February demand for second homes fell to its lowest level since May 2020.
Vacation-Home Bubble Popped in February
As we all remember, demand for second homes began soaring when the COVID pandemic gripped the United States. The Federal Reserve dropped mortgage rates to historic lows to counteract lockdowns and job losses, remote working took hold, and more affluent Americans wanted “out” of high-density metros and “in” to less populated and greener open spaces to live their lives.
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By the time March 2021 rolled around, second-home demand peaked at +95% compared to pre-pandemic second home demand levels.
Fast forward to now. COVID has transitioned from pandemic to endemic, on-site working is rebounding though remote working remains and mortgage rates are climbing. (As of March 16, the Federal Reserve announced a rate increase of +0.25% plus an additional six rate increases in 2022. Read our companion article this week about rate hikes.)
The result of all this present tense activity is that second-home demand dropped to its lowest level since May 2020…still up +35% from pre-pandemic levels but much lower than the +87% increase in demand in January 2022.
Demand for Primary Homes Outpaced Second-Home Demand in February
According to a just released report from Redfin, February demand for primary homes increased +36% from pre-pandemic levels while demand for second homes fell.
Home prices increased +13% in non-seasonal primary markets to $414,000 and inventory was down -17%.
Redfin chief economist Daryl Fairweather said, “Rising mortgage rates, combined with rising home prices are hitting the second-home market much harder than the primary-home market. That’s largely because vacation homes are optional. People don’t need a second home, but they do need a place to live. Still, people are buying up vacation homes more than they were before the pandemic, as work remains more flexible than it used to be.”
Mortgage Rates Peaked at 3.92% in Mid-February – Now
After incrementally climbing higher and higher, mortgage interest rates in mid-February peaked at 3.92%. That 3.92% was substantially higher than the 2.65% rate hit in the beginning of 2021. Subsequently, interest rates came back down to 3.85% at the beginning of March.
As of March 17 after the Fed announced its first of seven +0.25% interest rate hikes projected through 2022 on March 16, rates increased tp 4.16%. This is the first time interest rates have surpassed 4.0% since 2019.
Not only are mortgage rates rising, the Federal Housing Finance Agency (FHFA) recently announced that fees for second-home loans are to increase approximately +1% – +4% beginning in April. This FHFA increase will add an extra +$13,500 to the cost of buying a $400,000 second home. This increase will either be paid upfront or added into monthly mortgage payments of about $60/month.
Home Prices in Seasonal Towns Up and Supplies Down in February
As second- or vacation-homes are often located in seasonal markets, second-home buyers experienced an average home price increase of +20% y/y to a median of $513,000 in February 2022. (For the last 1.5 years, home prices in seasonal markets have gone up +10% y/y.)
Seasonal markets also experienced a record decline of -29% y/y of available for-sale homes in February. Such an inventory decline may suggest two things: workers with permanently remote jobs may be relocating full time to seasonal/vacation towns; and investors may be increasingly interested in picking up homes to rent out in seasonal towns.
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Thanks to Redfin.