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If you're in the market for a vacation home, falling home prices and desperate landlords make it a great time to rent
With home prices tumbling in some of the country's most attractive second-home destinations, it might be tempting to pick up a bargain on a beach cottage, a cabin in the woods, or a pad close to the Vegas strip. But wait. It may make more sense to rent and take the financial stress out of owning a vacation home.
The real estate market these days is fraught with risk and could take years to recover, especially in the sunny-but-toxic Florida, Nevada, Arizona, and California markets, home to many of America's most popular winter getaways. Renters don't have to worry about condo fees, maintenance costs, escalating mortgage payments, falling home prices, or leaky roofs. And they can take advantage of the slumping real estate market.
Apartment rents have stabilized or dropped in Florida, Nevada, and Arizona as landlords compete for tenants with desperate condo and homeowners, including those leasing properties they're unable to sell.
Florida Rents a Bargain
In the Naples (Fla.) area, for example, home prices fell 29%, to $275,000, in July compared with a year earlier, according to the Naples Area Board of Realtors. Rents are falling, though not nearly as much: In the Naples metropolitan area, rents fell 9.4% in the third quarter compared with a year earlier, according to Dallas-based apartment information company AXIOMetrics.
Still, the average monthly cost of renting an apartment in Florida is 50% to 60% of what it costs to own, according to Jack McCabe of McCabe Research & Consulting in Deerfield Beach, Fla. "If [home] prices were going up and you could hold on to [a house] for a long time, you might be able to make a case that it's a better time to buy," McCabe says. "But if you have the ability to rent for half the price without the liabilities that go with owning, it's a smarter decision to rent."
Sam Chandan, chief economist for New York real estate research firm Reis (REIS), says renting can be a cheaper and less risky way to vacation. "People feel nervous about trying to time the bottom [of the housing market], but they don't need to feel that urgency," Chandan says. "A year from now, they can come back to the market and they're not going to lose anything."
Know Your Risks
Quite a lot depends on the state of your finances and the industry in which you work. If you think your company might be considering layoffs, buying is not a good option, according to Vincent Valvo, group publisher for the Warren Group, a real estate information company based in Boston. "If you think you're at all in harm's way, you shouldn't be in the second-home market," Valvo says. "It doesn't matter how affordable a house is if you don't have any income."
Rob Massey Jr., a consultant for Norcross (Ga.)-based Rentals.com, suggests signing a long-term lease and then making an offer on the home when—or if—the time is right ("Try before you buy," he says). Buying requires "staying power," Massey says. "I don't think the market will turn around quickly. There are probably great deals on yachts right now, too, but not everybody can buy them."
But Brian Gordon, principal analyst with Applied Analysis, a Las Vegas economic and real estate research firm, says it might not be a bad idea to buy a second home in the Vegas market, where he expects prices may not fall much lower. "With values declining, it's difficult for many to make the leap and purchase a property with the concern that they will lose equity," Gordon says. "But at the same time, the suburban product, whether it's single-family homes or condos, are at price points where it's difficult to construct them at those levels."
Priciest Homes Hurt Less
Even in New England, which has not been hit as badly as the warmer second-home markets, renting can be a sound decision, says Valvo, whose company puts out monthly home sales data on Massachusetts, Rhode Island, and Connecticut.
Home prices in southern New England are down year-to-date by about 12% and the slump has spread across the entire region, including second-home communities, he notes. One segment that has not been hurt are homes selling for $1 million or more, because buyers in that range have more cash and are less dependent on mortgages.
Buying a home makes little sense, especially if the buyer doesn't plan to use it frequently, according to Valvo. "It makes no fiscal sense whatsoever to buy a second home—it barely makes fiscal sense to buy a first home," he says. "If you rent, you know what the costs are. If something breaks, it's somebody else's headache. It's a vacation."
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