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U.S. homeowners are showing less interest in taking on second-home mortgages, as elevated prices and economic jitters make these properties less appealing, Redfin reported on Thursday.
In August, mortgage rate locks for second homes fell 13.1 percent year-over-year to the lowest level since March 2016 on a seasonally adjusted basis. At the same time, rate locks for primary homes dropped 5.2 percent.
Mortgage rate lock agreements between buyer and lender, which secure an interest rate for a set period, result in purchases nearly 80 percent of the time.
According to a Redfin analysis of Optimal Blue data, rate locks for second homes were down 59.2 percent from pre-pandemic levels, compared to a 31.9 percent decline for primary homes. However, during the pandemic, second-home mortgage locks surged a record 96.2 percent above pre-pandemic levels in October 2020, as affluent buyers took advantage of ultra-low rates and the flexibility of working remotely from vacation destinations.
Several factors are contributing to the current slowdown in second-home mortgages:
Cash buyers avoiding high mortgage rates
When mortgage rates are low, second-home buyers often take out loans even if they can afford to pay in cash, using the funds for other investments. But with higher rates, it makes more financial sense to pay in cash to avoid large interest payments.
Rising costs and reduced second-home demand
Second homes are generally more expensive and less essential than primary residences. In August, homes in seasonal towns — where many second homes are located — sold for an average of $589,162, up 4.1 percent from the previous year. Homes in non-seasonal towns sold for an average of $437,787, up 4.7 percent. Rising housing costs are causing many potential second-home buyers to hesitate.
Return to office
Employers are increasingly requiring workers to return to the office, reducing the amount of time people can spend in vacation homes.
Stagnant rental income
Asking rents have plateaued below their previous highs, making buying a second home for rental purposes less attractive. Additionally, many cities have imposed stricter regulations on short-term rentals, further impacting profitability for owners of properties featured on platforms like Airbnb.
Economic uncertainty
Concerns about a weakening labor market and the potential for a recession are making buyers more cautious about making large purchases.
“Most of the homes that are sitting on the market right now are second homes — especially those in the $400,000 to $800,00 price range, which tend to be more stagnant,” Shay Stein, a Redfin Premier real estate agent in Las Vegas, said.
The overall demand for second homes has trended down drastically in recent years. In 2023, U.S. homebuyers took out 90,772 mortgages for second homes — 40 percent fewer than in 2022 and 65 percent fewer than during the pandemic housing boom in 2021, according to a Redfin report.
According to the report, vacation homes are typically more expensive than a primary home regardless of interest rates, with the typical second home worth $475,000 in 2023 compared to $375,000 for a primary home.
