According to reports, vacation home sales in the United States experienced a 50 percent jump in 2014, up from 717,000 homes the prior year. Two things in particular are driving the increase of sales for vacation homes to include a large number of baby boomers seeking out retirement destinations and a rebounding real estate market.
Vacation Home Hot Spots
A prime example of growing vacation home sales is seen in the Hamptons. For people living in New York and New Jersey, the Hamptons have long represented high-end vacation homes. In that particular market, a low-end home sells for around $1 million while higher-end homes go for $10 million and up. Currently, things are happening fast in the Hamptons as people eagerly snatch up vacation homes.
According to Lawrence Yun, Chief Economist with the National Association of Realtors (NAR), preliminary data shows that from 2013 when 717,000 vacation homes in the US were sold, numbers have climbed more than 50 percent. In addition, sales for second-homes are expected to keep climbing throughout this year.
As explained by Yun, with the stock market flourishing, the wealthiest people in the country feel more confident financially. Because of this, these individuals have no problem buying second homes. However, many baby boomers are now getting close to retirement and as such, many are interested in a second home where they will eventually retire.
Some of the hottest destinations for baby boomers interested in US vacation homes include cities in Arizona and Florida. However, top markets also include Denver, Colorado, Albuquerque, New Mexico, and Boise Idaho. As shown in the 2014 NAR reports, of all home buyers last year, baby boomers accounted for 30 percent.
Change in Lending Practices
Even certain lenders are now reporting an increase in the number but also dollar volume of applications for second home purchases. As stated by Bill Banfield, Vice President of Quicken Loans, this suggests that property values are going up or that people are interested in purchasing larger homes.
Just one year ago, the majority of residential lenders required a 30 percent down payment at minimum for a second home. However, now lenders are just asking for 20 percent. Because of this, lenders are attracting an entirely new group of borrowers. Then considering that interest rates for second homes are no different than for first mortgages in many instances, it is easy to understand by loans has increased. For Quicken, home loans are up $1.5 million while for Bank of America, $2 million.
There are a few challenges for some people interested in buying vacation homes. The first is that requirements for credit score are typically stricter. For example, to secure a jumbo mortgage with a 20 percent down payment on a second home, some lenders want a minimum credit score of 740. However, for a higher down payment, there are lenders that will drop the credit score requirement to 680.
Another possible challenge is that borrowers need to show lenders they are capable of handling to mortgage payments. There is also the issue of flood insurance required for homes near coastal areas as indicated by the Insurance Information Institute (III). Insurance premiums for flood coverage has skyrocketed and since banks traditionally will not lend money for homes deemed “underinsured”, this could present a problem for certain areas.