Middle class drives soaring purchases of second homes

WASHINGTON — Sales of second homes soared last year and accounted for more than a third of all residential sales transactions, according to a recent study.

The study, conducted by the Washington-based National Association of REALTORS® (NAR), showed that nearly one in four U.S. homes bought in 2004 was purchased for investment purposes; 13 percent were bought as vacation homes.

Together, that constituted the surging second-home market, which accounted for 36 percent of the 7.7 million homes sold in the country last year. Second-home sales were up 16.3 percent over 2003.

Kelly Robinson and Debra Thomas, office colleagues in Bethesda, Md., were two of last year’s buyers. The women decided recently to team up to invest in real estate together.

A few months ago, they bought their third investment property — a $225,000, four-bedroom townhouse in Gaithersburg, Md., that they now rent out.

And it’s people like Robinson and Thomas who are buying homes they’re not planning to live in rather than just high-income lawyers and lobbyists. A second survey by the Washington-based NAR found that the typical investment property buyer last year earned an annual salary of $87,500 and was 47 years old. The typical vacation-home buyer was a little older and made a little less — a 55-year-old making $71,000 a year.

“The second-home market is firing on all cylinders,” said David Lereah, NAR’s chief economist. “And it’s middle Americans who are buying, not high-flying investors.”

Thomas, 53, an administrative assistant in a busy real estate office, sums up why she decided to turn now to investment property: “I had money in the stock market, but the market always seemed to be going down, down, down. I decided to take that money out and invest it in real estate.”

Lereah said baby boomers, the largest generation in American history, are in their peak earning years and they are the ones buying second homes in record numbers. He said American households increasingly saw real estate as an option to other investment vehicles. Historically low interest rates have also fueled the fire.

Even if there is some caution about getting burned, it’s not hard to see why Americans have decided real estate can be a good investment.

House prices rose in 2004 at their fastest rate in 25 years, according to a government report released Tuesday. The average price of a single-family home financed through secondary mortgage giants Fannie Mae or Freddie Mac rose 11.2 percent over the year, the strongest annual growth rate since 1979, according to the government’s quarterly house price index.

The appreciation rate slowed dramatically, however, in the fourth quarter, to 1.7 percent, barely a third of the rate for the previous three months, according to the report.

Investments in housing depend largely on continued price growth. And while economists debate whether housing is currently in a bubble akin to the tech bubble that burst in 2000, there’s little argument about what can happen to such highly leveraged investments when the growth arrow goes flat or starts pointing downward.

When sales slow or prices flag, would-be resellers often become reluctant landlords, relegated to dealing with what the property management community has dubbed the world of “tenants and toilets.” Meanwhile, tapping out the equity in one’s principal residence can affect one’s ability to get credit for other purposes.

John Tuccillo, NAR’s former chief economist and author of the recent book “How a Second Home Can Be Your Best Investment,” said the large increase in house values is a major reason people are being tempted by second-home buying.

“The tremendous run-up in prices in certain markets … has given people a lot of money to play with,” Tuccillo said. “There’s been a very strong wash-over effect.”

Has the surge in second-home activity further fueled the run-up in house values?

Economists say yes.

“A huge bulge of investors means more people buying and so an increase in demand,” said Jason Schenker, an economist at Wachovia Corp., one of the nation’s largest lenders. “And when demand goes up, prices go up.”