A housing industry that remains focused on originating safe primary mortgages may be overlooking a new purchase money niche "ready for the tapping." According to Fannie Mae's Housing Industry Forum, second home mortgages may be safer loans, with lower delinquency and default rates than is found in the traditional primary home market.
Necole Peralta, writing for the Forum says that while many homeowners continue to struggle with payments on their mortgages, those with means are taking advantage of low interest rates and stagnant inventories to purchase a second home in vacation markets. Sales of homes that are neither primary residences nor investment properties have averaged 4.76 percent of sales over the last 16 years but there has been a recent uptick in those sales. The National Association of Realtors (NAR) found that vacation home sales, which experienced a severe decline in the housing downturn, jumped 29.7 percent from 553,000 in 2012 to 717,000 in 2013.
NAR says in its 2014 Investment and Vacation Home Buyers Survey that "A diverse set of buyers and property types comprise the second-home sector and opportunities for second-home buyers exist in nearly every market, even in nontraditional, non-resort markets." NAR identifies an average buyer as being 47 and in a two income household. At least 61 percent use a mortgage to purchase their second home and downpayments tend to be large.
Peralta said these buyers may present a new and under-tapped opportunity for servicers and lenders whose main post-crisis response has been to tighten credit standards, keep loans on their portfolios longer and increase securitization. While the tendency is to originate loans with very high credit scores which in theory present little default risk, a sound loan and a good credit score can turn on a dime in the face of job loss and extended unemployment in the current volatile job market..
Fannie Mae's Economic & Strategic Research group (ESR) recently examined second home data and found that second home mortgages tend to be safer loans, with lower delinquency and default rates than other purchase mortgages.
Geographically, the majority of second home purchases correlate to areas that experienced a higher decline in home prices during and after the recession. Florida, California, and Arizona each experienced home price declines of 40 to 46 percent between 2006 and 2012 An abundance of lower-priced properties now makes these states the top three for second home purchases, accounting for 34 percent of such mortgages originated last year.
Fannie Mae's Business Analyst David Kopita says, "By combining financial wealth data with home price and population data, findings suggest that the outlook for second home sales is positive in the near term, as those who have enjoyed appreciation in financial wealth now find themselves able to buy homes in popular second home destinations at a comparatively low cost." "Further, as the population continues to age in the coming years more people will find themselves in this position, assuming investment patterns remain similar," he adds.
Of course record low interest rates, not necessarily always a boon to persons of means, is another positive factor feeding second home sales.
