The National Association of Realtors recently released an interesting report about the sale of second homes in the United States. While the survey is a little outdated, the data covers sales over five years to the end of 2004, it still provides a perspective as to who, where, and how non-primary residences are being purchased.

For example, during the years from 2001 to 2004, second home sales (which include both recreational/vacation property and investment property) more than doubled from 405,000 to 881,000 while first home sales increased from 4,316,000 to 5,332,000. In 2000, second home sales represented 8.6 percent of all loans but by the end of 2004 represented 14.20 percent of total activity.

While the percentage of second home sales relative to first increased steadily during the five year period, the greatest increase, from 12 to 14.20 percent came in 2004, the final year for which data was available.

NAR's study was based on an analysis of information collected under the Home Mortgage Disclosure Act (HMDA). This act mandates the aggregation of data from individual loan applications including borrower demographics, the location of the property, and details about the loan itself such as rate, terms, duration, and so forth. By definition the study does not include information on homes bought for cash or private seller financed sales which may well represent significant portions of both the vacation and investment markets.

In 2000 the median income of a buyer of a primary residence was $52,200 while the median income for those buying a second home was $78,500. In 2004 those figures were $60,800 and $101,900 respectively, a substantial increase in income for the second home buyer. Loan amounts, however, decreased in disparity. In 2000 buyers took out a median loan of $102,400 to purchase a primary residence and $78,400 to finance the second home, i.e. the second home mortgage was 76 percent the amount of the primary mortgage. By 2004 the median second home mortgage was 86 percent of the median primary mortgage of $136,000. However, NAR found that the actual median purchase price of second homes was higher than that of primary homes in 2004 - $172,000 versus $170,000. The median price of second homes used for vacation purposes was $190,000 while the median for investment properties was $148,000. NAR speculates that this indicates that this boom was the result of wealthy baby boomers nearing retirement and buying into more expensive regions, however, it also obviously indicates that buyers were willing and/or able to provide larger down payment amounts for their second homes.

The NAR study states that the 1997 tax reforms fueled the demand for second homes. Under the prior rules a home seller had to purchase a more expensive home than he had sold in order to avoid capital gains taxes on any profit from the prior sale. Under the new rules a married couple could exclude $500,000 in profit, allowing sellers access to the funds to invest in vacation or investment properties, especially if they downsized financially when buying a new primary residence. Some used this money to diversify investments, perhaps gambling that a home that could be used for recreation would also appreciate, or selecting rental property for both income and appreciation. Another trend was to invest in a property with the long term goal of locking in an affordable situation for retirement.

The growth of second home sales was, of course, not equally distributed throughout the United States. The survey showed that the majority of second-home buyers chose homes close to their primary residence or employment with investment property buyers even more likely to stay close to home. With the recent trend toward shorter vacations those areas close to major cities show strong growth.

As usual the more temperate areas and those with abundant recreational facilities reaped the benefits of second home sales. The leader was Nevada with an average annual growth of 35 percent in its share of second home sales. Over the five year period Nevada's cumulative growth was 384 percent. Second with a five year growth of 231 percent was Arizona and third, at 224 percent, Utah. Others in the top tier are Virginia, Idaho, and Washington, DC. All of those lobbyists have to live somewhere.

The study report concludes that those baby boomers still in their peak earning years will continue to fuel the housing market, especially the second home segment for at least the next decade.