Second Home Demand Cools After Explosive January

Demand for vacation homes has cooled down after skyrocketing to near-record levels in January, Redfin reported.

February saw second home demand reach its lowest level since May 2020 as mortgage rates continued climbing, only 35% above pre-pandemic levels. Rates declined for a few weeks due to uncertainty surrounding Russia’s invasion of Ukraine, but started inching up again last week, reaching 3.85%.

While demand is still significantly elevated from two years ago, it’s nothing compared to January’s 87% increase.

February was also the first month where primary residence demand beat out vacation home demand since the pandemic began, though only by 1%.

“Rising mortgage rates, combined with rising home prices, are hitting the second-home market much harder than the primary-home market,” said Redfin Chief Economist Daryl Fairweather. 

“That’s largely because vacation homes are optional. People don’t need a second home, but they do need a place to live. Still, people are buying up vacation homes more than they were before the pandemic, as work remains more flexible than it used to be.”

The Federal Housing Finance Agency is raising fees for second-home loans starting in April, which may drag demand down further.

Home price appreciation grew in seasonal towns where vacation homes are popular climbed despite the turndown in demand, up 20% YOY in February to a median of $513,000. Zillow recently reported that many vacation hotspots are seeing more than 20% annual home price appreciation, higher than the typical U.S. home (19.9%).

This is due at least in part to stock shortages, with some indication that remote workers may be permanently moving to vacation spots rather than buying second homes.

Investor interest in vacation homes also remains high. While most rentals on sites like Airbnb are owned by individuals or small-time investors, bigger fish are taking an interest. New York-based investment firm Saluda Grade recently announced a venture with short-term rental operator AvantStay to buy about $500 million of homes.

“There’s a lot more yield available in the short-term market,” Saluda Grade’s chief executive, Ryan Craft, told the Wall Street Journal.