The Second Home Ownership Market

Second home ownership is one of the fastest growing sectors in the real estate industry and one set to rise dramatically over the next decade due to the confluence of very powerful demographic, socio-economic, and cultural trends in American society.

Many different types of people buy second homes, but the target market is dominated by higher-income young retirees and Baby Boomer households.

Baby Boomers, who total 79 million Americans, have reached or soon will reach the stage in their life when they have the time, financial means, and lifestyle orientation to buy second homes. Additionally, technology, greater work flexibility, investment potential, and a desire to have gathering places to bring extended families together combine to make second-home ownership increasingly attractive.

Increasing work flexibility may be the most important trend behind the rising appeal and demand of second home ownership. Technological advancement (cellular phones, Blackberries, laptops, other electronic gadgets, nearly ubiquitous internet access), combined with workplace culture and employment structure are creating interesting alternatives to the traditional workplace. It is becoming increasingly easy and common for mid-level and senior staff to telecommute for short-term periods.

Conducting office paperwork in the morning with breathtaking views of the mountains, taking a break in the afternoon for a swim in the lake, returning e-mails in the late afternoon from the veranda overlooking the forest – all of these functions are possible in a luxury vacation home.

Most people buy and own second homes for their own use and enjoyment. But demand is also shaped by the current and expected value of the property for investment. For a significant number of buyers and owners, investment potential – for oneself or one’s children and grandchildren – is the principal motivation to own or buy.

In addition to low interest rates and demographics, the second-home market has been helped by the Taxpayer Relief Act of 1997, which established new rules for the treatment of a capital gain on a principal residence.

Under the old law, taxes on gains were deferred if the seller bought a new home of equal or greater value up to two years before or after the sale of the primary home. Also, sellers over age 55 could claim a one-time exclusion of $125,000.

But new, liberalized rules repealed the mandatory gain-deferral and raised the exclusion to $500,000 for married couples filing jointly, provided a taxpayer owned and used the principal residence for two of the five years preceding the sale date of the home. Moreover, the exclusion now can be claimed every other year.

In addition to putting more money in potential buyers’ pockets, the change has “liberated” sellers from the pressure to trade up to avoid a tax hit. Instead, it seems to have encouraged some sellers to trade down to more modest digs, while using the remaining proceeds to purchase second homes

Buying a summer home used to be as simple as paying a few thousand dollars and getting a cabin near a lily pond.

Now, however, as more Americans own vacation homes — the number of recreational second homes has risen roughly 25% since 1989, to 5.1 million, according to the National Association of Realtors — an array of new options is gaining popularity. Developers are increasingly targeting buyers who want the convenience of a full-featured second home, without the hassle of actually owning it.