Remember a year or so ago, when Chicken Little ran around squawking that the real estate sky was falling? Well, even though then-Fed Chairman Alan Greenspan continued to raise short-term interest rates in 2005, mortgage interest rates have remained at a decent level. In fact, many mortgage companies continue to run ads luring holders of adjustable-rate mortgages over to fixed-rate loans at 5.5% or less.
Contributing to the seemingly continued buoyancy in the market is a recent upswing in purchases of vacation homes -- something that had Greenspan wringing his hands last year over the possibility that real estate bubbles do exist. Regardless, MarketWatch reports that, in a nationwide poll of 2,000 adults, 72% considered owning a vacation home the ultimate status symbol. The National Association of Realtors (NAR) reports that more than one-third of residences purchased in 2004 were second homes bought for investment or retirement by baby boomers aged 55 and up. Some 78 million boomers are now middle-aged.
Investment prognosticator Harry Dent has forecast that vacation, resort, and retirement homes will continue to be real estate hot spots. Peak baby boomers -- aged 47 or 48 -- will buy vacation homes until the end of the decade. A second surge -- boomers aged 58 to 65 -- should carry the trend up through 2014 or so.
Century 21 CEO Thomas Kunz estimates that $7 trillion to $10 trillion will land in the laps of baby boomers over the next 10 years. With vacation homes in some areas appreciating by as much as 20% to 30% per year, it's a hot time in the vacation real estate market.
The second-home market heats up
In 2004, Americans bought 1.02 million vacation homes -- a 20% jump from 2003 and a doubling over the past four years. Meanwhile, the hottest growth region for median home prices, according to the current existing-home survey from the NAR, is Phoenix, which experienced 55.2% growth, followed closely by a 44.8% growth spurt in Orlando, Fla. Both are prime vacation areas.
Think twice, invest once
You might be one of the growing number of Americans purchasing a vacation home. If so, do you want or need your vacation home to make you some money -- and not just during vacation season?
The old carpenter's adage of "measure twice, cut once" is an appropriate benchmark in the investment-property game. David Lereah, chief NAR economist, reports that buying investment property is far from being out of fashion. In fact, he says that 23% of the homes bought in 2004 fell into the investment category.
But when is the right time to buy? With NAR's prediction of a 3.7% decline in the existing-home market, a 4.8% drop in the new-home market, and a slight surge of mortgage interest rates to an average of 6.6%, a market slowdown may just be the right time to surf with the investment-property sharks.
Hugh Bromma, CEO of Entrust Administration and the author of How to Invest in Real Estate and Pay Little or No Taxes, says that an investor can strike it rich in a tumbling market. Here's how: If the initial purchase on properties is smaller, investors can build rental-property portfolios more quickly and turn a greater profit on rents. A falling market can occasionally have a positive effect on how much a landlord can charge for rent because of increasing demand.
But here's a caveat: The pool of good renters has depleted with the availability of buying a home with no money down at great interest rates. Chicago landlord Jane Garvey pulls no punches in calling the current pool of available renters the "cream of the crap."
Consequently, rents in many cities were flat or down in 2005, exacerbated by soaring rental-vacancy rates. According to the U.S. Census Bureau, rental vacancy rates rose to 10% last year, up from 7.5% 10 years ago.
What to do? If you want to rent out your hideaway, you might look to the land of fun, sun, and Dos Equis: Mexico.
A permanent getaway, with siesta?
Before you think I've snapped my sombrero, hear me out. Mexico -- yes, the land of tacos and sparkling beaches, the place you escape to in the dead of January -- has experienced a recent non-resident real estate boom.
The numbers alone are impressive. According to Tom Kelly and Mitch Creekmore, authors of Cashing in on a Second Home in Mexico: How to Buy, Sell, and Profit from Property South of the Border, values in some Mexican markets tripled in the past five years. You read that right -- tripled.
What's the impetus for this change? Well, laws pertaining to nonresident ownership of real estate have relaxed considerably. What's more, Mexico has tailored its system of real estate closings to be purchaser-friendly, and U.S. citizens have become better-educated on the ins and outs of closing on property in Mexico.
Moreover, Mexico's tourism agency has been working hard to promote foreign real estate acquisition. The Mexican government recently created a real estate agents' association similar to the NAR called the Mexican Association of Real Estate Professionals (AMPI) to help unify real estate listings, and multilist associations in markets such as Cabo San Lucas, Puerto Vallarta, La Paz, and Riviera Maya have helped bolster professionalism and service. Even better, Mexico has begun to improve its roads, bringing them up to international standards pursuant to NAFTA directives.
So where do you want to go? One hot Mexican destination is the southern tip of the Baja Peninsula. The hot homes there are found in beach communities with amenities such as golf courses, and they have management in place to handle rentals.
Another must-see spot is the perennial vacation favorite, Cancun. AMPI predicts that residential real estate sales will grow there over the coming decade, particularly with condos and in resort developments. The economy in Cancun has surged, and business there is booming.
With beachfront U.S. properties climbing out of the financial reach of baby boomers, Mexico -- as your own private tropical escape -- becomes a delightful alternative.
Foolish final thoughts
Second homes -- for vacation, retirement, or investment purposes -- have certainly helped the growing real estate wave. Given that they can appreciate in value, grow your net worth, or generate rental income, the investment potential is clear. Tread carefully, however, because the recent rapid increase in the price and popularity of vacation homes does make it possible that their values could be the first casualty if the real estate bubble really does burst.
VB Rosendahl still has her Mexican incense burner from the 1960s. If you'd like to comment on this piece, please feel free to email her. The Fool has a strict disclosure policy.
