Iain Heydon traveled to Colorado’s Rocky Mountains three times during the past year looking for a vacation home in Grand Lake, where waterfront properties list for as much as $3.95 million. After seeing more than a dozen houses, he has yet to make an offer.
“I’m watching to see what happens to the U.S. economy,” said Heydon, 46, who lives near Basel, Switzerland. “The market for these homes may not have reached its bottom.”
Demand for U.S. luxury vacation properties may be fading along with prospects for faster economic growth, after an early 2010 rebound. The government last week reported slower growth in private-sector jobs and manufacturing and a decline in factory orders. While rates on jumbo mortgages used for many expensive homes have dropped, it’s harder to qualify.
“There is a lot of concern about a double-dip recession that’s keeping people on the sidelines, especially at the high end,” said Mark Goldman, a mortgage broker with Cobalt Financial Corp. in San Diego.
The housing market deteriorated in May, with new-home sales tumbling to a record-low annual pace of 300,000, the Commerce Department said last month. Purchases of previously owned homes unexpectedly fell 2.2 percent, even with buyers eligible for a federal tax credit, according to the National Association of Realtors. To qualify for the benefit, buyers needed a contract signed by April 30 and have until the end of September to complete the deal.
Demand for expensive vacation homes is especially sensitive to economic weakness because it isn’t driven by a need for shelter, said Dennis Capozza, a housing economist who teaches at the University of Michigan in Ann Arbor.
U.S. gross domestic product will expand at a 3 percent annual rate in the third quarter and 2.8 percent in the final three months of the year, according to the median forecast of 66 economists surveyed by Bloomberg. That’s down from 5.6 percent in the fourth quarter of 2009.
A measure of global business sentiment last week showed that 18.7 percent of executives had a positive outlook for the economy, down from 25.7 percent the previous week, according to Mark Zandi, chief economist of Moody’s Analytics Inc. in West Chester, Pennsylvania. Consumer bankruptcies rose 14 percent in the first six months of the year from the same period in 2009, the American Bankruptcy Institute reported July 2.
There’s no official sales gauge for vacation homes, or a set price range that defines a luxury property. Such purchases often are financed with jumbo mortgages, which are used when borrowing exceeds the $417,000 to $729,750 caps set by the government for loans bought by Fannie Mae and Freddie Mac, the nation’s largest mortgage-finance companies.
Demand for homes in expensive resort towns surged in the first three months of 2010, according to local tallies. Sales in the Hamptons on New York’s Long Island more than doubled in the first quarter from a year earlier, reported Miller Samuel Inc., a New York property appraiser. In Aspen, Colorado, transactions rose 43 percent, said Tim Estin, a broker with Mason Morse Real Estate.
In Key West, Florida, there was a 26 percent increase in first-quarter sales from last year, according to Zillow.com, a real estate data firm in Seattle. On Cape Cod and the islands of Nantucket and Martha’s Vineyard in Massachusetts, sales gained 58 percent, said Paul Grover, a partner in Robert Paul Properties, a local brokerage.
Some of that first-quarter surge was “pent-up demand” from wealthy buyers who had put off purchases during the financial meltdown that accelerated in 2008, said Grover, a broker in Osterville, Massachusetts. Last year, demand for homes priced more than $1 million was the lowest in his 28 years of selling seaside properties, he said.
“The financial-services people we worked with at the beginning of the year were feeling a lot more confident in their futures and in their bonuses than they were in 2009,” Grover said. “Now, there is concern about the financial markets and the world economy.”
While rates on jumbo mortgages are near five-year lows, lenders are maintaining the stringent qualifications they adopted two years ago after defaults sparked a global recession, said Greg McBride, a senior analyst at financial-information publisher Bankrate Inc. of North Palm Beach, Florida.
“The jumbo rates have improved, but the needle really hasn’t moved in terms of qualification standards,” said McBride.
The average U.S. rate for a 30-year fixed jumbo mortgage fell to 5.47 percent on June 29, the lowest since 2005, when the real estate boom was near its peak, McBride said. That compared with the 4.62 percent rate on conventional mortgages on the same day, McBride said.
‘More Skin’ Required
For jumbo mortgages on second homes, lenders may require down payments of as much as 40 percent, instead of the 20 percent needed on primary residences and the 10 percent usually required for conforming mortgages, said Keith Gumbinger, a vice president at HSH Associates, a mortgage-data company in Pompton Plains, New Jersey.
“Vacation homes, especially luxury ones, have always carried more risk for lenders because if you have a catastrophic event like a job loss, the mortgage on your second home is going to be the first bill you don’t pay,” Gumbinger said. “To get financing, you have to put more skin in the game.”
Even if wealthy buyers can make the larger down payments, they will hesitate to do so when concerned about income, said David Crowe, chief economist for the National Association of Home Builders in Washington.
“It’s discretionary spending,” Crowe said. “It’s something people are going to do when they feel good about their situation.”