Housing Market in 2023: Decreased Demand for Vacation Homes
The COVID-19 pandemic sparked a surge in demand for second homes in early 2020, as those with the financial means took advantage of low mortgage costs and increased savings rates. However, vacation home sales have drastically declined as the pandemic progresses, according to a recent report by Redfin.
Redfin analyzed Optimal Blue market data and found that mortgage rate lock agreements for March dropped by 52% compared to pre-pandemic levels, in contrast to a 13% decrease for primary homes. This represents the lowest level of rate locks for second homes since February 2016.
Mortgage rate locks, also known as rate protection, help borrowers secure an interest rate on their mortgage during the application process until they close on the loan. This ensures that borrowers can obtain the best possible mortgage rate while going through the refinancing or purchasing process. However, if the locked rate is higher than the prevailing rates, borrowers cannot take advantage of any future rate decreases.
In August 2020, mortgage rate locks for vacation homes reached an all-time high, surpassing average pre-pandemic levels of January and February 2020 by 89%. However, in March 2023, these rate locks dropped by 75% since the peak, as reported by USA Today.
According to USA Today, mortgage rate locks for second homes decreased by 49% year-over-year (YoY) in March and have seen a 71% decline since January 2022. Mortgage rate locks for primary homes have decreased by 29% YoY and 35% since January 2022.
Redfin attributes the decline in vacation home sales to various factors, some of which are directly influenced by post-pandemic conditions, while others are tied to general economic concerns.
One contributing factor is that vacation homes are considered a luxury rather than a necessity. While second homes might be appealing under favorable economic circumstances, they become a riskier investment when prices, mortgage rates, and inflation are high.
Prospective buyers of second homes often face challenges in affording down payments and monthly payments. Redfin notes that the typical second home had an average value of $465,000 in 2022, compared to $375,000 for a primary home.
According to Taylor Marr, the deputy chief economist at Redfin, it is currently challenging for most Americans to afford a vacation home. With high housing payments, increased loan fees, inflation, uncertain financial markets, the end of pandemic-related financial stimulus, and companies recalling workers to the office, the financial landscape makes it difficult to even consider buying a second home. The demand for vacation homes for rental purposes has also decreased compared to the peak of the pandemic. As the pandemic led to a surge in short-stay and holiday rentals, affluent individuals and investors flooded the market with vacation homes, consequently saturating the short-term rental market.
While vacation homes still hold appeal, they may only be within reach for a limited number of buyers. It’s worth noting that Redfin’s analysis does not include cash buyers, who may still have the advantage of purchasing a second home in the current economy. High rates do not concern these affluent cash buyers, as they believe they can acquire a vacation home below the asking price. However, there is a decrease in buyers looking for properties to use as short-term rentals due to the saturation of the market.