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Second homes impact the Real Estate Bubble

Posted Oct 23 2008 6:21pm

Baby Boomers continue to fuel the real estate bubble by buying second homes.

Throughout their lives, Baby Boomers' self-indulgent behavior has had an impact on society.  From using their parents' wealth to finance their college education and putting their stamp on the "Age of Aquarius" during the 1970s to buying the best cars, homes and personal technology in middle age, the "me-first" generation has now decided that second homes are another birthright as they approach retirement age.  The typical vacation-home buyer is a 55-year-old making $71,000 a year whereas the typical investment property buyer is 47 years old with an $87,500 annual salary.

Second homes soared last year and accounted for more than a third of all residential sales transactions.  A Washington-based National Association of Realtors (NAR) study showed that nearly one in four U.S. homes bought in 2004 was purchased for investment purposes; 13 percent were bought as vacation homes.  Together, that constituted the surging second-home market, which accounted for 36 percent of the 7.7 million homes sold in the country last year.  Second home sales rose 16.3 percent from 2003.

However, anyone counting on continued home appreciation to fund their retirement are likely to face a big shortfall as the real estate bubble bursts.  Interest rates are expected to keep rising and higher borrowing costs are already pricing potential home buyers out of the market.  In housing and automobiles, affordability is determined by monthly payments, including taxes and insurance.

As higher rates dampen demand, the effects will spread to the rest of the economy.  More important than housing's direct affect on the economy will be fallout from the slowdown in home-price appreciation.  This is where the economy will be most vulnerable.  The easy availability of refinancings and home-equity loans have allowed consumers to tap into the equity built up in their homes.  The Federal Reserve found that the average household extracted $26,700 in equity with each refinancing.  That provided a welcome boost to demand as recession, terrorist attacks and a sagging stock market were dragging down household purchases.  Now the refinancing windfall is going away.

For more on real estate bubble bursting and its affect on the economy, click here.

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