Although the second home mortgage market
experienced a severe decline during the housing downturn, Americans still
aspire to buy second homes and have contributed to the growth of the market
consistently since it hit its bottom in 2009 Fannie Mae said today. While most mortgages are still originated to
purchase or refinance owner-occupied primary residences, there is a significant
market for mortgages to purchase second homes, those that are neither investment
properties nor primary residences. Fannie
Mae’s new report issued today, Second Homes:
Recovery Post Financial Crisis, is part of its Housing Insights
Second home mortgages have accounted for
an average of 4.76 percent of the purchase mortgage market since 1998 and the
government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have been
significant players, acquiring on average about 64 percent of the second home
purchase mortgages by volume over that time period.
Fannie Mae uses information from the
National Association of Realtors® (NAR) survey of second home buyers released
last week to profile a typical second home buyer who is older, has a higher
income, and is more likely to use a larger degree of cash to finance his
purchase than the typical primary home buyer.
At the time of purchase 70 percent of second home mortgages had loan to
value ratios under 80 percent compared with 44 percent of primary residence
Second home mortgage originations have historically
moved in tandem with the boom-bust cycle of the real estate market. The share of second home mortgages more than
tripled between the late 1990s and the peak year of 2006 then declined through
2009. In every year since however the
second home share of the purchase-money market (PMM) has increased. During this period, however, the GSEs share
of the market has decreased as the share of whole loans held by banks and other
institutions has grown, suggesting that private lenders are becoming more
willing to lend to these borrowers. Between them the GSEs and bank portfolios now hold
nearly 100 percent of the market compared to 77 percent in 2006. Fannie Mae says one of the major reasons for
this increase in market share is the exit of private label security (PLS)
competitors from the larger playing field after the market collapse.
The boom years were good for second home
mortgages which peaked at more than 15 times their 1998 volume during the
housing bubble compared to around a 400 percent increase for other purchase
mortgages. However, the PLS share of
second home originations, which was as high as 17 percent in 2006, has not
rebounded as second home sales have recovered.
Fannie Mae says that geography played a
role in both the decline and resurgence of the second home market. Since January 1998, just over 1/3 of all
second home mortgages have been originated on properties in Florida,
California, and Arizona, three of the four states that then entered a
multi-year foreclosure epidemic and witnessed huge price declines of over 40 percent
each. The only state with a larger price
drop was Nevada, which was not a popular second home destination, accounting
for only 2.5 percent of those mortgage originations from 1998 forward. Those three Sunbelt states did not lose their
popularity among second home buyers and accounted again for 34 percent of the
second home mortgages originated in 2013.
While second home mortgages bubbled like
all other purchase mortgages in the pre-2006 period, they did not perform as
poorly as the others when the crisis hit.
While both first home and second home mortgages saw delinquencies trend
upward in the years immediately after the bubble the second home purchase
series outperformed the all other purchases series, indicating that second home
borrowers have been better able to meet their mortgage obligations.
Fannie Mae noted many factors that will
affect the future direction of second home purchases and second home mortgage
buyers are affluent enough to pay cash and according to the NAR, between 2009
and 2013 an average of 38 percent of second home buyers did so. The remaining 62 percent who rely on a
mortgage must have adequate income to qualify for those second home mortgage
the recovery housing wealth appreciation has lagged financial wealth. The recovery in financial markets has allowed
many second home buyers, who are typically older and more likely to own
financial assets, to sell some of their assets to buy second homes or use income
from these assets to cover second home mortgage expenses. As shown in Exhibit E,
older age cohorts, who are more likely to buy second homes, tend to own more
home price recovery rate in the three popular second home sites of Arizona,
California, and Florida is another factor.
The Federal Housing Finance Agency price indices comparing these three
states to national averages show that two of the three have kept up with the
national recovery, regaining about one third of their home price peak to trough
losses but Florida lags far behind, having reclaimed only about 18 percent
since bottoming out. Given this slow
recovery and that Florida has accounted for the largest single share of second
mortgage originations since 1998 (17 percent), home buyers have an opportunity
to invest in Florida at bargain prices.
That financial assets have recovered more quickly than home prices
further increases this opportunity.
another factor is the aging of the American population. The age group most likely to purchase a
second home, those between 45 and 64 years of age, will grow at a slower rate
than that of the total adult population between 2015 and 2060. Thus, while demand for second homes will
continue to grow, it will likely occupy a smaller portion of the total purchase
market. However, assuming that Americans
continue existing investment patterns as they age and that aspirations of
second home ownership do not wane, second homes should still occupy a
significant place in the residential real estate market.
Fannie Mae concludes that although
the second home mortgage market was also hit hard by the housing downturn, Americans
still want to buy second homes and have contributed to the growth of the market
consistently since its bottom in 2009.
The GSEs acquired roughly 60 percent of second home mortgage origination
volume in 2013 and, barring rapid resurgence in PLS lending, should continue to
be major players in the second home mortgage market. “As the population continues to age, we
expect people to continue to use their savings to buy second homes, thereby
contributing to a segment of the mortgage market that will continue to grow in
the years to come.”