Monday, November 28, 2005

Second Homes

by Bill McBride on 11/28/2005 05:44:00 PM

Here are two commentaries on second homes ...

Dr. Robert Shiller writes: Home sweet second home

...the world is undergoing a second-home boom: an increasing number of people are buying vacation homes in beautiful and fun places that are within a few hours’ flying time from their first homes and jobs. Their second homes are a retreat where they will spend only a fraction of the year, and recently pristine mountain ridges and ocean cliffs are being dotted with new homes to meet the demand.
Some of the US counties with a high proportion of vacation homes are seeing price increases that rival, if not outstrip, the booming metropolitan areas.
There is reason to worry about this. ... in some places, a speculative bubble is fueling today’s boom in vacation-home prices. The vacation-home boom appears psychologically tied to the urban home-price bubble in many of the world’s “glamour cities,” and prices of these vacation homes are similarly vulnerable to a significant drop in coming years.
Fannie Mae Economist David Berson asks: What would the housing market have looked like if investor and second home demand had been more normal?
Data from Loan Performance indicate that the share of purchase originations going to investor and second home buyers has been trending upward for the past decade or so, with a significant acceleration beginning in 2003 -- although the modest decline in the investor share in the most recent quarter may be a sign that this trend is beginning to end (see Figure 1). The low share of investor/second home activity in the early-mid 1990s, however, was likely a reaction to the drop in home prices over that period, and so was below sustainable levels. Moreover, demographics suggest that second home demand should be rising, given the large share of the population between 45-60 years of age -- the prime second home buying years. As a result, an investor/second home share of 10-13 percent might be sustainable -- not the more than 20 percent current share. The lower end of this range represents the investor/second home share in 2002 (just before the recent boom began), while the upper end represents a continuation of the longer-term 1997-2002 trend.

Figure 2 shows our estimate of total home sales if the investor/second home share had either remained at the 2002 level of 10 percent, or had increased more modestly to 13 percent by the middle of 2005 -- compared with actual sales. Over the two-and-a-half year period from the beginning of 2003, total home sales would have been 17.9 million units instead of the actual sales of 19.3 million units over that period if the investor/second home share had stayed flat at 10 percent (a drop of 7.3 percent, or 1.4 million fewer units). Using the assumption that the investor/second home share would have increased to 13 percent by the middle of 2005, total sales would have been 18.2 million units (a drop of 5.7 percent, or 1.1 million fewer units).
In either scenario, home sales would have been considerably less than the actual figure since 2003 if the investor/second home share hadn’t skyrocketed in the past couple of years. Next week’s commentary will look at what the future path for home sales could be if the investor/second home share returns to a more normal level over the next year.