Wednesday, August 09, 2006

Vacation Home Market Slumps

by Calculated Risk on 8/09/2006 11:51:00 PM

UPDATE: From the NY Times: For Housing, a Finger in the Wind

Click on photo for larger image.

Denis Poroy/Associated Press
A roadside in Encinitas, Calif., illustrates some of the fallout from a slowdown in housing prices.

From the NY Times: Hot Market for Second Homes Hits Slump. Some excerpts:

As the overall housing market weakens, the interest in buying vacation homes ... appears to be falling faster. Unlike most metropolitan areas - where underlying demand and the normal turnover in primary homes as a result of job moves, new households and family changes provide a more solid floor under prices - the second-home market relies on a different set of motivations that tends to exaggerate booms and busts.

"Second-home buying is very discretionary," said Edward Leamer, an economist at the University of California, Los Angeles. "There is no force of demographics that is pushing people into buying homes as there is in primary home markets."
Vacation homes, like other luxury items, are frequently caught up in booms that appear to defy gravity. But they depend on a relatively narrow slice of the population, mostly affluent baby boomers, leaving them vulnerable to sudden downturns.
A survey of consumer finances conducted every three years by the Federal Reserve found that the overall interest in second homes tends to closely follow the ups and downs of the economic cycle. In 1989, some 13.4 percent of those responding said they owned a second home, but that figure fell during the recession in the early 1990Â’s and reached a low point of 11.9 percent in 1995. Such ownership rose to 13 percent in 1998 but fell back to 11.4 percent in 2001 before rising again to 12.6 percent in 2004.

Anecdotal evidence suggests that vacation homes might have reached a new high-water mark in 2005.
Second homes are probably the ultimate discretionary purchase. Perhaps there was more speculation in second home markets than primary markets, and this isn't an indication of an economic down cycle.


But more prosaic discretionary purchases, like boats and casual dining, are slumping too.