By Eugene L. Meyer, U.S. News & World Report
3:49 p.m. CDT, September 23, 2010
The housing market reflects a paradox of the current economy: Though some baby boomers are struggling to prevent their primary residences from sliding into foreclosure, others are realizing their dream of purchasing a vacation getaway.
Many people “still have a lot of money that sits on the sidelines waiting,” said Michael Saunders, a Sarasota, Fla., broker active in the second-home market. “I think the wait is over for them. Anywhere you look, you are going to find prices we haven’t seen since 2001,” largely because of foreclosures and short sales of homes for less than what’s owed on them.
However, boomers without disposable income should steer clear of the second-home market, even if they believe they can get financing, advised Christine Karpinski, author of “How to Rent Vacation Properties by Owner.”
“Don’t get yourself caught up in the mess millions of Americans are in right now,” she cautioned. “Don’t overleverage. If you are already retired or close to retirement, that’s not a risk I would take.”
Conversely, for the fortunate who are flush with cash, have high credit scores and possess sufficient disposable income to make down payments of 20 percent or 30 percent, now may be the time to jump into the market. Sharply reduced prices and the lowest interest rates in decades have combined to create a buyer’s market. Moreover, with the stock market in the doldrums, some boomers are finding that a second home can be a worthwhile long-term investment.
Marleen and Scott Karns, who live near Harrisburg, Pa., cashed in stock in December to buy a condo with relatives on St. Croix, in the U.S. Virgin Islands, for $310,000. This was well below the original asking price of $390,000. “It’s our ‘CD’ in St. Croix,” Marleen said.
After incurring some significant startup costs, including interior decorating and the purchase of a flat-screen TV, the Karnses now rent out the property when they are not using it themselves as a vacation home.
“We feel like we’ve kind of landed in our dream come true,” Marleen said.
What is unclear is how many couples have the ability to capitalize on the market as the Karnses have. In 2009, the typical second homebuyer was 46 years old with a median household income of $87,500 (down from $99,100 in 2007), according to surveys by the National Association of Realtors. And while income has gone down, second-home prices rose 12.7 percent in 2009, the NAR notes. Though these factors have closed the market for some, the simultaneous increased demand for rentals of vacation and weekend properties has made these purchases feasible for others.
If you are a prospective buyer, consider three key issues:
1. Can the property generate enough rental income to cover carrying costs (mortgage plus maintenance, insurance, utilities and property taxes)?
2. Will the rates you charge, especially for the most expensive properties, attract a pool of renters that is both sufficiently large and sustainable (particularly during economic downturns)?
3. If you intend to use the second home more than you will rent it, do you have the means to carry two mortgages and to pay associated costs?
Some boomers who bought second homes at their peak price now find themselves alarmingly underwater on their mortgages, which means they owe more than the property is worth. For these owners, Karpinski recommends renting to cover expenses and waiting out the market to give the properties a chance to appreciate.
New buyers, however, “can purchase a vacation home and have it break even from rental revenue … because the prices of properties are lower,” she said. “If in 2005 you bought for $500,000, and the rental market was $1,500 a week, you’d be hard-pressed to break even.” But with a property today at $300,000, “you can indeed break even. The rental rates have not gone down.”
Saunders said many sophisticated boomers are searching not for home equity but for “lifestyle equity.” They care more about their environment than rising property values. Saunders promotes the Sarasota area as the “Culture Coast,” offering opera, theater and other amenities.
That “absolutely compelling lifestyle” is what attracted Vic and Sandy Motto. The couple’s primary residence is in California‘s Napa Valley, which Vic said is suffering from a “very depressed” real estate market. In contrast, Sarasota offers “good values” and “mortgage interest rates which are at an all-time low.”
The Mottos — he’s 71, she’s 62 — paid $1.085 million in April for a 2005 contemporary with a 47-foot swimming pool that was listed at $1.23 million. When prices plunged during the recent downturn, “all the bells went off,” explained Vic, a wine industry investment banker. “We said, ‘This is it. Let’s jump on a plane and do something about it.'”
In Arizona, second homes are available at fire-sale prices, having plummeted as much as 70 percent from their highs in some areas. Foreclosures and short sales have driven prices down, said Phoenix-area agent Debora Nichols. Most of her clients are out-of-staters and Canadians, who are able to obtain lines of credit.
For many prospective second-home owners, “the difficult part is financing,” said Tom Kelly, co-author of “How a Second Home Can Be Your Best Investment.” “Lenders are even tougher with second homes than with primary residences.”
In some instances when a buyer cannot obtain traditional financing, Kelly said, the seller may be willing to hold the mortgage, acting as a banker. “Go in there and ask what’s possible,” he advised.
Saunders still sees real estate as a good long-term investment. Those who dream of a second home should consider this, Saunders said: “If you look at return on investment from 2000 to 2009, even though real estate has lost a lot of that (price) run-up we saw, it was still a better investment than the Dow, Standard & Poor’s and Nasdaq” stock indexes.
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