% were time share units.
6. Of the 30.5% of second home vacation properties, 4% were said to be intended to be occupied by a child in the future when they went to school (presumably college)
7. 21% of vacation home owners own two or more vacation homes.
8. 65% of vacation home owners said their vacation homes were better investment than stocks.

The salient point here is that investment, not leisure, is the real motivator of the poorly named “second home” market with as little as 17.5% of second homes serving as purely leisure use homes. The overwhelming majority of second homes are specifically investment properties. In addition, even a healthy 13% of vacation properties are serving as rental income properties.

The key here is that, given the current real estate climate, the upsurge in investment properties is tantamount to speculation. As recently as 2000, second home sales only accounted for 7% of new and existing home sales with the percentage of vacation and investment homes divided evenly. Thats a whopping increase for 5 years... 415,000 sales in 2000 to 3.34 million sales in 2005 with the vast majority of homes specifically earmarked as investment properties.

It seems clear that the notion of strength of second homes sales coming from boomers looking for nice vacation getaways is really just poor perception and that the majority of the activity in the last few years has been related to the gross hyper speculation typical of the current real estate market.

Incidentally, the popular perception of the boomer vacation home seems a bit fictitious as well with 6% of vacation homes being listed as timeshare units and 28% being listed as essentially lower cost shacks. Not to mention the 4% seem to be occupied as the primary residence of a child attending college.