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Investing in a Second… The Rise of Investor and Second-Home PurchasesSpecial Commentary from the Office of the Chief
Economist A family buys a home for one of three purposes: to live in it as their primary residence; to have a second home, typically as a vacation get-away; or to be an investor in a non-owner occupied property. Owning one’s home has always been the principal driver of home purchases. According to the 2001 Residential Finance Survey, 83 percent of single-family homes were owner occupied, and Home Mortgage Disclosure Act (HMDA) data show that more than 90 percent of purchase-money loans through 2001 were for a primary residence. However, over the past few years, investor and second-home purchases have gradually increased. In 1999, investor and second-home mortgages comprised about 8.5 percent of purchase-money loans in the prime, conforming market. This share had doubled by the first quarter of 2005 to about 17.6 percent, and some local markets were running close to twice that share. Investor and Second-Home Share Doubles: 1999-2005 The rise in second-home buying reflects both secular and cyclical phenomena. As baby boomers reach or near retirement, many of them choose to buy a second home, perhaps to move to in retirement. The leading cohort of baby boomers reached age 59 this year, an age at which they can begin to make tax-free withdrawals from investment retirement accounts (perhaps for a down payment on a second home!) if they choose. The aging of the baby boomers over the next decade is likely to keep second-home purchases at an elevated level. The cyclic low in mortgage-interest rates and lackluster stock market performance
have also contributed to investor and second-home activity. Low mortgage rates
have made it easier to afford to buy a second home or an investor property.
And low yields on fixed-income assets and stock equities have motivated investors
to look elsewhere for better returns and a diversified portfolio. Strong home-value
appreciation in recent years has made single-family homes appear to be an attractive
alternative. As shown in Exhibit 1, the investor and second-home shares have
risen as a percent of prime, conforming loans, and during the first quarter
were running about double the share of six years ago.
Because nearly all Federal Housing Administration (FHA)-insured loans are owner-occupied, the investor and second-home share of purchase-money conventional loans is slightly higher, accounting for 21 percent of such loans in the prime, conforming market during the first quarter of 2005. In some markets, the share runs about one and a half times as large – up to 36 percent of conventional lending. Exhibit 2 summarizes data from LoanPerformance, which shows the metropolitan areas where investor and second-home activity accounted for at least one-quarter of prime, conventional, conforming loans. The metropolitan markets with the highest shares tend to be clustered in Florida
and the Southwest. These also tend to be markets that historically have above-average
investor and second-home activity, and they include markets that have had large
home-value appreciation in recent years. While the additional home-purchase
demand from investor and second-home purchases probably has added to home-value
appreciation at the margin, these markets are still dominated by families buying
primary residences. House values are likely to be maintained if the local economies
remain strong; more worrisome are some localized condominium projects, which
have reportedly had much higher investor and second-home purchases, which may
have inflated valuations.
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