The leading edge of the baby boom generation is driving up demand for second homes as investments.
WASHINGTON -- Patricia and George Riddiford sold their vacation home last month for $925,000, reaping a 28 percent profit on the golf-resort property near Las Vegas that they bought in 2002.
"For us, it was an alternative to investing in the stock market and, at the same time, it gave us a quiet and protected place to get away to," says Patricia Riddiford, 55, a homemaker whose husband runs a roofing company.
Now, the Riddifords, who live in Chicago, are building again, on a $570,000 half-acre lot in the same Nevada resort.
They're among the baby boomers in their peak earning years who are igniting U.S. demand for second homes near beaches, lakes, ski resorts and golf courses. A record 445,000 vacation homes were sold in 2003, a 24 percent gain from the 359,000 sold in 2001, according to the National Association of Realtors.
As demand rises, prices for vacation homes probably will increase at a pace more than double the 6.7 percent forecast for the overall residential market in 2004, says David Lereah, the NAR's chief economist, based in Washington.
"It's all demographics," says Lereah, 51. "We're seeing the baby boomers nearing retirement age, and we're seeing real estate play a more prominent role in their investment planning because of their memories of the stock market declines." The Standard & Poor's 500 Index fell 13 percent in 2001 and 23 percent in 2002.
The leading edge of the baby boomers, the 29 percent of the U.S. population born from 1946 to 1964, turns 58 this year. That means the heightened demand for vacation and retirement homes probably will last for at least the next decade as they aim to buy their place in the sun, Lereah says.
On July 28, Boyd and Sandi Montgomery of Sylvania, Ohio, are buying a two-bedroom ranch for $285,000 at the Sun City Grand development in Surprise, Ariz. When he toured the development just outside of Phoenix, Boyd, 58, an insurance salesman, says he saw residents doing everything from woodworking to roller-skating.
"I guess you could say it's a little bit like camp for grownups," he says. "I'm looking forward to meeting new people and having fun."
He says he plans to start a "vintage baseball" team at the development's softball stadium. In Ohio, he's a second baseman, playing according to the rules of 1860, without a glove.
The Montgomerys, who say they'll use the home for vacations and eventual retirement, visited Florida, Texas and Arizona before settling on Sun City Grand. The development, built by Pulte Homes Inc.'s (NYSE: PHM) Del Webb subsidiary, the largest U.S. builder of retirement communities, is an "age restricted" community where buyers have to be over 55 years old.
This year, 3.5 million baby boomers will turn 55, and an additional 32 million will turn 55 in the next eight years, a report by the Washington-based National Association of Home Builders said.
Pulte will probably gain from the second-home trend. Its Del Webb subsidiary focuses on what it calls "active adults," those 50 to 70 years old. The shares of Pulte, based in Bloomfield Hills, Mich., have risen 61 percent in the past year. Golf course designers such as Montclair, N.J.-based Rees Jones Inc., which is closely held, may benefit, too.
Even so, demand for second homes may be restrained if mortgage rates rise as the Federal Reserve raises its interest-rate target. Qualifying for a mortgage may also become more difficult as the cost of carrying debt on credit cards increases.
Federal Reserve policy makers raised their target for overnight loans between banks a quarter point to 1.25 percent on June 30, the first increase in four years, to ward off accelerating inflation. Economists expect another quarter-point rise at the Fed's next meeting, on Aug. 10, according to the average estimate of 27 economists in a Bloomberg News survey.
Home builders including Pulte also say rising energy costs, local property-tax increases and declining consumer confidence can slow home buying.
"We don't fear rising rates," Pulte Chief Executive Richard Dugas said last week. "Fifty percent of the 'active adult' buyers pay cash -- less interest-rate sensitive than some other groups."
The pool of likely second-home buyers -- people 35 to 65 years old with household incomes above $125,000 -- will almost double in the next five years to 11.4 million from 5.8 million, according to a study by Centex Destination Properties, the vacation-home unit of Dallas-based home builder Centex Corp. (NYSE: CTX).
Americans who were 50 and older controlled two-thirds of U.S. wealth in 1998, up from 56 percent in 1983, according to a 2001 analysis by AARP, formerly the American Association of Retired Persons. Median net worth of families headed by someone 50 or older increased to $134,000 in 1998 from $98,000 in 1983, the report said.
Mary Koehlinger, 58, a homemaker from Brockton, Mass., is seeing the impact of demand on prices firsthand. She and her husband, James, an accountant, are buying at the Spruce Creek Country Club in Summerfield, Fla.
"We locked in at the right time," she says.
They signed a contract four months ago to buy the three-bedroom house for $220,000 and will close in September, she says. Today, similar homes in the Del Webb development are selling for $255,000, 16 percent higher, Koehlinger says.
The lowest mortgage rates since the 1960s and inheritances fattened during Wall Street's boom years from 1995 to 1999 have helped fuel demand for vacation properties.
While the U.S. average rate for a 30-year fixed mortgage has risen more than half of a percentage point to 6.01 percent in the last three months, borrowing costs remain low enough to make a second-home purchase affordable, according to David Berson, chief economist at Fannie Mae (NYSE: FNM), the largest U.S. home-loan financier.
The annual average rate for a 30-year fixed home loan probably will be 6.2 percent this year, which would be the lowest since 1966, Berson says. Last year, the average was 5.8 percent, the lowest since 1965. The rate probably won't break 7 percent until 2006, Berson says.
Many buyers are looking for more time with family after spending their 30s and 40s building careers.
"We're trying to have more fun in the second half of our lives," says Michael Mosley, 55, who lives in San Diego and owns a ranch-supply and saddle shop. He and his wife, Wendy, are building a three-bedroom house in La Paz, Mexico, that they plan to use for retirement.
The vacation-home market has been boosted by a 1997 federal tax-law change allowing married couples to exclude from capital-gains tax as much as $500,000 profit from selling their home, says Linda Goold, an NAR tax attorney. Under the old law, sellers had to reinvest capital gains in a more expensive property to avoid the tax.
The change allows "empty nesters," people whose children have grown up and left home, to trade a large home for two smaller properties without taking a tax hit, Goold says. About 21 percent of second-home buyers in 2003 were using some of the equity from the sale of a primary residence to buy two homes, according to an NAR study.
Federal tax laws allow owners to deduct mortgage interest payments for two homes for as much as $1 million of indebtedness, Goold says.
Robert Zamora, 54, president of Zamora Automotive Group, a chain of car dealerships in Stockton, Calif., is keeping his contemporary-style home in Lodi as he and his wife, Christine, 53, look forward to more leisure time.
The Zamoras bought a four-bedroom, Tuscan-style home eight months ago at Superstition Mountain Golf and Country Club, about 25 miles (40 kilometers) east of Phoenix. The house listed for $2.5 million; Zamora declined to say how much they paid.
"It's all about recharging my batteries," Robert Zamora says. "When I'm not working, I need a place that's very serene and quiet, where I can play golf with my wife."
They made sure their new vacation home is big enough for their three adult children to come to visit with their families, he said. The development has two 18-hole golf courses designed by Jack Nicklaus.
Buyers also are using inheritances to purchase vacation properties. The typical middle-class baby boomer is likely to inherit $100,000 or $200,000, after taxes, from World War II-generation parents, according to John Havens, a senior research assistant at the Center on Wealth and Philanthropy at Boston College.
"That's not a huge sum of money, but it's enough of a boost to give people the ability to buy a vacation home, if that's what they're dreaming about," Havens says.