second-home sales at all-time high
Vacation homes and investment properties show double-digit growth in 2005
by Les Christie, CNNMoney.com staff writer
April 24, 2006: 9:43 AM EDT


NEW YORK (CNNMoney.com) - Are homes still a good buy? Americans seem to think so -- they bought second homes, both as vacation properties but especially for investment purposes, in record numbers last year.

There were 3.34 million second home sales in the United States last year, up 16 percent from 2005, according to a report released Wednesday by the National Association of Realtors (NAR).

Nearly 40 percent of all home sales were for second homes, up from 36 percent the year before -- 27.7 percent of all home purchases were for investment (compared with 23 percent in 2004) and 12.2 percent were bought as vacation homes (13 percent in 2004).

"The baby boom generation is driving second home sales -- 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.

Vacation homes more expensive and more distant

Vacation homes cost more than homes bought for investment. The median price paid for a vacation home was $204,100, up 7.4 percent from 2004, while investment homes cost a median of $183,500, up 24 percent.

The buying of investment properties continues a trend that started with changes in tax laws in 1997. Previously, when homeowners sold their primary residences, the only way to avoid capital gains taxes was to roll over gains into another, more expensive home. Now, couples can claim a $500,000 exemption on sales of primary residences, enabling them to downsize into less expensive houses and apply the difference to second home purchases.

According to Lereah, vacation homes once constituted the majority of second home purchases, but the soaring real estate market has attracted more Americans to real estate investing.

Technically, many of the homes bought for investment cannot be classified as "second" homes, since many investors have purchased multiple properties. About 4 percent of home owners own three or more properties.

Typical buyers
The NAR report said that the profile of typical vacation home buyers was that they were 52 years old with earned income of $82,800. Their getaways were usually either within 100 miles of their primary residences (47 percent) or more than 500 miles away (43 percent).
Investment home buyers were, on average, a little younger (49 years old) with slightly lower incomes ($81,400). The biggest contrast was that investment buyers usually shopped much closer to their primary residences; the median investment home purchase was just 15 miles away.

The biggest consideration for vacation home buyers was that the properties should lie near recreation facilities such as beaches, mountains or golf courses. Midwesterners purchased more vacation homes than residents of any other region; they accounted for 33 percent of al sales. Southerners bought 30 percent of all vacation properties, Westerners 20 percent and Northeasterners 17 percent.

Southerners bought more for investment (38 percent of all sales), with 24 percent each accounted for by Midwesterners and Westerners and just 15 percent by residents of the Northeast.

Lereah said, "Vacation-home sales will remain strong for the foreseeable future given the fact that baby boomers are favorably positioned in terms of affordability, as well as being at the stage in life when people are most interested in making that kind of a lifestyle purchase."
Investment homes purchases, however, may drop, according to Lereah, as stagnant prices and rising interest rates will discourage buyers.