Investing in a Vacation Home During Rising Interest Rates
As interest rates rise, you could be wondering whether or not it’s still a good idea to invest in a second property or vacation home. Keep reading to hear from Alisa Koenigsberg, a loan officer in Colorado who closely studies real estate trends, on why you shouldn’t wait to buy a vacation home. We asked Alisa a few questions about current market trends—see her insight below.
Q: What’s happening with mortgage interest rates right now (or since the start of 2022), and what do you think is driving this change?
A: What’s happening in our economy is quite complex, but the short answer is that inflation numbers spiked after COVID-19 sanctions were lifted. An extreme demand for goods and services created a shortage of supply, and an already tight labor market began commanding higher wages.
Since 2009, the Federal Reserve has been one of the biggest purchasers of mortgage-backed securities and just recently declared that they would no longer continue this trend. Removing the Federal Reserve from this equation causes a serious void that needs to be filled—the intent of higher interest rates is to slow the economy and cool the demand that is causing inflation.
Q: How has the recent activity with interest rates differed from the previous couple years?
A: Whether you’re looking at interest rates or just life in general, nothing was normal over the last few years. What some people may not understand is that the Federal Reserve was artificially taking action to keep interest rates down. If we look at historical data, interest rates in the 1970s averaged at 8.86%. The 1980s averaged 12.7%. The 1990s came back down to an average of 8.12% and the 2000s at 6.29%. When you put all of that into perspective, a 5% interest rate is still historically a great interest rate!
Q: What should potential homebuyers expect through the remainder of 2022? Is there any difference in how the rise in interest rates affects potential vacation home buyers?
A: It is my belief that over the next few years we will start to see downward pressure on home prices, but I don’t envision that happening this year, especially in seasonal and destination locations. We’re already seeing lumber prices, which have a significant impact on housing cost, come down infinitely. I believe that bond and mortgage investors will inevitably feel better about investing long term in mortgage-backed securities and government bonds.
Q: Would now still be a good time to make a home purchase, even with rates increasing? What tips or pieces of advice do you have for vacation home buyers?
A: I constantly hear people say, “I’m going to wait until the market slows down” and I just don’t see that happening any time soon. From an investment purchase standpoint, there is no doubt that travel is back on everyone’s mind after COVID-19; we’re already seeing airlines reporting pre-pandemic numbers. Real estate markets are still very hot in destination areas, and the surge in remote employees is not only creating the desire and ability to travel more frequently, but competition for purchasing vacation homes.
What I love about Inspirato is that homeowners have a fixed rental income despite how frequent their home is booked. There aren’t many investments that protect and provide peace of mind to their partners quite like Inspirato.
All of this is to say: Don’t wait to buy! While an increase of a full point on an interest rate matters for the monthly payment, we should be looking at the bigger picture. If a client is looking at a home in the $2 million price range today, it’s likely that home could be in the $2.2 million dollar range next year. That $200,000 difference far outweighs what a 1 percentage point increase can do.
Q: Are there any specific trends you are seeing in the luxury home and vacation home markets?
A: In the last few weeks, we’ve started to see homes sit a little longer. We’re not watching homes come on the market one day and under contract the next. The competition is leveling out, but prices don’t seem to be budging. I believe we are still seeing a luxury and vacation home boom and will likely continue to see that because of where these homes are located. The demand for vacation homes hit a record high in 2022; so much so that we were seeing more mortgages on second and investment homes than primary homes—the demand to travel and work remotely in seasonal locations doesn’t seem to be stopping any time soon.
You should not treat any opinion expressed herein as a specific inducement to make a particular investment or follow a particular strategy. Neither Inspirato Incorporated nor its affiliates and/or subsidiaries warrant the completeness or accuracy of the information contained herein, and it should not be relied upon as such. Inspirato Incorporated, its affiliates and/or subsidiaries are not under any obligation to update or correct any information, the forgoing statements and opinions are subject to change without notice, and no compensation has been paid for the expressed opinions.
Past performance is not indicative of future results. Inspirato Incorporated does not guarantee any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment discussed herein. Strategies or investments discussed may fluctuate in price or value. Investors may get back less than invested. Investments or strategies mentioned may not be suitable for you. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned. Before acting on information, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.
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Spotlight on the Dominican Republic, a Member-Favorite Destination
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