In much of Florida, homes have become dramatically more affordable since 2005, attracting new buyers who couldn't have made a purchase "in the peak years," says Rei Mesa, president and CEO of Prudential Florida Realty. In Nevada, buyers are snatching up $200,000 properties that just a few years ago would have been listed at twice that price, says Bryan Drakulich, president and CEO of DoMore Real Estate in Reno.
[In Pictures: 10 Places to Reinvent Your Life in Retirement.]
The housing market reflects a paradox of the Great Recession: While some baby boomers are struggling to prevent their primary residences from sliding into foreclosure, others are realizing their dream of purchasing a vacation getaway. Many people "still have a lot of money that sits on the sidelines waiting," says Michael Saunders, a Sarasota, Fla., broker active in the second home market. "I think the wait is over for them. Anywhere you look, you are going to find prices we haven't seen since 2001," largely because of foreclosures and short sales (homes sold for less than what's owed on them).
However, boomers without disposable income should steer clear of the second home market, even if they believe they can get financing, advises Christine Hrib Karpinski, author of How to Rent Vacation Properties by Owner (2009). "Don't get yourself caught up in the mess millions of Americans are in right now," she cautions. "Don't over-leverage. If you are already retired or close to retirement, that's not a risk I would take."
Conversely, for the fortunate who are flush with cash, have high credit scores, and possess sufficient disposable income to make down payments of 20 or 30 percent, now may be the time to jump into the market. Sharply reduced prices and the lowest interest rates in decades have combined to create a buyer's market. Moreover, with the stock market in the doldrums, some boomers are finding that purchasing a second home can be a worthwhile long-term investment.
Island life. Marleen and Scott Karns, who live near Harrisburg, Pa., cashed in stock last December to buy a condo with relatives on St. Croix, in the U.S. Virgin Islands, for $310,000. This was well below the original asking price of $390,000. "It's our 'CD' in St. Croix" is how Marleen puts it.
After incurring some significant start-up costs, including interior decorating and the purchase of a flat screen TV, the Karnses now rent out the property when they are not using it themselves as a vacation home. "We feel like we've kind of landed in our dream come true," Marleen says.
What is unclear is how many couples have the ability to capitalize on the market as the Karnses have. In 2009, the typical second home buyer was 46 years old with a median household income of $87,500 (down from $99,100 in 2007), according to surveys by the National Association of Realtors. And while income has gone down, second home prices rose 12.7 percent in 2009, the NAR notes. While these factors have closed the market for some, the simultaneous increased demand for rentals of vacation and weekend properties has made these purchases more feasible for others. If you are a prospective buyer, you need to consider three key issues:
1. Can the property generate enough rental income to cover carrying costs (mortgage plus maintenance, insurance, utilities, and property taxes)?
2. Will the rates you charge, especially for the most expensive properties, attract a pool of renters that is both sufficiently large and sustainable (particularly during economic downturns)?
3. If you intend to use the second home more than you will rent it, do you have the means to carry two mortgages and to pay associated costs?
These three criteria did not deter Catherine Mettey, 50, a state transportation engineer. Mettey paid $200,000 in August 2008 for a 1928 waterfront cottage, listed for $300,000, near the Maine coastal town of Lubec. She put down 20 percent, financed the rest, and rents the cottage for $800 or more a week. "Everybody wants to rent in July and August," she says. In 2009, she received $11,600 in rental income, which covered about half of her annual costs for maintenance, insurance, mortgage payments, and property taxes.
"I didn't buy it as an income property, but as a retirement home," she explains. "I have always wanted a home on the ocean and knew that if I waited any longer, I wouldn't be able to afford it. My plan is to pay off the mortgage in 15 years—by the time I retire. Renting it just helps pay some of the expenses. Plus, having it as a business, I get to claim my losses on my taxes. Maybe my accountant would have said, 'You are crazy!' But, I love being there!"
Some boomers, who bought second homes at their peak price, now find themselves alarmingly underwater on their mortgages, which means they owe more than the property is worth. For these owners, Karpinski recommends renting to cover expenses and waiting out the market to give the properties a chance to appreciate.
New buyers, however, "can purchase a vacation home and have it break even from rental revenue . . . because the prices of properties are lower," she says. "If in 2005, you bought for $500,000 and the rental market was $1,500 a week, you'd be hard-pressed to break even." But with a property today at $300,000, "you can indeed break even. The rental rates have not gone down."
Saunders, the Florida broker, says many sophisticated boomers are searching not for home equity but for "lifestyle equity." They care more about their environment than rising property values. Saunders promotes the Sarasota area as the "Culture Coast," offering opera, theater, lectures, and other amenities.
[Visit the U.S. News Retirement site for more insight and advice.]
That "absolutely compelling lifestyle" is what attracted Vic and Sandy Motto. The couple's primary residence is in California's Napa Valley, which Vic says is suffering from a "very depressed" real estate market. In contrast, Sarasota offers "good values" and "mortgage interest rates which are at an all-time low." The Mottos—he's 71, she's 62—paid $1.085 million in April for a 2005 contemporary with a 47-foot swimming pool that was listed at $1.23 million. When prices plummeted during the recent downturn, "all the bells went off," explains Vic, a wine industry investment banker. "We said, 'This is it. Let's jump on a plane and do something about it.' "
In Arizona, second homes are available at fire-sale prices, having plunged as much as 70 percent from their highs in some areas. Foreclosures and short sales have driven prices down, says Phoenix-area agent Debora Nichols. Most of her clients are out-of-staters and Canadians, who are able to obtain lines of credit. "They feel they need to buy now when prices are so low" so "they'll have something to retire in," she says.
For many prospective second home owners, "the difficult part is financing," says Tom Kelly, coauthor of How a Second Home Can Be Your Best Investment (2004). "Lenders are even tougher with second homes than with primary residences." In some instances, Kelly says, when a buyer cannot obtain traditional financing, the seller may be willing to hold the mortgage, acting in effect as a banker. "Go in there and ask what's possible," he advises.
Saunders still sees real estate as a good long-term investment. Those who dream of a second home should consider this, Saunders says: "If you look at return on investment from 2000 to 2009, even though real estate has lost a lot of that [price] run-up we saw, it was still a better investment than the Dow, Standard & Poor's, and NASDAQ" stock indexes.