Market Overview
Are you second-homeless?
By all accounts, residential real estate is hotter than Tucson in July. The fact that the median home price there is now $336,300 supports the point.
There are a whole lot of buyers out there and just not enough homes for sale. To make matters worse for prospective buyers, people are less tethered to offices, and less accustomed to going out multiple times a week, so home is even more important. We are nesting now, and willing to spend a little more on the domicile since we’re there more hours each day on average.
Adding a little heat to the market is the fact that roughly 15% of home sales are for second homes. Vacation home mortgage applications jumped 30% from 2019 to 2020. If we could build a million more housing units in the U.S. overnight, the experts tell us they would all be bought up in short order, but that’s done nothing to derail the frothy market for vacation homes. Easy money and low rates for financing have a lot to do with it – directly by making mortgages more affordable and indirectly by promoting economic expansion.
(We also suspect that income from renting second homes out on Airbnb has something to do with it, but who knows for sure?)
But the horizon seems to be filled with thundershowers that could douse this hot market. Interest rates are going up, which means mortgage rates and costs will be going up as well. A recession might not be looming, but serious people are talking about it. And, of course, real estate has always been a boom/bust business.
So, is now a good time to consider taking the plunge into buying a second home?
Reasons why and why not
Among the key practical – as opposed to emotional – reasons to buy a second home is the tax advantages. These include deductions for interest, insurance and other expenses.
On the flip side, there are plenty of practical reasons why not buying that second home makes sense. If you’re buying a home for commercial purposes – whether leasing it out to a permanent tenant or setting it up for weekend guests – you become a landlord, which can be fraught with its own headaches. You can choose to hire a property manager, but that expense will cut into your profits, if you even have any.
Regardless of how a given family might weigh these, the pandemic has spawned an interesting niche: people who buy a second home before they buy a first home. The New York Times ran an article about how a family that was renting a Brooklyn apartment needed to find a place to sprawl out a little during the lockdown, so they bought a cottage three hours away in the Catskill Mountains while continuing to pay rent in their home borough.
Other considerations
In addition to whether this new, second property will be an investment or a lifestyle choice, there are many other things to think about:
- How often are you going to stay there and for how long? If you want a place for weekend retreats, make sure it’s less than a tank of gas away rather than an airline flight.
- Do you really need to buy the whole place, the whole time? There are fractional ownership and timeshare opportunities. Historically, these have not generally been great choices because the secondary market is almost non-existent, but looking into it might be worthwhile.
- The mortgage payment is just the beginning of any home’s expenses. Have a good idea of how much extra cash this little extravagance is going to cost you per year.
If you have any questions about whether or not you can afford a second home – much less whether it could be a profitable endeavor - you might want to talk things over with your financial advisor.
