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Vacation Homes
by David Stanowski
30 October 2007

It sounds like a good idea!

You take a small town, in an idyllic setting, with a struggling economy, and sell off "pieces of this paradise", at very high prices, for vacation homes! This will raise the property tax base, and give the local economy a boost; so everyone wins.

However, there are always some unintended consequences. In the medical field, they call these side effects! Bringing in a large influx of people, who often don't respect the original character of the town, can change the entire nature of the city. There will be a larger property tax base, but also a need for new infrastructure, and more demand on city services.

The economic footprint of vacation-home owners is not nearly as large as that of full-time residents. Their jobs or businesses do not become part of the local economy, and they usually spend less money, when at their vacation home, than people who live in town. They pay their share of property taxes, but their purchases of vacation homes usually pushes up local real estate prices.

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This looks good on paper, to full-time residents, until they get their new property tax bill. Now it costs them more to live in their own house. Local incomes may rise, but usually not as much as housing prices, and property taxes.

Some will feel the squeeze, and see the situation as an opportunity to sell, and move to a lower-cost location. Others may do the same, because they don't like how the town is changing.

Realtors and developers see this as a golden opportunity, and often make a lot of money, but the vacation-home business has brought rampant speculation to town. When the boom turns to a bust, it will rock the fragile local economy!

The vacation-home market is much more speculative than the market for primary residences simply because these are homes people do not need, so they are the first thing that has to go when the buyer gets in a financial squeeze. In recent years, with the lax credit standards, and abilty to buy with little or no down payment, the speculation has gotten even worse!

The article, Second-Home Housing Glut; Real Estate Bubble Losing Air, written back in June 2006, made the following comments about the state of the vacation-home market, at that time:

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"For starters, many second homes have been sold not to serious vacationers but to speculative investors hoping to cash on the national real-estate craze. How else to explain why six out of 10 second-home owners surveyed by the Realtors group own two or more homes in addition to their main residences?

The danger is that if enough of those investors decide the market has peaked, they could trigger a selling frenzy throughout the second-homes market. That, in turn, could add to the pressures in the main housing market."

"After a long string of double-digit annual price increases, a number of second-home meccas across the country are suddenly suffering from plunging sales volume and burgeoning inventories of unsold homes."

"The price runups of the past several years are reason enough for concern. A report from Cleveland-based National City, a top banking and mortgage concern, points to serious overvaluation in a number of second-home hot spots in Florida, California and elsewhere."

"He rejects a notion advanced by housing bulls that shore communities in Florida and California will be protected because of the limited supply of coastline. Japanese real estate and land prices went down for 15 years and Japan is an island."

"Investors hoping to sell luxury condos that they bought over the past couple of years could be in for some special trouble."

The article, Hot Market for Second Homes Hits Slump, written back in August 2006, made the following comments about the state of the vacation-home market, at that time:

"The once-bustling deal making in a wide variety of popular locations for second homes — areas like Florida, the Jersey Shore and Lake Tahoe, as well as the high-price playground on the East End of Long Island — has slowed markedly in recent months.

As the overall housing market weakens, the interest in buying vacation homes, from the most modest condominiums on up, appears to be falling faster. Unlike most metropolitan areas — where underlying demand and the normal turnover in primary homes as a result of job moves, new households and family changes provide a more solid floor under prices — the second-home market relies on a different set of motivations that tends to exaggerate booms and busts.

“Second-home buying is very discretionary,” said Edward Leamer, an economist at the University of California, Los Angeles. “There is no force of demographics that is pushing people into buying homes as there is in primary home markets.”

In second-home markets around the country, the number of sales is shrinking even as the properties on the market increase. Prices at all levels are softening, and in a few places recently have begun dropping."

"In addition to the overbuilding factor, rapidly rising insurance premiums tied to the greater risk of hurricane damage have hurt home sales in many coastal areas of Florida."

"During the boom, prices in regions with a heavy concentration of second-home sales rose higher and faster than elsewhere, an analysis by Moody’s of national mortgage and housing data showed. “These have been the most juiced-up markets,” said Mark Zandi, chief economist at"

"Vacation homes, like other luxury items, are frequently caught up in booms that appear to defy gravity. But they depend on a relatively narrow slice of the population, mostly affluent baby boomers, leaving them vulnerable to sudden downturns."

"...overall interest in second homes tends to closely follow the ups and downs of the economic cycle."

"Plenty of people are willing to pay more for waterfront property, privacy and pristine vistas, but no region has a monopoly on those features."

"When you don’t like the pricing someplace, you can go someplace else."

With home prices increasing much faster than in any other city in the state of Texas, there is no question that the recent housing boom, in Galveston, is driven by the vacation-home market. The Median Selling Price in 2006 had already reached 5.32 times the Median Household Income, which is 77% higher than the long-term national average, and many recent projects far exceed that number.

Condos in the Palisade Palms complex, that are selling for $400,000 to $1,650,000, yield a Price to Median Household Income ratio of 13.11 to 43.28. It should be clear that this project, and many others, are not priced to be affordable by residents of Galveston, so if the speculative money pulls out, there is going to be a lot of high-end vacant inventory on the market!

It has only been a little over 20 years since the last vacation-home bubble came to Galveston, but the after effects have long been forgotten! This is all that remains, on East Beach, of J.R. McConnell's vacation-home bubble in the 1980's! What will the current bubble leave behind?

East Beach Ruins 

For more information on the Galveston Economy:


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