The rise and fall of the vacation home

The last year has seen record numbers of people purchasing vacation homes and other investment properties. But due to regulatory changes and other factors the market is shifting. New research from Redfin explores the possible causes of this sudden change.

All through 2020 and into 2021, sales for vacation homes have broken records, as many people invested in purchasing a second home. The change was driven by fear of COVID in crowded cities, affordable mortgages, and the greater flexibility afforded by remote work. There has been massive year over year growth in the sale of these sorts of properties for nearly a year. The average year over year growth in the number of vacation home sales has been 80% for months.

In May, this dropped dramatically. Last month, the year over year growth was only 48%, according to Redfin. This is a lot closer to the pre-pandemic level, and may signal a broader turn in the vacation home market. The Redfin report points out that the absolute numbers tell an even more striking story. As May 2020 was such a sluggish month, the 48% number makes it sound like there is more activity on the market than there currently is.

One major source of the change is regulatory. The federal government, in a move meant to curb dangerous lending practices, has placed limits on the number of mortgages lenders can issue for vacation homes and investment properties. Fannie Mae began adapted to the new regulations in April, with Freddie Mac following suit in May.

The economists behind the Redfin report also see deeper causes. In addition to regulation, some would-be buyers are simply getting priced out. As supply tightens, the prices rise, making vacation properties economically unviable for many households. Furthermore, with how hot the market has been for a year, the market is very saturated. It could be that everyone who wants a vacation home already has one.

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