After losing out on one seashore property despite an above-market bid, Donna and Michael Davis plunked down $300,000 this spring for a bay-front vacation home in Sea Isle City, N.J., to which the middle-aged couple intend to retire someday.
“This is what we always wanted,” Mrs. Davis said of the four-bedroom house. And considering the availability of 7 percent mortgage money, with stock-market profits in reserve, she said the time was right.
The Davises–he’s a 55-year-old construction equipment salesman, she’s a former secretary–are part of a surge in the vacation-home market that seems fueled by low interest rates, soaring stock prices and a tide of buyers reaching prime earnings years.
In a sharp break from the norm, interest rates for vacation homes are now generally no higher than for primary residences.
Others who find the vacation-home stars in alignment include Douglas and Joanne Johnston of Wilmington, Del., who closed recently on a $580,000 property–the second floor of a beach-front duplex–in Ocean City, N.J. It is a major step up from the $285,000 duplex unit they sold on the other side of the same street and the culmination of a steady, 24-year effort, involving four houses, to creep to the water’s edge.
Besides using the proceeds from selling their previous iome, the Johnstons financed the purchase with the sale of shares of DuPont–where Johnston, 47, is director of marketing–and a jumbo bank loan at 7.625 percent interest with no points.
“It was the right time,” said Johnston, noting the favorable rate and hefty profits in DuPont. “The strength of the stock market is something that helped us make the decision.”
Julie Mealo, manager of the Norwest Mortgage branch serving the New Jersey shore communities, said she had “never seen anything like” the current hectic pace of business. “It’s absolutely incredible,” she added. “All the Baby Boomers are buying their vacation homes.”
After showing virtually no growth during the first half of the decade, the nation’s stock of second homes jumped more than 200,000 in both 1996 and 1997 to reach 6 million, according to the Census Bureau. Real estate specialists foresee no letup.
“Everything has fallen into place,” said Nancy Cox, an agent with Island Homes Realty in Emerald Isle, N.C., where prices for property on the Atlantic Ocean side of the main highway are up 20 percent this year after a similar increase in 1997.
In South Jersey, prices have nearly regained or surpassed their 1986-88 peaks, according to Jim Bourgeois, a partner at Hager Real Estate in Ocean City.
A chief contributor to the surge is low-cost mortgages, a result of lender competition that in the last 18 to 24 months has almost wiped out traditional distinctions between mortgages for first and second homes.
Historically, buyers have had to pay one-eighth to as much as one-half a point more to finance a vacation home than a primary, or year-round one. Not only might a borrower in financial trouble be more inclined to walk away from a second home, but such properties are often vacant and remote and thus subject to vandalism.
Now, “we have no pricing difference for second homes,” said Thomas Smith, vice president for product development at Nationsbanc Mortgage in Charlotte, N.C.
Nationsbanc requires that the property be a true, owner-used second home; it has to be at least 100 miles away from the primary residence and cannot be an investment property rented to others. Mortgage lenders still charge extra for financing on rental properties, typically one-eighth to three-eights of a point.
Personal use is preferred on the assumption that property will be better cared for, though rental income could make the borrower a better financial risk.
While lenders tend to seek higher down payments on vacation homes–30 percent is common, versus 20 percent for first homes–much depends on the particular transaction.
“We can get people in with as little as 10 percent,” said Michael Ternosky, the owner of First Eastern Realty in Sea Isle City and the broker for the Davises.
Economists contend that consumers spend less than a nickel of each dollar of new wealth. But real estate people almost invariably cite soaring stock prices in explaining the boom in vacation property.
“Some of the stock market gains have undoubtedly translated into demand for second homes,” said Michael Carliner, economist for the National Association of Home Builders.
Second homes remain one of the few remaining legal tax shelters; periodic attempts to restrict or eliminate the mortgage interest deduction for them have fizzled.
Still, most vacation properties are not pricey coastal retreats. In fact, the median price of vacation homes that changed hands in the late 1980s was just $19,000, the Commerce Department’s consumer expenditure survey says, using data from the latest census. But this may be an understatement because of the common practice of sharing ownership.
According to a study for the American Resort Development Association, which mainly represents the time-share industry, the chief concentrations of vacation homes, apart from the Eastern Seaboard, are in the Rocky Mountains and the Upper Midwest. Indeed, the study showed, the congressional district for northern Michigan has more second homes than any other.
