Baby Boomers Driving Second Home Sales

Baby Boomers Drive Second-Home Purchases
Approximately 35% of all home sales in 2004 were second-home purchases, and baby boomers make up the majority of buyers for this growing trend. Boomers have both the means and the motivation to take advantage of the attractive housing market, and they represent a high percentage of the population.

Boomers, who were born between 1946 and 1964, now aged 41 to 59, definitely have the means. They are in their peak earning years and many are also equity-rich, with homes that have appreciated significantly over time. Match that buying power with low interest rates, and they are in a prime position to buy a second and sometimes even a third home. Many of them remember 18% interest rates of the early ‘80s, making today’s environment even more attractive.

Baby boomers also have the motivation, buying for vacation, investment, and other reasons. They may be planning to retire in a few years and want to lock in rapidly escalating prices now at low interest rates to buy a home that serves as a short-term vacation residence and a future retirement home. Or they intend to work for several more years, but are seeking an appealing recreational attraction in the meantime for their children and grandchildren to enjoy holiday weekends and vacations.

In many cases, boomers are opting for vacation properties they can enjoy in the off-season and rent out during peak vacation months, with the goal of covering expenses while the property appreciates. They may share such purchases with other family members to accomplish their objectives. Builders have created or partnered with property management companies to handle rentals and absentee ownership details for such buyers.

Vacation purchases are occurring in the obvious resort locations – Myrtle Beach, Atlantic City, Naples, Cape Cod, Panama City, and the like. But, in addition, many sales are being made in metropolitan areas, led by Las Vegas, West Palm Beach, Tallahassee, Reno, Orlando, Honolulu, Charleston and Miami.

Boomers tend to buy for either vacation or retirement in Sunbelt areas, or within two hours’ driving distance for weekend enjoyment with family and friends. Interestingly, some retirees who initially bought in traditional locations like Florida and Arizona have later opted to return to a location nearer their family members, perhaps in a resort setting but closer to home.

In addition to recreation, boomers buy second homes for other reasons too, such as commuter marriages and college-age children. An increasing number of boomer couples include one retiree and one spouse still in the work force, resulting in ownership of one home in a lake, golf or beach community as well as a condo or cluster home near the workplace. Others are buying homes for their undergraduate or graduate school children as a quasi-investment and lodging solution during those years. There are even “event homes” like weekend condos marketed for football weekend use by alumni. And, of course, there are the traditional investment rental property purchases.

Baby boomer behavior differs dramatically from that of previous generations and influences both their propensity for buying second homes and the kinds of homes they are buying:

1. They are much better-educated and comfortable with large-scale purchases like real estate.
2. They are investment-conscious, knowing that their requirements to be comfortable in retirement exceed those of their parents.
3. They have a much younger self-perception: today’s 60 is yesterday’s 45.
4. They are more active and prefer to be in inter-generational communities with an abundance of recreational options, from fly-fishing and hiking to golf and skiing.
5. They value family, and they view their homes as the center of family gatherings.
6. They are healthier and will live longer.
7. Home is a statement of who they are…more individualized, less cookie-cutter, with their individual choice of design and amenities.

In all baby boomer second-home purchases, investment is an important motivator, as boomers look to diversify their portfolios with real estate. While we hear comparisons between the stock market and real estate, the two are actually very different investments for many reasons including:

1. Stock purchases are relatively quick and easy, while real estate is time-consuming.
2. The transaction costs are minimal for stocks compared to real estate.
3. The motivation to buy stocks is purely financial, while a real estate purchase is partly financial and partly tied to the desire for life experiences.
4. Stock purchases are made with no questions asked, while real estate purchases – at least those with financing – receive mortgage lender scrutiny.
5. Stocks experience price declines on a daily or hourly basis, while there has been no national housing price decline since the 1930s.

In both types of investments, though, speculation can lead to unfortunate results. Red flags do exist for the practice of trying to “flip” properties in the short term for a significant profit, as well as for looser lending practices leading to an unhealthy

proportion of interest-only and adjustable rate mortgages. The rise of these practices in overheated markets with lower affordability is a recipe for trouble.

Nevertheless, if undertaken appropriately, real estate investments can outperform stocks, create wealth, offer the best form of leveraged investment, provide great tax benefits and government subsidies, and generate social benefits to both the property owner and the community.

All of these factors help explain why baby boomers are such a driving force behind the housing boom in general and the second-home market in particular. Given that about two-thirds of the nation’s housing stock was built before1980, many boomers are ready for a change. It’s why their vacation homes may be larger, newer, and more expensive than their primary residences and why these second homes may, in fact, be their ultimate dream homes.