Second Home Demand Remains Far Above Pre-Pandemic Levels

Pacaso Second Home Market Analysis Q3 2022: Key takeaways

Luxury second home mortgage rate locks declined 28% from Q2 to Q3 in 2022, however they remain 152% above their pre-pandemic level in Q3 2019.
While many pandemic boomtowns began to see price declines in Q3, those still have not extended to luxury second homes in destination communities.
The data suggest buyers are adjusting their second home purchases to account for deteriorating market conditions by opting for less expensive destinations closer to home.
The unprecedented ten-fold increase towards remote work since the pandemic is an historic development that will continue to fuel second home demand for many years to come.

Q3 2022 marked the end of the pandemic real estate boom for luxury second homes with a 28% quarter-over-quarter decline in mortgage rate locks across the country, according to luxury second home mortgage data analyzed by Pacaso’s research team. Luxury second homes are defined as homes sold for $1 million or more that are designated for seasonal and/or recreational use. “The pandemic unleashed unprecedented, unsustainable demand for luxury second homes,” said Austin Allison, Co-Founder and CEO of Pacaso. “While market conditions deterred many buyers from making purchases in Q3, mortgage rate locks are still flowing at double the pace from before the pandemic. Remote work has become so prevalent that it has created a new normal for luxury second homes, and we should continue to see elevated demand in historical terms even as market conditions take the froth off.”All-cash buyers play a particularly important role in the luxury second home market and, unlike the buyers driving the mortgage rate lock figures, their buying power is not directly affected by the steep rate hikes of recent months. That said, all-cash buyers are generally more exposed to the ups and downs of the stock market, which has lost considerable ground since the beginning of the year.

The pandemic’s effect on luxury second homes

Luxury second home rate locks were 152% higher in Q3 2022 than they were in Q3 2019, the last reading for the same season before the pandemic. In fact, every quarter from Q3 2020 to Q3 2022 saw rate locks on luxury second homes clock in at more than double the level in the corresponding quarter of 2019.

In 2018, according to the U.S. Census, just 8 million people in the U.S. worked from home, or 5.3% of workers. Today, a recent McKinsey survey found that “58% of employed respondents…equivalent to 92 million [workers]…report having the option to work from home for all or part of the week.” Granted, that’s not a perfect apples-to-apples comparison, but it amounts to a whopping ten-fold increase. And now that about half of the workforce has shed a key obstacle to getting away—probably permanently--second homes remain superbly poised to benefit from that newfound geographic freedom. “Market conditions are temporary, but remote work and the desire to spend time with your people in amazing places are here to stay. That’s why I remain bullish on second homes in the long-run, especially in the luxury tier and despite the short-term challenges,” continued Allison.

Impact of market conditions

Mortgage rate hikes, a weak stock market and general economic concerns, particularly regarding the housing market, combined to deter many buyers from purchasing a luxury second home in Q3. The relationship between mortgage rate hikes and second home rate locks is stark.

Another important factor is the stock market. According to the National Association of Realtors, about half of second home buyers pay all-cash, and their role in the market isn’t captured by rate lock data. Luxury second home buyers tend to be affluent and hold much of their wealth in equities. Analysts suggest that stock market declines this year have erased $9 trillion in U.S. household wealth, and as losses mount it becomes harder to fund or at least justify a major discretionary purchase.Despite all that, rate locks were historically high—double their pre-pandemic level—so what is the story here? It turns out that rate locks varied throughout the country. Reviewing regional data, we observe a steeper decline in rate locks in premium destination communities, and an increase in more affordable locales.

Premier destination communities trending down

Premier Destination Community	YoY Rate Mortgage Lock Change
Park City, Utah	-44.9%
Truckee-Grass Valley, California	-47.8%
Santa Barbara County, California	-56.7%
Breckenridge, Colorado	-62.5%
Honolulu County, Hawaii	-66.7%

Regional destination communities trending up

Regional Destination Community	YoY Rate Mortgage Lock Change
Washington County, Utah	+450.0%
Belknap County, New Hampshire	+183.3%
Currituck County, North Carolina	+160.0%
Osceola County, Florida	+116.7%
St. Johns County, Florida	+100.0%

This is consistent with a trend we identified in our Q2 analysis, where buyers began to flock to locally-relevant destinations which can be more affordable and convenient. Taken together, these findings suggest that buyers are adjusting their second home purchases to account for market conditions by opting for less expensive destinations closer to home.

Resilience in purchase price and appreciations

Despite the decline in rate locks, luxury second homes maintained their value in Q3. Prices have held up due to low inventory, as sellers who are also seeking to buy want to avoid trading a low mortgage rate for a high one, and as demand remains well above pre-pandemic levels. Some parts of the housing market began to see price declines in Q3, particularly the middle and lower tiers in pandemic boomtowns. While that may extend to luxury second homes in destination communities down the line, second home prices in those communities did not lose ground in Q3.

Methodology

Pacaso identified the nation’s top second home markets by compiling census data on counties with a percentage of seasonal homes and median home values at or above the top 20th percentile, and by excluding those below the bottom 10th percentile of counties with the fewest households.Pacaso then analyzed real estate activity in the top second home markets by observing mortgage rate lock data, a leading indicator of second home buying activity. When applying for a mortgage rate lock, a home buyer must specify whether they are securing a mortgage rate for a primary home, secondary home or an investment property. Approximately 80% of mortgage rate locks result in home purchases. Mortgage rate lock data was provided by real estate analytics firm Optimal Blue and includes a sizable share of the market that is taken to be representative of the whole. For this analysis Pacaso’s research team looked at mortgage rate lock volume for both second homes and investment properties for Q3 2022 with a purchase price of greater than $1 million to focus on the luxury end of the second home and investment property category. Rate lock transactions and median purchase price data were sourced at the county level for counties that had a minimum of 5 second home transactions and aggregated quarterly, with Q3 representing the months of July through September 2022.

Despite a weak Q3, luxury second home demand remains far above pre-pandemic levels