Second-home demand fell for a second straight month as rising rates and increased fees deter buyers, Redfin reported.
Mortgage-rate locks for second homes dropped to their lowest level since May 2020 in March, though still remained 13% above pre-pandemic levels.
“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 some second-home buyers to back off,” said Redfin Deputy Chief Economist Taylor Marr.
“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.”
A drop in vacation home demand reflects the pressures facing many homebuyers as mortgage rates increase. Rates averaged 4.72% last week, and the daily rate exceeded 5%.
“Mortgage rates have increased 1.5 percentage points over the last three months alone, the fastest three-month rise since May of 1994,” said Sam Khater, Freddie Mac’s Chief Economist. “The increase in mortgage rates has softened purchase activity such that the monthly payment for those looking to buy a home has risen by at least 20 percent from a year ago.”
In addition, the Federal Housing Finance Agency increased upfront fees on second homes by 1.125% and 3.875%, tiered by loan-to-value ratio. The fee hikes took effect at the beginning of this month, and add about $13,500 to the cost of purchasing a $400,000 home for the typical buyer.
“Plus, some buyers’ down payments–and their nerves–probably took a hit when the stock market dipped over the last few months,” Marr added.
But Redfin predicts vacation home demand may never fully return to pre-pandemic levels because many Americans have switched to long-term remote work.
Demand for primary residences has stayed steady since June 2020 and outpaced vacation home demand in March. But in the same month, 12% of homes listed for sale in the U.S. had their prices reduced, a sign the market could finally be cooling.