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The demand for mortgages on second homes has plummeted to its lowest level since 2016, with high costs, a shifting remote work landscape, and a less profitable short-term rental market deterring prospective buyers. According to a March 2023 analysis, mortgage-rate locks for second homes were down 52% from pre-pandemic levels, a significantly steeper decline than the 13% drop for primary residences. This article breaks down the key economic and lifestyle factors behind this sharp contraction.
A mortgage-rate lock is a formal agreement between a homebuyer and a lender that guarantees a specific interest rate for a set period, typically until the loan closes. This lock protects the buyer from potential rate increases during the home buying process. When applying, buyers must specify if the property is a primary residence, a second home, or an investment property, as different loan terms and fees apply.
Several interconnected factors are responsible for the outsized decline in second-home purchases.
Higher Overall Costs: Purchasing a vacation home is inherently more expensive. In 2022, the typical second home had a median value of $465,000 compared to $375,000 for a primary home. Additionally, elevated mortgage rates and a federal increase in loan fees for second homes enacted in April 2022 have made monthly payments significantly higher. For many, the financial barrier is now too high.
A Cooling Short-Term Rental Market: The prospect of offsetting costs by renting a property has become less appealing. The short-term rental market, popularized by platforms like Airbnb, is experiencing a steep decline in profitability due to oversupply and new local regulations, including taxes and stricter permits. This reduces the investment incentive for potential buyers.
The Shift Away from Full-Time Remote Work: While remote work is still more common than before the pandemic, the trend has receded from its peak. As more companies implement return-to-office policies, the utility of a vacation home diminishes when there is less time available to spend there.
Economic Uncertainty and Shrinking Savings: Persistent inflation and volatility in the stock market have impacted the disposable income and savings of potential buyers. With less cash on hand for down payments and monthly carrying costs, many affluent individuals are postponing or canceling second-home plans.
Despite the challenging landscape, there are still active buyers. Based on our experience assessment, the current market is dominated by affluent cash buyers who are insulated from high mortgage rates. These buyers are often motivated by the opportunity to negotiate purchase prices below the asking amount in certain markets. They are typically seeking properties for personal use in desirable vacation destinations, rather than as rental investments.
If you are considering a second home, a cautious and well-researched approach is essential.
The combination of high costs, a saturated rental market, and changing work patterns has made second-home ownership a less attainable goal for many Americans. While opportunities exist for those with significant capital, the era of rapid growth in this sector has significantly cooled.
