The U.S. second home market is gearing up for what is virtually certain to be a series of record years for sales volume. But new research suggests that the buyers currently jumping into that market are strikingly different from buyers barely three years ago.
The new wave of second home purchasers--the leading edge of the baby boom demographic shock wave--are far more investment-oriented than their predecessors, according to a new national study conducted by the National Association of Realtors in conjunction with Escapehomes.com. Many more of them are buying to make money, not to spend weekends at the beach sipping margaritas.
Whereas just 20 percent of second home buyers in 1999-2000 had invesment returns as their primary motivation, nearly double (37 percent) of second home buyers last year ranked rental income as their primary objective.The study defined “investment” properties as those rented out for an aggregate six or more months per year, and rarely if ever used personally by their owners.
Traditional “non-investment” second homes, by contrast, are primarily purchased for personal use and only sporadically rented out.
Why the dramatic switch?
According to NAR economist Thomas Beers, the “slumping stock market” and the continuing high appreciation and capital gains from residential real estate have grabbed the attention of the baby boomers. While the Dow Jones index is off by 25 percent over the past three years and the Nasdaq down by 65 percent, Beers notes, residential proprty has been gaining value impressively. Nationwide, home values are up by an average 38 percent over the past 60 months alone, according to the Office of Federal Housing Enterprise Oversight. But for many resort areas on the East and West coasts and in resort communities elsewhere, average gains have been even higher. Some well-located properties along the mid-Atlantic coast have doubled in resale value since 1997.
Who are the new, investment-minded baby boomers snapping up resort condos and homes? The NAR study of a national statistical sample found that the typical purchaser is 56 years of age, married with no children living at home under age 18, and is relatively affluent, with a household income of $92,000.
Equally important: the baby boom shock wave is just getting started on second homes. Each year for the coming decade, according to NAR estimates, enough consumers will hit their mid-50s--the prime buying years for second homes--to expand construction in this sector by 150,000 units a year.
A key sub-trend documented by the study: Nearly 30 percent of all buyers expect to convert their second homes into their primary homes sometime in the future. That move would provide a neat way to get maximum use of the federal $250,000/$500,000 tax-free capital gains exclusion.
For example, a married couple in their mid-50s right now could buy a second home in a resort comunity, rent it out for the next five to seven years, then sell their principal home tax-free, and convert the rental home to their new principal residence. That would start the tax clock ticking again on their resort residence, and allow them to pocket all gains on the house tax-free (up to the $500,000 limit) after just 24 months of ownership and use.