The flip side of 'irrational exuberance'
Journal and Courier

On Friday, the National Association of Realtors reported that the sales of existing homes fell by 2.6 percent in April -- the slowest sales pace since June 2003. Meanwhile, for the ninth month in a row, the median home price dropped.

That's more bad news for those looking to sell their homes, as the housing bubble continues to deflate.

Nationally, the new median price of home prices is $220,900, according to the association. That's an 0.8 percent fall from the median price a year ago.

If homeowners are losing sleep over what for them may be their biggest investment, they can thank speculators and mortgage brokers for starters.

When home prices were soaring during the 1990s, investors bought, renovated and sold properties and made money -- gobs of it. "Flipping" houses became a national trend.

At the same time, credit-challenged homeowners, hungry for a mortgage, found help from subprime lenders who offered them loans at higher interest rates. The increased accessibility to mortgages put more buyers in the market. Home prices soared.

Remember the stock market boom of the 1990s, when former Federal Reserve Board Chairman Alan Greenspan urged caution?

"How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?" he asked during a 1996 speech at the American Enterprise Institute.

The same kind of "irrational exuberance" took the housing market by storm. His comment, now as much a part of the American economic vernacular as the term "supply and demand," could easily apply to the overheated housing market that saw prices increase by double-digit percentage points.

Now homes aren't the get-rich-quick investments they once were.

But there are glimmers of good news, especially for the Midwest.

As reported Friday, the sales decline for existing home here -- 0.7 percent -- was significantly smaller than the one experienced in the Northeast, which saw sales drop 8.8 percent. The correction continues to be worse for homeowners in more expensive areas of the country, such as Connecticut and California.

Economists are crossing their fingers for a modest recovery in 2008. So are we.

In the meantime, hold on.

And if you happen to be in the market for a home, celebrate. For you, all this is good news.

Vacation Homes

Vacation homes: a booming trend
JIM BUCHTA
Minneapolis Star Tribune
Last update: May 26, 2007 – 10:17 AM

While primary home sales fell 4.1 percent last year, according to the National Association of Realtors, sales of vacation homes rose 4.7 percent to a record 1.07 million. They represented 14 percent of all real estate purchases, up from a 12 percent share in 2005.

What's driving that trend? Leisure-seeking baby boomers, who were younger and wealthier last year.

"The rise in vacation-home sales is based on strong demographic and lifestyle factors, with only modest interest in renting their properties to others," according to David Lereah, NAR's chief economist.

Here's a snapshot of the characteristics of 2006 second-home buyers and their purchases.

WHO ARE THEY?

Median age in 2006: 44

Median age in 2005: 52

Median household income 2006: $102,200

Median household income 2005: $82,800

Marital status: 78 percent married

WHERE ARE THEY?

Distance from primary residence: 215 miles

Closer than 100 miles: 42 percent

More than 500 miles: 32 percent

Rural areas: 29 percent

Resorts: 24 percent

Suburb: 22 percent

Urban area or central city: 10 percent

WHAT'S NEARBY?

Close to an ocean, river or lake: 66 percent

Close to recreational or sporting activities: 39 percent

Close to vacation or resort areas: 38 percent

Close to mountains or other natural attractions: 31 percent

THE DRAW

Beach, lake or water sports: 57 percent

Boating: 38 percent

Hunting/fishing: 32 percent

Golf: 21 percent

Biking, hiking or horseback riding: 20 percent

Ski/winter recreation: 17 percent

Tennis: 9 percent

WHAT ARE THEY BUYING?

Detached single-family house: 67 percent

Condos: 21 percent

Town houses/row houses: 8 percent

Other: 4 percent

New construction: 44 percent

WHY DID THEY BUY IT?

Family retreat: 79 percent

Diversify investments: 34 percent

Primary residence in future: 28 percent

Tax benefits: 25 percent

Use by family member, friend or relative: 22 percent

Extra money to spend: 21 percent

To rent: 18 percent

HOW MUCH DID THEY PAY?

Median price 2006: $200,000

Median price: 2005: $204,100

Paid cash: 25 percent

HOW MANY DO THEY HAVE?

One vacation home: 86 percent

Two homes: 12 percent

Three or more: 2 percent

55 percent said they were likely to purchase another one within two years.


JIM BUCHTA

Vacation Homes and Second Homes

On the House Thinking 2d home? Hold on, investors
By Al Heavens
Inquirer Columnist
May 13, 2007

If you were thinking about investing in the vacation-home market, it appears you have missed the boat, so to speak.

The National Association of Realtors reports that vacation-home sales rose 4.7 percent to a record 1.07 million in 2006, from 1.02 million in 2005. But NAR also reports that sales of investment homes fell sharply, down 28.9 percent to 1.65 million in 2006, from a record 2.32 million in 2005.

The big drop in investment sales cut second homes' share of the resale market to 36 percent in 2006, down from 40 percent in 2005. By contrast, primary-residence sales fell 4.1 percent to 4.82 million in 2006, from 5.02 million in 2005.

"We expected the drop in investment sales because speculators left the market in 2006, which caused investment sales to fall much faster than the primary market," said David Lereah, NAR's chief economist. "But the rise in vacation-home sales is based on strong demographic and lifestyle factors, with only modest interest in renting their properties to others."

(Coincidentally, Lereah is leaving his post this month, after seven years, to become executive vice president of Move Inc., which operates NAR's official Web site, Realtor.com, and Move.com.)

In 2006, the typical vacation-home buyer was 44, had a median household income of $102,200, and purchased property that was a median of 215 miles from his or her primary residence. About 42 percent of the vacation homes purchased last year were closer than 100 miles, and 32 percent were 500 miles away or farther.

The median age of the vacation-home buyer declined last year, from 52 in the 2005 second-home-buyer survey. Lereah said he anticipated the decline because there are now 44.7 million people in their 40s, and this larger age group will be driving the market in the coming decade.
"The demographics favor vacation-home sales [instead of sales to investors] because large numbers of consumers are in the prime buying ages, and buyers want recreational property for personal use - investment is a secondary consideration," Lereah said.

In listing their reasons for purchasing vacation homes - they could pick more than one reason - 79 percent of the 1,412 buyers who responded to the NAR survey said they wanted to use the homes for vacations or as family retreats; 34 percent wanted to diversify their investments; 28 percent planned to use the properties as primary residences in the future; 25 percent bought for the subsequent tax benefits; 22 percent bought the homes for use by family members or friends; 21 percent had extra money to spend; and 18 percent planned to rent the houses to others.

Twenty-nine percent of vacation homes were purchased in rural areas, 24 percent in resorts, 22 percent in suburbs, and 10 percent in an urban area or central city, the survey showed.
Sixty-seven percent were detached single-family homes, 21 percent condos, and 8 percent townhouses or rowhouses. Four percent fell in the "other" category.

One-quarter of vacation homes were purchased in the Northeastern United States, 13 percent in the Midwest, 38 percent in the South, and 25 percent in the West.

Investors may be down but not out in the second-home market. The survey showed that the sale price of the typical investment property in 2006 declined 18.6 percent, to $150,000, from $183,500 in 2005. By comparison, the median price of a vacation home in 2006 was $200,000, down only 2 percent from $204,100 in 2005.

"The drop in investment prices comes as no surprise, but for vacation-home prices to edge down in a record market is a bit puzzling," Lereah said.

"It may result from a large dumping of inventory on the market by speculators, especially in the condo sector, with long-term second-home buyers taking advantage of the glut and buying at negotiated discounts," he said.

This underscores that housing should always be viewed as a long-term investment, providing solid returns over time.

Part of the drop in the median investment price results from investors shifting away from pricier markets like Florida, Nevada and Arizona, and into affordable locations such as New Mexico, Idaho, Utah, Georgia, Tennessee, and the Carolinas