Buyers look to purchase second homes even in sluggish market

It might surprise you to learn that a third of all homes sold during the past year were second homes for purchasers - those to be used as a vacation residence or investment property.

This was revealed in the "2008 Investment and Vacation Home Buyers Survey," conducted by the National Association of Realtors. To be more specific, 12 percent of home sales were vacation homes, while 21 percent were purchased as investment properties.

About 59 percent of vacation homes were detached single-family residences, 29 percent were condominiums, 7 percent were town houses and 5 percent were other types.

Even in a sluggish sales market, the appeal of owning a private vacation home is strong. It provides a preferred location for a getaway respite when pressures approach the unbearable point. Others see the current market as an opportunity to acquire homes as investments, sometimes at bargain prices.

"Vacation home purchases are largely tied to lifestyle considerations," said the NAR report. "Households seek to own an additional home in a desirable destination. While the potential financial benefits as an investment are considered, the purchase of a vacation home is a discretionary choice more closely tied to the utility that households enjoy from unfettered access to a second home."

For buyers of investment residential properties, the potential financial gains are far more important, the report said. The purchase of a home for investment is a dollars-and-cents decision resting in part on current cash flow from rental income and expectations of future value appreciation (gains).

The motivation to buy investment homes is partially driven by investors seeking to diversify their assets and generate income.

The March 2008 survey includes responses from a random sample of households that purchased any type of residential real estate during the past year.

Q: To what extent are luxury home sales increasing? A: A new NAR report documents the growing number of luxury homes being sold in the current marketplace. In February, nearly 13,000 homes priced from $1.5 million to $2 million were sold - up from 9,860 during the same month last year.

About 11,175 homes priced from $2 million to $3 million were sold in February, up from 5,800 a year earlier. For those super-high priced homes over $3 million, about 4,470 were sold in February, up from 2,900 last year.

Q: What's the average commission rate charged by brokers? A: The commission rate charged by real estate brokers has long been a touchy subject for both brokers and consumers. Some people believe the conventional 6 percent is a constant, mandatory rate. Not so. Commissions are strictly negotiable between the property seller and the broker.

Considering today's home prices, even though lowered a bit over the past year, a 6 percent commission is a lot of money in most cases - more than many people believe is justified. An increasing number of brokers are reducing their requested commission to be competitive in the current market environment, often lowering it to 4 percent or 5 percent. It's impossible to determine a precise average commission because brokers usually decline to reveal their rate. But estimates by real estate reporting groups put the current average at just over 5 percent for full service.

Some firms offer a tiered system of fees - different amounts for varying packages of services. Others render their professional service for a flat fee. Brokers are constantly coming up with creative programs and fee structuring plans to gain a competitive edge in their local market.

A few brokers are actually charging more than 6 percent commissions, sometimes raising it to 7 percent or 8 percent. Their rationale usually relates to extra work and expense involved in today's slow market. It takes more marketing activity and time to produce a buyer and consummate a sale, they say.

Some brokers offer to charge a low commission if they sell the listed property within a short (specified) time period. Others offer a "guaranteed sale" program, where the brokerage firm will buy the property if it doesn't sell within a certain time - usually a very bad plan for the seller, in this writer's opinion.

Q: Are FHA mortgages becoming more viable for home buyers? A: Proposed changes in mortgages insured by the Federal Housing Administration will definitely make them more viable. Those changes are being vigorously discussed by lenders and political leaders. The focus on FHA loans is producing some interesting comments.

"When I started in the mortgage business, FHA programs helped us serve many borrowers who otherwise would not get a loan," said David Kittle, vice chairman of the Mortgage Bankers Association.

"In 1983 when I was a loan officer, over 90 percent of the loans I closed were FHA insured. During the latter part of the 1990s, FHA loans made up 38 percent of our volume. In the past couple of years, only 2 percent of our business went to FHA.

"My experience with FHA programs is similar to other lenders. Financial institutions progressed, reacting to quickly changing markets. Unfortunately, during this time, FHA did not. It was not adapting to meet borrowers' changing needs. As a result, FHA became a bit player in the market.

"With the current situation, there is a strong need for a robust and nimble FHA. Its reform must be completed as soon as possible. FHA needs to be given the tools to respond to an ever-changing market," Kittle said.

Send inquiries to Jim Woodard, Copley News Service, P.O. Box 120190, San Diego, CA 92112-0190. Questions may be used in future columns; personal responses should not be expected.

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