The buying frenzy of vacation homes witnessed during the pandemic is largely over, as intensifying home prices rapidly cool demand.
Demand for vacation homes tumbled for the second month in a row in March, with mortgage rate-locks for second homes falling to their lowest level since May 2020, according to a recent analysis from real estate brokerage Redfin. Although demand was up 13% from levels seen before the onset of the pandemic, it’s far from the peak of March 2021 – when activity figured 88% higher than pre-pandemic levels.
The slowdown in demand highlights the harsh impact surging home prices and the historically rapid rise in mortgage rates have reckoned on buyers.
“The pandemic-driven surge in sales of vacation homes is coming to an end as mortgage rates rise at their fastest pace in history, causing second-home buyers to back off,” Redfin Deputy Chief Economist Taylor Marr said in a statement. “When rates and prices shoot up so much that a vacation home starts to look more like a burden than a good investment and a fun place to bring your family on the weekends, a lot of prospective buyers have second thoughts.”
In the early days of the pandemic, vacation home sales skyrocketed by 16.4%, far outpacing the growth in total existing-home sales of 5.6% in 2020. According to the National Association of Realtors, once state-mandated shutdowns eased off – the sales pace growth of getaway homes jumped even more – hitting 57.2% by the end of June 2021.
But that trend is finally reversing.
Redfin data shows that growth in demand for primary residences is once again outpacing that of second homes for the second month in a row. As of March, mortgage-rate locks for primary homes are up 34% from pre-pandemic levels. According to the firm, demand for primary residences has remained at roughly the same level since June 2020, though this may soon change.
Overall, surging borrowing prices and tight inventory levels are finally taking a toll on would-be homebuyers — primary and vacation-home buyers — forcing many to step back from the once red-hot housing market.
“We expect the combination of surging mortgage rates and record-high home prices to cause more homebuyers to drop out of the market,” Redfin chief economist Daryl Fairweather, said in a prepared statement, about the overall market.
The rate on the 30-year fixed mortgage — the most common home purchase loan — was 5.25% last week, per Freddie Mac, over 2 percentage points higher since the start of the year.
That has sent the monthly mortgage payment skyrocketing. At the beginning of 2022, the payment on a median home for sale was under $1,700. Now it’s near $2,450, according to Redfin data.
“Second homes investment homes were definitely a point of interest for many people during the pandemic when rates were at record lows, especially folks in cities that weren’t ready to move yet,” Robert Heck, vice president of mortgage marketplace Morty, told Yahoo Money. “But recent changes from the Federal Housing Finance Agency in the pricing adjustments for second homes ... have dramatically changed the affordability of a second home.”
Loan fees for second-home loans, increased by about 1% to 4% starting April 1. The change added about $13,500 to the cost of purchasing a $400,000 home for the typical vacation-home buyer and will continue to cool interest in vacation homes in coming months, according to Redfin analysts.
“Relative to the volume of second homes witnessed last year, it's definitely slower than it was at least with our consumers,” said Heck. “The adjustments were aggressive, I think the FHFA did a good job in terms of actually moving the needle and not making a small change. How that actually plays out will remain to be seen.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.