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Vacation Home Buying On Rise: Should You Make A Move?

If you’ve been dreaming about a place to get away on weekends and vacations, you are not alone.

The vacation-home buying trend continued to improve this year, the National Association of Realtors says, after sales jumped 7% in 2011 to 502,000 properties. Meanwhile, it sees investment home sales at least on pace to remain strong, after a staggering 64.5% gain in 2011 as cash-flush buyers picked up foreclosures, short-sale properties and other homes with price cuts.

Housing Outlook Up For 2013

If you’ve been sitting on the fence while buyers have snapped up second homes for vacation, retirement and investment, is it time to make your move? IBD looks at some financial issues and trends to watch in 2013 as you consider a purchase. Many of the factors also apply to buying a primary residence.

  1. Prices. They’ve been rising in many markets. But since they fell in the housing bust — as much as 50% in hard-hit Sunbelt areas desired by vacation-home buyers — real estate watchers say they can still be a bargain.

The median price of an existing U.S. home of any type rose 10.1% in November from a year earlier to $180,600, reports the NAR. It was the ninth straight monthly year-over-year gain. Changes in the median can reflect either changes in home values or buying moving to the high or low end of the market.

Supply was down to 4.8 months from 5.3 months in October, and the lowest since September 2005. Months’ supply is how long it would take all homes on the market to sell, at the current sales pace. Listed inventory was 22.5% below the 7.1-month supply a year earlier.

By another measure, the S&P/Case-Shiller home price index showed a 3.6% third-quarter gain in the national composite average vs. the year prior.

“We’re likely to see a continued rebound albeit at a modest pace,” said Greg McBride, senior financial analyst with Bankrate.com. “Prices are not going to run away from you.”

Some popular second-home markets with low inventory, such as South Florida and the Hamptons in eastern Long Island, N.Y., could see prices edge up more than the average next year due to low inventory, says Jonathan Miller, president of appraisal firm Miller Samuel.

Sales of distressed homes in Florida, Phoenix and other hard-hit markets have already seen above-average appreciation this year. Phoenix continued to lead the recovery with a 20.4% annual growth rate in Case-Shiller’s latest survey. Miami prices were up 7.4%.

  1. Mortgage interest rates. They’re about as good as they’ll likely ever be. The average rate on a 30-year fixed-rate mortgage edged up this week to 3.37% from 3.32% a week ago, federal loan-backer Freddie Mac (FMCC) said. That’s still near a 40-year low.

The average 15-year fixed-rate mortgage slipped to 2.65% from 2.66%, also near a record low.

As low as they are, rates aren’t expected to go up too much anytime soon, making the case for buying right away less urgent.

“The Federal Reserve has telegraphed that they are going to work to keep rates low through the first part of 2015,” said Miller, who expects mortgage rates to stay low for the next year or two.

The Fed may keep interest rates down even longer than it had earlier indicated. Last week, it said it would keep rates low as long as the jobless rate remained above 6.5%. Most senior Fed officials don’t expect the unemployment rate to fall below that until the end of 2015.

But you have to qualify for a loan if you need one, and lenders are still skittish. If you’re buying a second home, be prepared to make a down payment of 30% or 40% of the price.

“I don’t see that requirement easing up significantly in 2013,” said McBride, who notes that defaults are more likely on second homes than primary residences, thus the higher down-payment rule.

  1. Mortgage interest deduction. Will it fall victim in some way to tax reform? It’s the biggest wild card as Congress looks for ways to raise money. Even if the deduction is not touched in any near-term solution for avoiding a fiscal cliff, it’ll likely come into play later in 2013 when Congress takes up tax reform.

Some of the scenarios being discussed are a cap on all itemized deductions, eliminating the mortgage interest deduction entirely for second homes and cutting it only for those with high incomes.

Though it’s still anybody’s guess, Miller thinks it’ll end up being a cap on how much interest you can deduct. Second homes could get hit harder, he says.

  1. Flood insurance. This is a concern if you want to be near water. Even before Hurricane Sandy destroyed a wide swath of waterfront homes in the Northeast, rates were on the way up thanks to a new flood insurance bill passed in late June.

It put more flood-prone homeowners in line for rate hikes in the next year, says Ken Wingert, NAR senior legislative representative.

Also, the Federal Emergency Management Agency, or FEMA, is looking at expanding flood-zone maps, which would mean more homeowners needing to buy flood insurance.

“Sandy brought the flood insurance system to the edge,” Miller said. “There are two things sure in life: death and taxes. Now there’s a third: higher flood insurance premiums.”

  1. Capital gains taxes.You might not want to sell your just-purchased second home anytime soon. But when you do, you could get hit with higher capital gains taxes.

Unlike a primary home, second homes and investment properties don’t enjoy the same kind of capital-gains tax exemptions.

Potential changes being mulled include raising the long-term capital gains tax from 15% currently back up to the rate of 20% seen before the Bush tax cuts.

A new 3.8% tax on top of any capital-gain tax goes into effect in January 2013. It targets taxpayers with adjusted gross incomes of more than $200,000 for a single person or $250,000 for married couples filing jointly.

The so-called “Medicare tax” on total investment income over those thresholds is meant to find new revenue that can help fund Medicare.

If you rent out your vacation home part of the year, net rent would be counted toward total investment income in determining whether you are subject to the 3.8% tax, Wingert says.

More Investment Home Buyers

The number of investment-home sales last year reached 1.23 million in the NAR’s tally, more than double the vacation-home sales. But the NAR notes that the supply of discounted distressed homes so popular with investors has tightened considerably this year.

While the median 2011 vacation home price was down 19.1% to $121,300 last year, that of investment homes was up 6.4% to $100,000. The data cover all kinds of homes from condos to single-family. The association’s next annual report on vacation and investment home sales comes out in April.

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