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The breakout second home market is cushioning the housing market against a hard landing as the second home sector's sales pace surges far ahead of both new and resale homes.

The housing market's fastest growing segment, second home sales boomed last year more than twice as fast as all new single-family home sales and nearly four times faster than all resale homes.

Meanwhile, the median price of investment properties increased at twice the rate of resale homes and more than three times the rate of new homes.

There were 3.34 million second-home sales in 2005, up 16.0 percent from the revised total of 2.88 million in 2004, according to the National Association of Realtors.

Meanwhile, the 7.1 million existing home sales in 2005 represented an increase of only 4.2 percent in 2004, NAR said. The National Association of Home Builders said the 1.3 million new home sales represented an increase of 6.6 percent.

Among all home sales, approximately four in 10, 39 percent, were second homes in 2005 up from 36 percent in 2004.

NAR said nearly one in three, 27.7 percent of all homes purchased in 2005, were for investment purposes and another 12.2 percent were vacation homes.

The market gets its greatest boost from wealthy baby boomers and stock market refugees who fled the dot com crash looking for better investment returns.

Baby boomers and others are also cashing in on the Tax Relief Act of 1997 which grants eligible home owners up to $500,000 in tax free profits on the sale of their home.

"To begin with, the baby boom generation is driving second home sales. They're at the optimum point in life when people become interested in second homes, they're at the peak of their earnings, interest rates remain historically low and boomers want to diversify investments," said David Lereah, NAR's chief economist.

The median price of a vacation home in 2005 was $204,100, up 7.4 percent from $190,000 in 2004. The typical investment property cost $183,500 last year, up 24.0 percent from $148,000 in 2004. Compare that rate of return with the increase in the median price of new homes, 7.7 percent last year. The median price of resale homes rose 12.7 percent.

NAR also said 41 percent of vacation-home buyers said they purchased second homes to use for vacations, 31 percent to use as a family retreat and 28 percent to diversify investments.

For investment-home buyers, 55 percent said rental income was the primary factor for buying, and 35 percent wanted to diversify investments.

The baby boomer trend to retire in place rather than to move to a retirement community or institution is also fueling the purchase of second homes as "retirement homes."

More than 75 percent of vacation-home buyers told NAR they have no interest in renting their property, and 21 percent said it would become a primary residence on retirement compared with only 2 percent of investment buyers.

Some 14 percent of investment buyers and 6 percent of vacation-home buyers purchased a property that their son or daughter can occupy while in school.

More domestic travel due to post-911 security concerns has also helped boost the investment potential of second home buys, as well as subsequent purchases. Vacation rentals has given a new, more homey dimension to travel accommodations both here and abroad.

NAR said in describing their second home's valued characteristics, 40 percent said ocean, river or lake proximity; 34 percent said proximity to family members; 27 percent said proximity to preferred recreational activities and proximity to their primary residence; 26 percent proximity to mountains; 24 percent said proximity to a preferred vacation area; and 17 percent said proximity to a job or school.

"The lion's share of investment homes is actually the primary residence of a renter. Most investment owners are seasoned buyers who understand the long-term benefits of ownership, but not everybody is cut out to be a landlord." said Thomas M. Stevens NAR President and senior vice president of NRT Inc.

NAR also reported:

  • The typical 2005 vacation-home buyer was 52 years old, earned $82,800, and purchased a property that was a median of 197 miles from their primary residence. Some 47 percent of vacation homes were less than 100 miles away and 43 percent were 500 miles or more away.
  • Investment-home buyers had a median age of 49, an income of $81,400, and bought a home that was a median of 15 miles from their primary residence.
  • The largest concentration of vacation home buyers, 33 percent, are in the Midwest, although the property may be located in another region. Buyers in the South accounted for 30 percent of vacation home transactions, the West, 20 percent, and the Northeast, 17 percent.
  • Most investment home buyers, 38 percent, are in the South. Buyers in the Midwest and Western regions each purchased 24 percent of investment properties, and Northeasterners, 15 percent.
  • One in three vacation-home buyers and 36 percent of investment-home buyers said it was very likely that they would purchase another home, in addition to properties currently owned, within the next two years.

A more detailed second home study, "The 2006 National Association of Realtors Profile of Second Home Owners," will be released in late spring to update NAR's benchmark second home study published in 2002.

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