Those who purchased a second home after the stock market bust four years ago are seeing the financial benefit today.
Four years ago, people began to flock to real estate as a safe harbor for their money after the stock market meltdown of 2000. Spurred by the lowest interest rates in a generation, they moved up to new houses, fixed up old ones, snapped up investment property, and most notably bought second homes.
A second home purchase was a lot more fun than a portfolio of stocks and bonds anyway. And it turns out it was a pretty good financial decision for many people as well. Home values have soared in the past five years—nationally, the average price of a house has risen 38 percent, according to the U.S. Office of Federal Housing Enterprise Oversight. Home prices in desirable vacation areas have appreciated even more.
Second homes have some additional financial advantages. They can generate rental income, in effect paying part of their tab. A 2003 survey of second home buyers by the National Association of Realtors found this was important to an increasing number of them; twice as many (37 percent) said they purchased their second home for its income potential than did in a similar survey two years earlier. The Realtors also learned that about a third of buyers plan to live full time in their vacation house once they retire, which will make it eligible for the capital gains tax exclusion down the road.
But in 2003 the stock market came roaring back, and now the question is where have people of means invested their money? Have they invested it with Wall Street or with their real estate agent? I called a few custom builders in vacation home markets to find out if they've noticed a switch in investment strategies. The consensus: Not really.
The only thing slowing down Cottage Home, Brian Bosgraaf's second home business in Holland, Mich., is severe winter weather. But, while Bosgraaf's sales are as strong as ever, he's noticed people have become a little more practical when it comes to square footage and selections. Times are very good, too, for Boardwalk Builders in Rehoboth Beach, Del. Owner Patty McDaniel says that buyers are acting normally, trying to get the price down at the beginning of the job and then adding things back in as it goes along. “As long as the value of real estate keeps going up,” she says, “they feel comfortable spending money.” Richard Wodehouse, who has custom home businesses in Aspen and Telluride, Colo., says Telluride has been slow since Sept. 11, 2001, and that wealthier Aspen finally picked up last summer. But clients there are driving hard deals.
Looking ahead, I'd place my money on the staying power of the second home market. After all, even Wall Streeters want a vacation place. Forbes magazine, in fact, predicts that the fat bonuses received on Wall Street this year will feed the "booming second home market." On the other hand, if the stock market takes another serious dive, it will affect more than Wall Street and all bets will be off.
