Many potential homebuyers are waiting for a demand drop in the real estate market, but is it coming? It seems like primary residences are still highly desired, but there are signs of a cool-off in the second-home market. Some market assessments show a significant fall in vacation home demand ever since the Fed raised the interest rate.
The pandemic-driven low mortgage rates, combined with the fear of crowds and the need for space, created an unprecedented interest in second homes. Well-off homeowners grabbed the chance to lock in the low rates and brought second-home sales to 88% above pre-pandemic levels.
The first quarter of 2022 marked the end of this vacation home frenzy. Not only do the interest rates demotivate even the more affluent buyers, but some counties instituted higher taxes on vacant properties and loan fees. Locking in the rates seems unappealing by adding these costs to second-home buyers’ budgets.
The interest in vacant homes started declining in February, and it hasn’t stopped since. April marked the start of adding a 1% - 4% increase to second-home loans, which adds around $14,000 to the median purchase price of $500,000. The demand decrease still hasn’t affected the costs in the second-home market since there is such a shortage of inventory.
Growth in Demand for Primary Residences
Source: Redfin.com
The demand for primary homes was lower than that for vacation homes during the pandemic, but the situation has changed. The beginning of the year saw secondary houses in much higher demand, which all of a sudden plummeted in February.
On the other hand, demand for residential properties jumped at the beginning of the pandemic and has kept a high pace ever since. May will be the fourth consecutive month of higher demand for primary residences than secondary homes. This is not hard to explain - people need a place to live, and rents are high and unaffordable, so people who saved just enough for a down payment rushed to lock in the current rates.
Additionally, this discrepancy may stem from the fact that investors started leaving the real estate market. Since there will always be more people in need of a rental to live in than a vacation house - investors are leaving the second-house market first.
Will the Prices Drop with the Demand?
The reports are showing no price drops, even though the demand has significantly fallen, almost to pre-pandemic levels. Unfortunately, the lack of supply is so grand that the prices cannot be balanced out just by a drop in potential homebuyers. It will probably take creating inventory to bring the price to some kind of affordability. Los Angeles has some high goals set in this department - half a million residential units to be built by 2029.
Other areas with a lot of seasonal residencies try to install a tax on vacant homes. By taxing vacancy, the government will try to motivate the sale or rent of a unit and also collect the tax to create an affordable housing fund. There are ideas and promises, but will they be fulfilled and realized - that is something we cannot know right now.
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Zachariah Peterson (69 blogs)