During the past economic boom, one of the “must have” status items was a vacation home. Easy credit was the “opiate of choice” to spur the boom in vacation homes. But as with any recovery from addiction, America is now dealing with the painful economic consequences of being “over-homed.” Right now we have a glut of vacation homes and desperate homeowners seeking to either sell or rent.
Dark Clouds on the Horizon
Fueled by easy credit and low interest rates, baby boomers flocked to purchase vacation homes. However, by 2006 publications such as Barron’s recognized the oversupply of homes and the dramatic drop in prices. Mike Morgan has chronicled the collapse in Florida real estate values. Even speculators were burned as bargain prices on vacation homes became even cheaper. Recent statistics for 2008 revealed that prices on vacation homes dropped 23 percent while sales dropped 30 percent.
The Economics of Vacation Homes
Examine the economics of vacation homes. In a previous post, I discussed the difficult economics of owning a primary residence. See Governmental Support of Housing – Irrational or Good Public Policy? Vacation homes offer an even greater set of economic challenges. Along with traditional costs such as mortgage, taxes, utilities, insurance there are special costs: travel to the location, hiring of an agent to ensure the property is being properly maintained and perhaps common charges for recreational facilities. (Anecdotally, a co-worker of mine racked up thousands of dollars of fines for watering her lawn during a drought. Why? Her local neighbor had no access to turn off the automatic sprinklers and she could not take time off to work to travel to the home.)
When the financial crisis hit, houses became illiquid with costs continuing to mount. With a “dead” re-sale market, the next natural instinct was to rent the property. When everyone tried this strategy, the result was plunging rents. Incidentally, this puts enormous pressure on resort hotel rates as well.
The future does not look promising. If one owns a home on a Caribbean island or other remote location, additional problems abound. With rising oil prices and airlines cutting back on flights, there is an effective surcharge trying to reach these locations. Concomitantly, there is the problem of repairs, language and legal problems in foreign jurisdictions.
Before the financial crisis, I was tempted to purchase time shares and vacation homes. After each initial rosy sales pitch, I would sit down and “run the numbers.” In 2007, I looked at purchasing a time share in London in a prestigious location from a major international time share and hotel chain. At the time, only half the time share units were sold. Three years ago the sales price was $210,000 with $11,000 a year in common fees for 21 days of usage. “Running the numbers” assuming a 6 percent mortgage, each night of ownership would have cost $1125. Even by London standards that is an expensive hotel room. Since I could also rent the room through the hotel booking site, I went on the web and learned that the room actually rented for about $600. Despite 2007 projections that London hotel rates would rise 7 percent per year, I was able to rent the time share room for $450 per night last year and $330 per night this year. This year free breakfast and passes to an art exhibition were included in the room rate. Subsequent increases in common fees have raised the effective cost of an ownership night to more $1250. With a current $900 per night differential, all in all renting was the far wiser strategy.
Vacation Homes Will Slow the Recovery
Vacation homes will add both to the foreclosure crisis and retard any economic recovery. Watching their investments shrink and their income imperiled, desperate homeowners will travel the path from attempting to sell, to renting, to ultimately walking away from their properties. With all due respect to Schaefer Beer, vacation homes are not the investment to have when you are having more than one.
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