In May, demand for second/vacation homes fell below pre-pandemic levels for the first time in two years.
Cooldown of Vacation-Home Boom
Demand for vacation homes is on the downward slope. May’s mortgage-rate locks for second homes dropped -4% y/y from pre-pandemic times, according to Redfin. This was the first time second-home demand fell below its pre-pandemic baseline in two years. One year ago, second-home demand was up +70% compared to January-February 2020.
The main causes of this about-face in vacation homes include high home prices, climbing mortgage rates, a volatile stock market and the government’s increase in second-home loan fees in April.
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According to the FHFA, (Federal Housing Finance Agency) upfront second-home fees increased between 1.125% – 3.875%, tiered by loan-to-value ratio. This translates into adding approximately $13,500 to the cost of buying a home priced at $400,000.
Many Second Home Buyers “Priced Out of Market”
“Skyrocketing monthly payments, along with higher loan fees, have priced many second-home buyers out of the market,” said Redfin Deputy Chief Economist Taylor Marr. “Many would-be second-home buyers are also deterred by turmoil in the stock market, high inflation and recession fears, and they can be quicker to pull back from the market because vacation homes aren’t a necessity the way primary homes are. The cooldown in the second-home market is likely to continue as long as mortgage rates are elevated and the stock market is slumping.”
Tipping Point in Q1 2021
Demand for second homes soared from Q3 2020 through Q1 2021 due to historically low interest rates and remote working options that untethered thousands of people from fixed locations so they could work wherever they wanted. At its peak in March 2021, demand for second homes was approximately 90% above pre-pandemic levels.
Mortgage-rate locks for second homes began declining in February 2022 when buyers sniffed mortgage rate hikes. The kicker was the FHFA’s increase of mortgage fees to second home loans in April.
No more “sniffing” required. The average 30-year sixed mortgage hit 5.78% during the week ending June 16.
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Thanks to Redfin.