In early 2020, when the pandemic began, there was a significant surge in demand for second homes. Many affluent individuals took advantage of low mortgage costs and higher savings rates, leading to a notable increase in vacation home sales. However, as with various trends that emerged during the pandemic, the market for vacation homes has experienced a sharp decline, as reported by Redfin.
Redfin’s analysis of Optimal Blue market data reveals significant changes in mortgage rate lock agreements. In March, rate locks dropped by 52% from pre-pandemic levels for second or vacation homes, whereas primary houses experienced a milder decrease of 13%. This March decline marks the lowest level for rate locks on second or vacation homes since February 2016.
A mortgage rate lock, also known as rate protection, is a mechanism that prevents your interest rate from increasing between the time you apply for a mortgage and the loan’s closing. It ensures borrowers secure the best possible mortgage rate while navigating the refinancing or home purchasing process. However, if rates decrease after locking, borrowers miss out on the opportunity to refinance at the lower rate.
For vacation homes, the peak of mortgage rate locks was observed in August 2020, soaring to 89% above the average pre-pandemic levels in January and February 2020. Since then, March 2023 witnessed a sharp decline of 75% from that high spike, as reported by USA Today.
Breaking down the figures further, mortgage rate locks for second homes saw a 49% year-over-year (YoY) decrease in March and have plunged 71% since January 2022. Meanwhile, mortgage rate locks for primary residences decreased by 29% YoY and 35% since January 2022.
These trends reflect the dynamic nature of the mortgage market and the impact of changing economic conditions on the decisions of prospective homeowners and property buyers.
What are the reasons behind the decline in demand for vacation homes?
The drop in vacation home sales can be attributed to a variety of factors, some directly related to post-pandemic conditions, while others stem from general economic concerns.
Firstly, unlike primary residences which are considered a necessity, vacation homes are a luxury. While they may be appealing during prosperous economic times, they become riskier purchases when prices, mortgage rates, and inflation are high.
The financial burden is a significant deterrent for potential second-home buyers. Redfin’s data shows that the typical second home was valued at $465,000 in 2022, compared to $375,000 for a primary home. As a result, many individuals simply lack the financial means to afford down payments and monthly payments for a second property.
Various factors exacerbate the situation, including the recent increase in loan fees, inflation, uncertainty in financial markets, the end of pandemic-related financial stimulus, and the shift back to office work for many companies. All of these factors combine to create a challenging environment for most Americans to consider purchasing a vacation home.
Moreover, the trend of buying vacation homes for rental purposes has also declined compared to the peak observed during the pandemic. The surge in short-stay and holiday rentals during the pandemic, driven by wealthy buyers and investors acquiring vacation properties, has resulted in oversaturation of the short-term rental market.
While vacation homes are still considered desirable, they are becoming increasingly out of reach for a larger segment of potential buyers. Redfin’s analysis does not include cash buyers, who may still have the means to acquire a second home in the current economy. Affluent cash buyers are motivated to make purchases now, anticipating the opportunity to secure vacation homes below asking prices. However, the number of buyers looking to use these properties as short-term rentals has decreased due to market saturation.