Vacation homes--the next domino to fall?

Posted by: Dean Foust on June 1, 2007

I’ve wondered whether the foreclosure wave would eventually lap up onto the vacation/second home market. I’ve heard anecdotally from real estate agents are how some clients were buying second homes using option ARMs, or interest-only loans. jerseyshore.jpgThey were betting that either their income would rise by the time the monthly payments rose, or they’d be able to flip it for a profit. But as much as I’ve followed the housing bubble, I’ve never seen much hard evidence of beachfront/lakefront/mountain communities suffering from foreclosures—until now.

A Philadelphia TV station ran this story noting that foreclosures on the Jersey shore are up 110% over last year (though doesn’t provide hard numbers).

I’d love for some real-estate professionals to weigh in here with their take on the second-home market—specifically, how sound are all those mortgages underpinning these properties.

Reader Comments

rich

June 1, 2007 5:26 PM

how sound are all those mortgages underpinning these properties?


Dean, what are you trying to find out here?

Mortgages don't underpin properties.

The borrower's ability to repay mortgages underpins property.

Are you asking whether vacation buyers on the Jersey Shore have the means to repay mortgages?

Or are you asking whether the homes on the Jersey shore are overvalued and heading for a price decline?

Dean, there's a fundamental difference between a first and a second home. It's real easy to bail on an overvalued second home, especially with a 100% mortgage.

For that reason, almost all vacation home markets in the U.S. are overvalued. Why should the Jersey shore be different?

Pretty soon, Dean, you will be writing about foreclosures on Fire Island.

David A. Porter

June 1, 2007 7:23 PM

Dean,

I was on the "Big Island" of Hawaii a few months ago. Several Realtors told me that in the resort areas north of Kona, fully 50% of the vacation/second home condos were on the market.

It is a complete mess. When I was there two years ago the condo flipping frenzy was like nothing I had ever seen.

Now that this has all blown up, I am circling in the waters for an opportunity.

David Baker

June 5, 2007 1:22 AM

I have a Dr. I work with telling me daily how stupid I am for renting. He brags how his beachfront home has tripled in value in the last five years. I asked him the other day if he had planted any tulips out front.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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