Record Low Demand for Vacation Homes in the U.S

Discover the recent Redfin data showing a record low demand for vacation homes in the U.S. Mortgage rate locks for second homes have declined by 47% in August compared to pre-pandemic levels, while primary homes experienced a 33% decrease. Limited inventory and high costs prevent potential buyers.

According to recent data from Redfin, mortgage rate locks for second homes in the United States have experienced a significant decline. In August, these locks were down by 47% from pre-pandemic levels, compared to a 33% decrease for primary homes. This marks the 14th consecutive month that demand for second homes has remained at least 30% below the levels seen before the pandemic. The high costs associated with housing and the limited availability of inventory have acted as deterrents for potential buyers.

Record Low Demand for Vacation Homes in the U.S - Redfin Data

The decline in rate locks for second homes reached its lowest point in February, falling 52% below pre-pandemic levels. For those unfamiliar with the concept, a mortgage-rate lock is an agreement between a homebuyer and a lender that allows the homebuyer to secure a specific interest rate on their mortgage for a fixed period. It is worth noting that approximately 80% of rate locks ultimately lead to home purchases.

When compared to the same period last year, demand for second homes has also decreased. Mortgage-rate locks for these types of properties are down by 19%, whereas primary homes have experienced a smaller decline of 14%. This decline follows a surge in demand for vacation homes during the pandemic, which peaked in October 2020 at 88.5% above pre-pandemic levels. Wealthier individuals, armed with the flexibility to work remotely from vacation destinations, took advantage of the record-low mortgage rates. Primary homes experienced a similar surge, albeit to a lesser extent, with demand reaching a peak of 16% above pre-pandemic levels at the end of 2020.

Various factors contribute to the larger drop in demand for second homes. Rising mortgage rates, reaching a two-decade high in August, have dampened interest in both primary and secondary residences. Additionally, high home prices, elevated costs of goods and services, an uncertain economy, and a shortage of new listings have all shifted buyer preferences.

However, the decline in demand for vacation homes is more pronounced due to several circumstances. First, purchasing a second home is typically more expensive. The typical price of a home in a seasonal town, where many second homes are located, has risen by 5% year over year and currently sits at $564,000. In comparison, homes in non-seasonal towns have also experienced a 5% increase but now have a median price of $421,000. Moreover, mortgage rates for second homes are usually higher. Lastly, the federal government has implemented higher loan fees for second homes in 2022, which often translates to tens of thousands of dollars added to the total cost. These factors collectively contribute to the decreased attractiveness of second-home purchases.

Another reason for the decline is the return of many workers to the office, at least on a part-time basis. With the allure of remote work fading, the motivation to invest in vacation homes has diminished. Furthermore, buying a vacation property to rent out on short-term rental platforms, such as Airbnb, is now less appealing. Local governments, including New York City, have implemented stricter regulations regarding short-term rentals, introducing new taxes and rigorous permitting processes that eat into profits and increase operational challenges. Consequently, long-term rental options have also become less enticing. While asking rents remain high, many landlords are now offering concessions to attract tenants. Additionally, the market is experiencing a rise in vacancies, with a plethora of new units set to hit the market soon.

In conclusion, mortgage-rate locks for vacation homes have faced a considerable decline, with August witnessing a drop of 47% from pre-pandemic levels. This decline has extended over a 14-month period, fueled by high housing costs, limited inventory, and a variety of external factors. In comparison, the decline for primary homes sits at 33%. Affluent Americans capitalized on record-low mortgage rates during the pandemic, driving demand for second homes to new heights. However, rising mortgage rates, premium prices for second homes, increasing loan fees, the return to office work, less attractive short-term rental opportunities, and a cooling rental market have contributed to the significant drop in demand for vacation homes.