Homes: Big drop in speculation

Report shows real estate investors making fewer buys; vacation-home purchases show increase.

By Les Christie, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- After years of big increases in the buying of real estate for investing, speculators fled many housing markets last year.

Second-home sales dropped from 40 percent of all home sales to just 36 percent, according to a report released Monday by the National Association of Realtors (NAR).

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That happened despite a rise in vacation-home purchases, one of the two components of second-home sales. These were actually up 4.7 percent during the year to a record 1.07 million units.

But a precipitous decline in investment-home sales, they fell 28.9 percent in 2006 to 1.65 million units, led to the overall drop in second-home sales.

As housing prices stagnated or reversed in many markets around the country, investors started pulling their money out of real estate.

That trend may worsen this year, as an expected rise in mortgage delinquencies, foreclosures and forced sales dumps inventory on the market.

Investors tend to move quickly in such situations; they are much more willing to cut their losses and sell out when confronted with declines in house prices. Owner/occupiers, in contrast, usually work hard to keep from losing their homes.

Total sales of all homes fell 4.1 percent for the year but Investment-home buying fell to 22 percent of all home sales last year compared with 28 percent in 2005. Vacation-home sales were up to 14 percent of all sales, from 12 percent the year before.

NAR's chief economist, David Lereah said the fall in investment buying was expected. "Speculators left the market in 2006, which caused investment sales to fall much faster than the primary market."

Vacation-home sales, on the other hand, are less dependent on house -price trends; they are more likely to involve lifestyle choices driven by demographic trends. Boomers with disposable income and contemplating retirement are prime customers.

The report pegged typical vacation-home buyers as 44 years old, with median household incomes of $102,200. About 42 percent purchased vacation properties closer than 100 miles from their primary residence and 32 percent were 500 miles or more away.

Some 79 percent said the primary reason for their vacation-home purchase was to use the home for vacations or as a family retreat.

Other factors that influenced the buy include: 34 percent to diversify investments; 28 percent to use as a future home; 25 percent for the tax benefits; 22 percent for use by a family member or friend; 21 percent because they had extra money to spend and 18 percent to rent to others.

Rural areas, at 29 percent of all purchases, were most popular destination with 24 percent buying in resorts, 22 percent in suburbs and 10 percent in cities. Top of page