The vacation home market makes an unexpected recovery.

In January, I focused on multifamily housing, particularly the rental market, as an emerging bright spot in what has been a sluggish housing market for four years. Now it appears we will progress toward more reasonable start levels in 2011.

One surprising trend has been an unpredicted spurt in vacation home sales—a segment of the market I expected would take years to recover. It appears that concrete producers may be bidding on new high-end residential projects sooner than expected.

There are a couple of economic factors in the background that affect this. First, the Dow Jones Industrial Average closed above 12,000 at press time, marking a recovery from 6547 just two years ago. This helped edge the affluent vacation home buyer into a better comfort zone about the future of the economy.

Also, new private sector job figures have stayed in positive territory for many weeks, except for small, occasional weekly dips. On top of this, the University of Michigan’s regular survey that tracks consumer sentiment has shown a generally improving trend for 2010.

As a result, sales in many vacation communities across the U.S. soared last year to levels not seen since boom times, driven by deep discounts, cash purchases, and rising stock portfolios. Improvements were felt across the country, from the Pacific Northwest to the Southeast.

Few vacation home markets were left behind, according to the National Association of Realtors. On Mercer Island, Wash., waterfront sales nearly tripled in 2010 compared with a year earlier, reaching a total volume equal to the hot market of 2006. Sales on Hilton Head Island, S.C., rose 14% for the year. Palm Beach, Fla., experienced a 40% annual increase and a 54% increase in homes under contract, with an especially strong fourth quarter. Sales volume is now comparable to its 2007 peak.

The recovery has been helped by gains in the stock market and an improving economy, which have made wealthier Americans more upbeat about the future. It also implies that prices in some markets have come down so much that people are competing for the best properties against the backdrop of much lower prices than the 2005-06 peak.

Nonexclusive neighborhoods

More importantly, the upturn is not limited to the more affluent, milliondollar- plus vacation home markets. Sales of second homes are also showing an improvement in more affordable communities. In some locations, prices are even inching upward. Cape Cod sales climbed nearly 9% in 2010 from 2009, while prices rose 7%. Monroe County, Pa., in the heart of the Pocono Mountains, saw a 3% decline in transactions, but sales in its Lake Naomi resort community were up nearly 15%. Nevertheless, markets such as Florida are down substantially from their peak, offering values that may be difficult to replicate in just a few short years.

The improvement in sales has been driven by a difference in the profile of the typical vacation home buyer. In many instances, buyers are paying all cash, looking to diversify their net worth after experiencing the drubbing of the 2008- 09 stock market. For those who finance, their loans are generally less leveraged, with down payments of 25% or more according to published reports, making mortgage qualification much easier.

I expect this trend will continue in 2011. Vacation home markets that have seen substantial drops in value will continue to attract affluent buyers who see a window of opportunity to buy at artificially low prices, and expect values to return to their historical levels soon.

For the overall housing market, this trend will help reduce inventories and promote general improvement in the construction materials industry.

 

Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at pvillere@allenvillere.com. Follow him on Twitter – @allenvillere.