The National Association of Realtors reports that last year, 27.7 percent of all home sales were for investment purposes, while another 12.2 percent were vacation homes. Read the NAR press release.
This is consistent with my story that we are building many more homes than we need, with speculators buying up the excess. The Wall Street Journal had an article earlier this week which mentioned a fellow with an investment house with a monthly mortgage of $2,045 and a $108 monthly homeowner association fee. He’s renting the house out for $1,000 a month. Is my calculator broken or does this math not work out?
The vacation home story is partially about investment, too, though the NAR disagrees with me on this. Certainly there are some families who have always wanted a vacation home. Thanks to rising incomes and low mortgage rates, they can now afford the vacation home they’ve always wanted. But I talk to friends and neighbors who have bought a vacation home and they often tell a different story: "We’ve been talking about a vacation home for years, but we weren’t sure it made sense. However, our stocks aren’t doing anything, and home prices are zooming up, so we decided a buy that place at the beach." In short, there’s a speculative element underlying many of the vacation home purchases.
I’m not prone to pessimism, but this housing market scares the bejeesus out of me. There are about 3 million houses on the market now. There were 3.3 million sales to investors or vacation home buyers last year. If a moderate fraction of those second homes come back onto the market, they could drastically pull down home prices, raise selling times, and possibly cause some panic. Throw into the mix ARMs adjusting upward. Frightening.
Business strategy implication: If you’re a residential developer, keep your time horizons very short. Don’t bank too much land, don’t spend too much money without a firm commitment for someone to buy the property. And expect some firm commitments to fall through. If you’re a realtor, your best years are behind you. There may be some good years ahead, but there won’t be anything as good as the last three years.