Global Trend

Think of Real Estate as your "Last Resort"

If you want to make money in real estate over the next decade, plan on buying a vacation or resort home. Currently, 6 percent of all homes sold in the U.S. are vacation homes. While the percentage is small, it is growing faster than the overall market for residential real estate. In 2003, 445,000 vacation homes were sold, the highest number ever. This was a 24 percent increase from 2001, the National Association of Realtors reported.

While the Association’s chief economist, David Lereah, predicted that the total residential market would appreciate by 6.7 percent in 2004, he expected that the prices of vacation homes would rise by more that double that rate.

As he explained in an interview with The Washington Post,1 “It’s all demographics. We’re seeing the Baby Boomers nearing retirement age, and we’re seeing real estate play a more prominent role in their investment planning because of their memories of the stock market declines.”

The 80 million members of the Baby Boom generation were born between the years 1946 and 1964. Those who were born in 1946 will turn 59 in 2005.

Not only are there more people in this generation, but they also have more money. People who are 50 or older now control a staggering two-thirds of the wealth in the U.S., compared to 56 percent in 1983, according to the AARP. The median household net worth of people in this age group rose from $98,000 in 1983 to $134,000 in 1998.

Research shows that the ages at which most people buy vacation homes is from their late 50s to early 60s. According to the Consumer Expenditure Survey by the U.S. Bureau of Labor Statistics, the median age of purchasers of vacation homes is 62. By extending birth statistics out by 62 years, it’s easy to see that the years with the highest numbers of births should lead, 62 years later, to the years with the highest numbers of vacation home sales.

By that logic, it’s clear that the peak years for sales of vacation, resort, and retirement homes will be from 2005 to 2009, and from 2016 to 2024, according to The Next Great Bubble Boom2 by Harry S. Dent. Between those periods, from roughly 2010 to 2015, a smaller number of people will reach the peak buying age, and demand will be much lower.

Beyond the demographic forces at work, there are powerful economic reasons for the growing demand for vacation homes.

One reason is the uncertainty over Social Security. As we’ve discussed in Trends many times, the millions of aging Baby Boomers threaten to bankrupt the Social Security system if changes are not made. Fearful that the system will not provide a secure retirement, some people are investing in real estate in the hope that they will be able to sell their property at a huge profit in the future.

But most people buy a second home for personal enjoyment, according to a recent study by the National Association of Realtors. And changes in tax laws have made it easier to afford a second home as part of a better lifestyle. Until 1997, people who sold their homes had to either pay a capital gain tax on the profit, or they had to invest the proceeds in a more expensive property. However, in 1997, a change to the federal tax law now allows married couples to keep a profit as high as $500,000 from the sale of their homes without paying a capital gains tax.

What this means, according to a tax lawyer quoted in Bloomberg News, is that empty nesters ? couples whose adult children have moved out of the house ? can now sell their house and buy two smaller homes without paying taxes on the sale. Instead of a four-bedroom house in Denver, the couple can live in a two-bedroom townhome outside of Denver and spend their winters in a two-bedroom condo in Arizona.

A study by the National Association of Realtors found that nearly one in four of people who buy second homes use equity from selling a primary residence to buy two homes.

Others are using the inheritances they receive from their parents to purchase a second home, rather than leaving the money in low-interest-bearing savings accounts or taking a risk on the stock market.

This is particularly important because the largest transfer of wealth in America’s history is underway. Between 1998 and 2052, somewhere between $41 trillion and $126 trillion will be left by one generation to the next, according to the Rocky Mountain News.

According to John Havens, a senior research assistant at the Center on Wealth and Philanthropy at Boston College, a middle-class Baby Boomer inherits between $100,000 and $200,000, on average, from his or her parents.3

And even those who finance their primary residence and their vacation home can deduct the mortgage interest from each loan on their federal income taxes, up to $1 million in debt.

Finally, there are emotional reasons behind the rising demand for vacation homes. Since the terrorist attacks in 2001, overseas vacations have taken on an element of risk and fear. As David Lereah, the chief economist for the National Association of Realtors, explains, “Since 9/11, it’s about security. People don’t want to stray too far from home.”

Looking ahead, we can confidently forecast the following four developments:

First, the demand for vacation homes will continue to rise through 2009. As we discussed, the first wave of Baby Boomers will reach their peak buying age from 2005 to 2009.

From 2010 to 2015, the market should decline due to demographic forces. A smaller number of people will reach the prime age for buying vacation homes, and demand will weaken.

The demand for vacation homes will increase again from 2016 to 2024. At that point, the number of people at age 62 will increase sharply.

Fourth, there are two prime buying opportunities for buying vacation, resort, or retirement homes. The first opportunity is right now, to take advantage of low interest rates. The second opportunity is around 2014, after prices fall ? and before they start to rise again.

References List :
1. The Washington Post, July 31, 2004, “Boomers Flocking to Second Homes; Vacation Retreats Can Also Serve as Investments for Retirement,” by Kathleen M. Howley. ⓒ Copyright 2004 by The Washington Post Co. All rights reserved.2. The Next Great Bubble Boom by Harry S. Dent, Jr. is published by Free Press, a Division of Simon and Schuster, Inc. ⓒ Copyright 2004 by Harry S. Dent, Jr. All rights reserved.3. The Journal of Gift Planning, 1st Quarter 2003, Vol. 7, No. 1 “Why the $41 Trillion Wealth Transfer Is Still Valid: A Review of Challenges and Questions,” by John J. Havens and Paul G. Schervish. ⓒ Copyright 2003 by National Committee of Planned Giving. All rights reserved.