A new Redfin report says the rush to purchase second homes dropped in February to its lowest level since May 2020. Though demand is still up 35% above pre-pandemic levels, the vacation housing market will cool as rates rise.
The Redfin report shows that vacation home purchases dropped 38% year-over-year in February after falling 34% in January and 27% in December. The drop comes as the cost of borrowing rose at an accelerated pace following an increase in Treasury yields due to rising inflation expectations, soaring government debt issuance, and ongoing fears related to the COVID-19 pandemic.
Over the last couple of years, affluent homebuyers have been snapping up vacation properties at an unprecedented rate amid the pandemic and remote work flexibility. Many are moving out of cities and into suburbs and smaller cities or greener pastures in states with lower taxes and a more reasonable cost of living.
Before the pandemic, demand for second and primary homes grew at similar rates. But pandemic lockdowns and the Federal Reserve’s easiest monetary policies on record, coupled with FOMO and low inventory, unleashed a surge in buying panic in beach towns and mountain areas.
Upscale housing markets in Phoenix and Las Vegas saw double-digit increases in demand for luxury vacation homes this past winter compared with a year earlier as snowbirds flocked to warmer climates for COVID-19 respite and remote work escape options during the pandemic lockdowns.
But as rates rise, the market is more unaffordable to potential second home buyers.
Redfin found that demand for vacation homes declined 7% in February compared to January. The percentage of vacation home searches fell from 7% of all searches in mid-January to 5% at the end of February, “a bigger drop than we saw after last year’s election,” said Daryl Fairweather, Redfin’s chief economist.
“With mortgage rates now over 3%, they are starting to affect buyers’ decisions,” Fairweather added. “The slowdown in vacation home searches is a sign that it may be getting harder for many Americans to afford a second home.”
Mortgage rates on vacation homes have risen to 3.37% from 2.88% in January. A 30-year fixed-rate mortgage for a home purchase is now at 3.12%, the highest rate since July 2020.
The report says: “As interest rates climb toward 3%, that market is going to cool off. Affordability has been bolstered by historically low mortgage rates for much of the past year and a half. As those low rates start to disappear, we could see buying power dip and affordability decline once again. But there will be more sellers on the market this spring and summer than last year, which will help offset some of those effects on affordability.”
“With mortgage rates on an upward trajectory again, it’s likely we’ll see a drop in demand as people reassess what they can afford,” said Taylor Marr, senior economist at Redfin. “The future of the vacation home market will depend on how long mortgage rates stay elevated and if there is another round of stimulus that boosts buyers’ confidence.”
“Vacation home buyers have the most urgency about locking in low rates,” Redfin agent Kathleen Plinske said in a statement. “They’re generally wealthier, more stable and more risk averse than people looking for primary homes.”
Moe Bedard is the founder and lead mortgage analyst for LoanSafe.org. Since 2007, LoanSafe has helped over 2 million consumers with solutions to their mortgage problems and has been featured in the New York Times, LA Times, Fox Business, and many other media publications.