Second Home Purchases Are Up 128% Year Over Year. Should You Buy a Second Home Now?

Buyers aren't just clamoring to buy a first time -- they're going after second properties, too.

Mortgage rates are no longer sitting at historic lows, but they're still very competitive. And that's not only driving people to go out and buy homes -- it's also prompting them to purchase second homes.

In March, the number of buyers who signed a mortgage for a second home increased by a record 128% year over year, according to Redfin. If you've been thinking of buying a second home, you may wonder if now's a good time. Here's what you need to know.

Inventory is still limited

One challenge you might encounter is limited inventory. On a national level, inventory has been sluggish all year, and that could make your search difficult for a number of reasons.

First, in limited housing markets, sellers have the upper hand, and a home is likely to cost a lot more than normal. Secondly, limited inventory means you'll face more competition from other buyers -- buyers who might also be in a position to outbid you. Finally, you may have to settle for a subpar home if there aren't many to choose from in the area you want to buy in. That could, in turn, leave you on the hook for costly renovations.

Should you buy a second home today?

Let's assume you've managed to find a second home in the location you want at a price you can swing, despite inventory challenges. Is now a good time to buy?

From a mortgage rate perspective, yes. Today's rates are very attractive. We don't know if they'll rise as the year chugs along, or if they'll shoot up substantially once the U.S. economy manages to recover from the pandemic.

From a price perspective, though, you'll probably overpay for a second home right now. If you're buying the home in the hopes of selling it at a profit in a few years, that may be difficult to do.

Meanwhile, you'll need to make sure you're in a strong enough financial position to swing your second home. Before you make an offer, ask yourself:

• Have I factored all the costs into my budget? There are a number of hidden costs, such as security and taxes when you buy a second home. If it's far away from your primary home, you may need to outsource certain maintenance items to someone local. Make sure you can cover those expenses.
• Am I counting on rental income to afford this home? A lot of people are cutting back on spending due to the pandemic. Some may continue that habit in the coming years to fuel their own recovery. If your plan is to rent out your second home for parts of the year to help pay for it, talk to a local real estate agent and make sure there'll be a healthy market.

Buying a second home can be a smart investment, and it can also give you a place to escape to when life gets tough. There are pros and cons to buying a second home in today's housing market, so make sure to think things through before making your decision.