Who Is Buying Second Homes

They already have three homes, but Deb and Anthony Howard are considering adding to their portfolio.
 

As Baby Boomers, those Americans born between 1946 and 1964, they are hitting their prime second home-buying years. A recent study from the National Association of Realtors confirms that the most popular ages to buy second homes are from ages 55 to 65, followed by 45 to 55.

“This is a large national trend, and the Boomers have the wherewithal to invest in a second home or property based on profitable quality of life investments,” said Deb Howard, a real estate broker based in Lake Tahoe, CA who specializes in resort homes.

Roughly 7,000 Baby Boomers per day will turn 60 in 2006. They’re thinking about retirement – and where to spend it. The residential real estate industry is trying to anticipate their moves. But as interest rates rise, real estate observers wonder how price sensitive Boomers will be.

According to David Lereah, Chief economist for the National Association of Realtors, the buying market for second-home purchases is still strong, regardless of rising interest rates.

“Interest rates are coming up a little, so I predict a modest drop in home sales,” said Lereah. “Prices got way too high at the resorts 2 years ago, and there was a lot of overbuilding in places like Orlando. This has resulted in slow price appreciation, but it will also bring down cost, which is actually good for home buyers.”

Even if the second home market slows a bit, the numbers are still impressive: 78.2 million Baby Boomers who have an estimated $2 trillion in disposable income, according to the 2004 U.S. Census, and are set to inherit trillions more.

They spend 31.2 percent of their income on housing. Last year, 32 percent of homes purchased were investment homes, with 13 percent accounting for vacation homes.

With those kinds of numbers, many real estate agents and brokers don’t see a cause for alarm.

“(Baby Boomers) can afford it and want it, and more so, they feel they deserve it,” explained Deb Howard, adding “As a result, second home resort markets are a very attractive option.”

As attractive as second homes are, there’s no sense in wasting money. Baby Boomers have educated themselves not only about hot housing markets for second homes, but also how to save on taxes.

The Howards’, like many of Deb Howard’s clients, have taken advantage of the 1031 tax free exchange. They sold an investment home and purchased a vacation home in Scottsdale, Arizona, and deferred taxes owed on the profits.

A 1031 tax-free exchange allows an owner to swap an investment property for one of greater or equal value. The owner must identify the property within 45 days and close on the sale within 180 days, as well as follow other rules.

Of the several hundred transactions Deb Howard closes in a year, she estimates one-third of her clients use a 1031 tax-free exchange.

She thinks that’s significant. “People are sitting on an awful lot of equity and want to avoid paying taxes on that equity, so they are using the tax exchange as incentive,” Howard said.

Howard also noted that since interest rates have been historically low for years, a small up tick won’t price the second home market out of reach for most Boomers.

That seems seems to be the case in Orlando, according to Beverly Pindling, president of the Orlando Regional Realtors Association, who oversees 12,000 Orlando real estate professionals.

“People want to hold on to real estate in Orlando,” observed Pindling. “Because of all the attractions, it’s always going to be booming.”

Pindling says the Orlando market is relatively balanced now. Inventory is up, but she’s not worried about the market slowing down.

“Higher interest rates may cause an issue for some people, but there is always a segment (of buyers) that can buy regardless of the interest rates,” she noted.

Margaret Wylde, president and chief executive of ProMatura, a research consulting firm in Oxford, Miss. that specializes in housing research among mature consumers, says that most Boomers are not going to be affected by interest rate changes because many of the Boomers buy their homes with cash.

“With the advent of Boomers acquiring inheritance from family members, most home purchases would be an out and out purchase,” Wylde added. “If the interest rates were lower, they would probably finance them so they can put money somewhere else. “

Wylde added that buying a second home is typically a discretionary purchase. Financing is a nice option to have, but not a necessary one.

Since Boomers now are in the best position of their lives financially, most industry observers believe that this can only be a boon for the real estate market.

Debra Howard agrees. Her second home clientele is expanding as she and her husband try to figure out not only what property to buy next, but where they will eventually retire.

“We will probably buy and sell a few times before we land on a retirement home,” she notes, adding that the location may not necessarily be in Arizona. “We might settle into a retirement home in Lake Tahoe, one that is new of course.”

10 hottest second-home spots:

1. Naples, Fla.
2. Myrtle Beach, S.C.
3. Orlando, Fla.
4. South Padre Island, Texas
5. Park City, Utah
6. Las Vegas, Nevada
7. Tampa, Fla.
8. Phoenix, Ariz.
9. San Diego, Calif.
10. Destin, Fla.

NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.