When Michael J. Bennett decided to buy a $350,000 condo for his retirement in the Gulf beach town of Placida, FL, in 2006, he saw nothing but blue skies ahead. After all, he had good credit, experience investing in real estate, and 20% in cash to put down. What could go wrong?
Then the bottom fell out of the housing market and Bennett was left holding the bag. He struggled to rent out the place, about an hour south of Sarasota—a sweet location near Gasparilla Island, where both Presidents Bush vacationed with their families. But empty apartments glutted the market, and there were no buyers.
Bennett lost his condo as well as his primary residence, about 40 minutes away in Punta Gorda, FL.
And, sadly, he had plenty of company in his misfortune. Vacation destinations were particularly hard-hit during the past recession. While the nation’s housing market has made a roaring comeback in recent years, an overall slowdown has now taken hold, marked by lower annual price acceleration and more properties on the market. With some forecasters predicting a recession on the horizon, buying a second home in an idyllic location may seem like a dicier-than-ever prospect.
Home on Gasparilla Island, FL
Home values in resort areas fell roughly 25% to 50%, depending on the location, estimates Jack McCabe of McCabe Research & Consulting. That’s compared with a 17.5% drop nationally in home sale prices from 2006 to 2011, according to an analysis of CoreLogic home sales data.
Coastal communities in Florida and California were among those hurt the worst, says McCabe, who’s based in Deerfield Beach, FL.
“Housing was hit harder than any previous recession, and a substantial share of that was due to vacation homes,” says Andres Carbacho-Burgos, a senior housing economist at Moody’s Analytics.
Why vacation spots were hit hard
Take tourist favorite Charleston, SC. Prices in the city’s beach and historic neighborhoods, popular for second homes, peaked in late 2007—and within a year fell 27% from that high, according to a study published last year in the Journal of Housing Research. Other neighborhoods in the city fell 17% from their peak by the beginning of 2010, says Norman Maynard, one of the study’s authors and an assistant professor of economics at the College of Charleston.
The crash was especially hard on some of the most alluring vacation spots. In Pensacola, FL, median annual condo prices fell as much as 62% from 2007 to 2010, according to ATTOM Data Solutions, a real estate information firm. They fell 40% in just one ZIP code in Sedona, AZ, a scenic spa town near the Grand Canyon. Meanwhile, in Bennett’s Placida community, foreclosure filings soared to 16% of all housing units in 2010. That was more than seven times the national average.
“You keep thinking it will level out, like the stock market,” says Bennett, a retired firefighter who’s now 59 and living outside Nashville, TN. “And it kept going down and down and down.”
Waterfront homes in Charleston, SC
Some vacation hot spots still haven’t recovered. A condo in the building where Bennett once owned a similar unit was recently sold for about $100,000 less than what he had paid 13 years ago.
Part of the problem is how dramatically prices had surged in many of these popular warm-weather destinations, says Rick Harper, an economic adviser at Triumph Gulf Coast, who has long studied Florida’s economy. That was partly a result of buyers with lousy credit scoring mortgages with as little as 3% down.
When the bubble burst, many of these folks couldn’t make, or no longer wanted to make, their monthly mortgage payments on these properties. And these second-home communities got hammered.
Big Sky bust
But it wasn’t just beach resorts that received the brunt of the housing bust.
In Big Sky, MT, posh resort developers built ski-in/ski-out homes with breathtaking views to meet demand in 2004 and 2005, says Shawna Winter, managing broker of the Big Sky Real Estate Co.
Winter remembers one buyer scribbled on a legal pad all the properties she had bought and flipped, reselling for a profit, Winter says. Some houses were bought and resold on the same day.
Winter invested with her now ex-husband in a second home in Big Sky that cost more than $1.5 million.
“I didn’t feel good about it,’’ she says. “The whole time, I had this pit in my belly.”
By 2007 and 2008, major developers were filing for bankruptcy and few people wanted to rent or consider buying the place. The roughly $12,000 monthly mortgage payments were a hefty and hugely stressful burden.
Winter eventually sold the property for a loss and, though she recovered from it, she has become quite a bit more conservative. Winter is now building a home on which she’ll owe less than half its value.
“The thought of having a mortgage much more than $3,000 to $5,000 makes me want to throw up,’’ she says.
Resort in Big Sky, MT
What’s different for buyers today
These days, it’s much tougher to get a mortgage than before the crash. The bar is set higher for income, credit scores, and manageable debt loads.
From 2005 to 2007, the median Vantage credit score for someone getting a first mortgage on a property was 685 to 690, says Carbacho-Burgos. So far this year, it was about 739. That bodes well for real estate in the next recession as the housing market isn’t likely to cause another global crash.
“Unlike the previous decade, you’re going to have the housing market follow the economy, rather than the other way around,’’ he says. “We don’t expect huge price corrections in this recession.”
In Big Sky, it’s rare nowadays for someone to make a down payment of less than 30% to 50% of the purchase price, says local real estate broker Robyn Erlenbush of ERA Landmark Real Estate. Half of all the properties are paid for with cash.
Home values in Big Sky have climbed in recent years. But they’re not back up to the peak of the market, when the median single-family home sold for $1.85 million in 2008, Erlenbush says.
That’s a sign that folks may still want to be careful when buying in touristy areas. McCabe’s advice is to not buy vacation properties with the thought of flipping for a profit in the next few years.
“Some of the best bargains in vacation communities are off the water or away from the slopes,’’ says economist Harper. They’re cheaper and their values are less likely to be hurt quite so much if another downturn occurs.
Source: Housing Trends Feed