On today’s show, we are looking at a market effect that could have been easily predicted. In fact, we made precisely this prediction on the show back in 2021. When markets over-shoot the long-term averages for demand, it is reasonable to expect a bit of a boomerang effect on the tail end of that demand.
I have long maintained that second homes are a discretionary investment. People will do everything they can to protect their primary residence and ultimately sacrifice when it comes to a second home. In 2021 and 2022 we saw the surgeon demand for vacation properties whether it was a lakefront cottage Ski chalet in the mountains. There was absolute white hot demand for what seemed like scarce number of properties. Many buyers of these properties, finance their purchase by tapping into a home equity line of credit rather than getting a fixed rate financing pacifically tied to the new property. With the rapid increase in interest rates, the carrying cost associated with these vacation properties has increased dramatically.
Owners of these cottages are looking to unload them for a variety of reasons. Some have discovered the cottage. Life is not for them. Some have decided that living in a rural area, not fit their lifestyle. Install others simply cannot afford a higher caring cost at today’s interest rates.
The market averages seem to obscure what is truly happening in the market. Paradoxically, sales, volume and prices, in the luxury segment of the market appear to be largely unaffected. These buyers are more sophisticated. They are typically paying cash, and therefore they are largely unaffected by the recent spike in interest rates. we are seeing softness in demand and pricing at the lower end of the market.
Lower end properties in less desirable locations are sitting on the market with next to no activity.
Some brokers are reporting price drops of nearly 30% on these lower end properties.