Buying the perfect vacation home

Insane market
Baby Boomers are now nearing retirement age and are driving the market for second homes insane. A review of 2003 census data by the National Association of Realtors (NAR) found 43.8 million second homes, including 37.2 million investment homes and 6.6 million vacation homes. There are about 72.1 million owner-occupied homes in the U.S.

“Because the typical second-home buyer is a baby boomer, it's likely over the next decade that second-home sales will remain historically high,” says David Lereah, chief economist for the Chicago-based trade association.

The NAR says 23 percent of all homes purchased in 2004 were for investment purposes, and another 13 percent were vacation homes.

Second home sales totaled 2.82 million last year, up from 2.42 million, or about 16 percent, in 2003. Sales of investment homes totaled 1.8 million, up about 14 percent from 1.57 million in 2003. And the sales of vacation homes rose to 1.02 million, up almost 20 percent from the 850,000 sold in 2003.

There are many financial Web sites that can outline the basics of financing a second home, including LendingTree.com, a division of IAC Interactive, JPMorgan Chase, Bank of America, Citigroup and Wells Fargo.

When taking notes and researching your vacation home, write the word "CAUTION" in bold letters at the top of the page.

“If property-appreciation rates decline, those investors who need to sell their properties may not be able to get the prices they're counting on, which may lead to an increase in defaults,” says Beth Haiken a spokeswoman for PMI Mortgage Insurance in Walnut Creek, Calif.

This happened in the 1980s, which forced the mortgage insurance industry to pay about $6 billion in claims.

“What's different today is that we've seen a dramatic increase in financing vehicles, like interest-only adjustable-rate mortgages and 80/10/10s (80 percent of the first mortgage, 10 percent of the second mortgage at a slightly higher rate and 10 percent cash), and a decrease in the percentage of loans covered by mortgage insurance,” she says. “This means that risk has been dispersed among various parties who many not be as sophisticated in their analysis of credit risk and as financially disciplined as the mortgage insurers. This leads to some uncertainty as to how the market will respond during the next mortgage cycle.”

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