The pandemic-fueled vacation home buying frenzy is beginning to fizzle.getty
The sad thing about vacations is that no matter how much fun you’re having, they have to end. Just consider that demand for vacation homes has fallen below the pre-pandemic baseline for the first time in two years.
Sky-high home prices and surging mortgage rates, along with economic uncertainty and an increase in second-home loan fees, have put the kibosh on the pandemic-driven vacation home boom.
Mortgage rate locks for second homes are down 4% from before the pandemic in May. That’s down from a revised rate of 3% above pre-pandemic levels a month earlier, and 70% above pre-pandemic levels a year earlier, according to a Redfin analysis of Optimal Blue data.
A mortgage rate lock is an agreement between a home buyer and lender that allows the buyer to lock in an interest rate on a mortgage for a fixed period, offering protection against future interest rate hikes. Home buyers must specify whether they are applying to secure a mortgage rate for a primary home, second home or an investment property. Redfin defines pre-pandemic levels as January and February of 2020.
Demand for second homes is also declining due to higher home prices, mortgage rates that have rapidly risen to nearly 6% and a slumping stock market–factors that are also cooling the rest of the housing market. Another deterrent to second-home buyers is the fact that the federal government increased loan fees for second homes in April, adding roughly $13,500 to the cost of purchasing a $400,000 home.
“Skyrocketing monthly payments, along with higher loan fees, have priced many second-home buyers out of the market,” said Taylor Marr, Redfin’s deputy chief economist. “Many would-be second-home buyers are also deterred by turmoil in the stock markets, high inflation and recession fears, and they can be quicker to pull back from the market because vacation homes aren’t a necessity the way primary homes are. The cooldown in the second-home market is likely to continue as long as mortgage rates are elevated and the stock market is slumping.”
The drop in vacation home demand marks a drastic change from the second half of 2020 and 2021, when mortgage-rate locks for second homes skyrocketed due to record-low mortgage rates and the flexibility to work from anywhere thanks to remote work. Demand peaked in March 2021, when it was about 90% above pre-pandemic levels.
Interest in vacation homes started declining sharply in February as mortgage rates began their ascent. The average 30-year fixed mortgage rate reached 5.78% in the week ending June 16.