Bull, Bear Grapple in Vacation Home Market

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Adverse economic conditions, rather than seasonal climate change, has ushered in the off-season for investment properties known as vacation rentals.

Hordes of investors have gone back to real jobs, the forecast calls for cooler rates of appreciation and discount sale prices are de rigueur.

For vacation home buyers with lots of discretionary cash or credit it's quite a bull market and it could be a good time to get that second home.

However, if you need to rent out your vacation home to help foot the mortgage bill, don't overlook the bear's grip on the travel market.

Second homes (which include both investment properties and getaway vacation homes) were hit so hard last year, the sectors' sales plummeted 18.56 percent while primary residences fell only 4.1 percent according to the National Association of Realtors latest second home report.

The big loss was in the investment sector where sales were down a whopping 28.9 percent. Vacation home sales, those not considered rentals or investment properties, on the other hand, were up 4.7 percent, NAR reported.

"They really are two separate and distinct markets. So don't let the doom-and-gloom-sayers discourage you, and don't let a sluggish real estate market in your area do so, either. You're on a whole different playing field," says Christine Karpinski, director of Owner Advocacy for HomeAway.com, a network of vacation rental listing websites serving owners of 130,000 vacation rental homes in 100 countries.

"There's a definite green light to anyone thinking of buying a vacation property," said Karpinski, also author of "How to Rent Vacation Properties by Owner" (Kinney Pollack Press, $26.00).

Hold on.

Make that a yellow light.

Think twice should you need to rent that property in the current market, say to cover unexpected or underestimated costs.

Because there was so much speculative building and buying during the housing boom, some investors and developers are having a tough time unloading properties in once hot areas. That's forcing them to convert investments and developments to rentals and the trend has already slowed recovery in the general rental housing market.

A recent CompleteLandlord.com study revealed nearly one out of five landlords did not intend to rent the property when they purchased it.

The National Association of Residential Property Managers says that's reflected in an increase by more than 20 percent in its membership in the past year as more suddenly-landlords seek property management help.

Certainly not all the landlords are holding vacation rentals, but other market conditions come into play should you need to rent your vacation home.

Domestic travel is not growing as fast as the supply of vacation rentals.

Travel Industry Association forecasts expect the rate of growth in "Total Domestic Person-Trips" to continue to decline, from an increase of 2.0 percent in 2005, to an increase of 1.7 percent in 2006, and only 1.3 percent in 2007.

Right now, that's largely due to the higher cost of travel.

The associations' March Travel Price Index (TPI) rose 2.8 percent compared to March 2006 as gasoline prices increased 7.2 percent, airfares rose 1.8 percent and lodging prices were up 1.1 percent during the same period.

The rate of inbound foreign travelers is also rising at ever smaller rates. The rate of growth in inbound travelers rose 11.8 percent in 2004, compared to 2003, but by 2007 the rate of growth is expected to fall to less than half, or 5.3 percent, according to the travel association.
With a turnaround in travel not expected until 2008, and the extra supply in the rental market, vacation home buyers should carefully consider positive market conditions, travel and rental conditions and their own need to rent out their vacation home.

In addition to the investors fleeing the market, HomeAway.com, says there are other bullish indictors for buying a vacation home.

Prices are down. NAR says the median price of a vacation home fell 2 percent in 2006, falling from $204,000 to $200,000.

Extreme wealth isn't necessary. The typical vacation property owner in 2006 had a median household income of $102,200, up from $82,800 in 2005.

Age is less of a factor.

"The typical vacation home buyer in 2006 was only 44 years old, according to the NAR survey," says Karpinski. "In 2005, the median age was fifty-two. That is a significant change, and it's interesting to speculate on why more people are exhibiting this 'seize the day' mindset. I do think children of baby boomers are more inclined to live for the moment, so maybe that has something to do with it. Or maybe it's a result of the 'nesting' phenomenon Faith Popcorn predicted back in the '80s."

Real estate, over the long haul, has always been a good investment. The second home boom got a big boost from the stock market's last bust during the dot combustion era. Those who survived (and many who didn't), typically younger investors, moved into real estate and became richer for it. In many communities Wall Street investments plays second fiddle to Main Street investments.

Wall Street often performs well, over long periods of time, even out performing real estate, but the returns are often punctuated with wild swings. Real estate returns are steadier, less nerve wracking, rarely falling as far as they've risen -- again, over the long haul.
It's a kinder, gentler investment.

Purchased in the right location, with affordable financing, by a savvy buyer, a good vacation home can easily convert to a rental if necessary.

"I've found that there's usually a honeymoon period of two to five years between the time people buy a vacation home and the time they decide to rent it to others," says Karpinski.
"But I've also found that when people do decide to start renting it out, they are delighted to discover how easy it is and how profitable it can be."

Karpinski also said the first vacation rental can be the start of a beautiful, and lucrative friendship.

"It's like opening a bag of chips. You can't stop with just one," she said.

Written by Broderick Perkins
May 14, 2007

Broderick Perkins, is executive editor of San Jose, CA-based DeadlineNews.Com, an editorial content and editorial consulting firm. Perkins has been a consumer and real estate journalist for 28 years.

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