Personal Property
The Hottest Vacation-Home Markets

Second vacation homes/houses are sizzling. We tell you where -- and why.

By JUNE FLETCHER
Staff Reporter of THE WALL STREET JOURNAL
June 13, 2005; Page R1

A year and a half ago, David Krahn had never been to the Jersey shore -- but he plunked down almost a million dollars to buy a house there anyway.

Why? The Philadelphia utilities analyst had heard home prices along the shore were booming.

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So, for $990,000, he and a business partner bought a four-bedroom oceanfront townhouse in Brigantine, N.J., a barrier island about an hour away, to use as a summer getaway and part-time rental.

The townhouse appreciated so quickly -- local brokers say they can easily get $1.5 million for it today -- that Mr. Krahn is about to buy another, bigger place nearby. That house / home costs $1.875 million, but he hopes it, too, will be a gold mine.

"Sure it's a risk," he says, "but where else can you make this sort of money so fast?"

The phenomenal real-estate boom of the past five years is sweeping through the vacation-home market. Lured by relatively low interest rates and the promise of big resale value, investors and regular vacationers alike are snapping up second vacation homes / houses  -- or, in some cases, third or fourth vacation homes / houses. And though rising interest rates could cool things off, the juggernaut shows few signs of stopping for now, even in upscale areas.

With the trend toward shorter mini-vacations rather than two-week breaks, the market is especially strong in slightly faded resort towns that are an easy drive from major cities, such as Sayville, N.Y., and Newport, R.I. Indeed, the entire Jersey shore is popular with buyers, due to its proximity to New York, Philadelphia and Washington, as is the coast between Los Angeles and San Diego.

HOT TOWNS

Areas with the biggest five-year gains in housing prices through the fourth quarter of 2004 among ZIP Codes with 500 or more vacant seasonal vacation homes / houses (1) and a median price of $350,000 or more.

Source: Fiserv CSW
1) Not occupied by an owner as his or her primary residence
2) As of the fourth quarter of 2004

Places like Pompano Beach, Florida -- which have Costcos with minivans in the parking lot, rather than celebrities strolling past chic boutiques -- are coming into their own, too. "It's a come-and-get-it-while-you-can mentality," says local broker Karen Dove, noting inventory there is 30% lower than it was last year.

According to the National Association of Realtors, last year there were a record 2.82 million vacation-home purchases, up 16% from the year before. All that demand has sent prices soaring. The price of vacation vacation homes / houses increased 21% over the past year, according to a survey done for The Wall Street Journal by Cambridge, Mass., market-research firm Fiserv/CSW. That's about twice the rate of appreciation of vacation homes / houses overall. All but two of the towns in the survey, which looked at 54 ZIP Codes with median home prices above $350,000, saw double-digit gains; nearly all were waterfront.

It's not just the wealthy who are buying vacation homes/houses, the Realtors association says. The typical buyer earns $71,000, and buys a home worth slightly less than $200,000. But, increasingly, buyers who are just looking for a vacation property have to fight with investors for a place in paradise.

A recent report by the Realtors association found that more than one in 10 home purchases last year were by vacation-home buyers who planned to use the property themselves, a 20% rise over the previous year. But about a quarter of the nation's home sales were to investors, up 14% over the year before.

Like Mr. Krahn, many late-to-the-game vacation-home buyers are mixing business and pleasure, renting out their property part of the time. That's actually the best way for investors to preserve the home-mortgage deduction, tax experts say; to get the deduction, the Internal Revenue Service requires owners to use a property 14 days or more a year, or 10% of the time it is rented, whichever is greater.

So, how long can the good times last? Watch the investors. They're often the first ones into an area, and will be the first to sell if they believe prices are starting to soften. Should investors start to pull out of today's hot markets, "it would be time to worry," says Gopal Ahluwalia, director of research for the National Association of Home Builders.

Indeed, vacation towns soon may find their price bubbles bursting. Economist David Stiff of Fiserv/CSW, who prepared our report, says many vacation-home markets are "more overvalued and at greater risk of a price correction" than primary-home markets.

Because vacation homes/houses are a discretionary purchase, when mortgage rates rise, demand will fall faster in vacation-home areas. Mr. Stiff expects prices to rise at half their current rate over the coming year. He expects the weakest performance in places that had the steepest price gains last year, particularly in Florida, Arizona and Southern California. New England and the Jersey shore, which have been cooling a bit for the past year or two, will have softer landings, he predicts.

Below, a closer look at the hottest vacation-home market, based on appreciation over the past five years, in each of five states.

Oceanside, California ( ZIP code: 92054)

•  Five-Year Price Appreciation: 161.6%

•  One-Year Price Appreciation: 28.3%

•  Median Home Price: $509,000

Even with sparse cultural attractions -- the main draw is the California Surf Museum, where you can learn who invented the "hot curl board" and the "thruster" -- Oceanside has appreciated faster over the past five years than any other community on our list.

Once a summer movie colony for stars like Mary Pickford and Douglas Fairbanks, Oceanside lost favor with vacation buyers after Camp Pendleton, the U.S. Marine Corps base, was built in 1942.

But in the past few years, as prices in San Diego, 35 miles to the south, rocketed skyward, Oceanside's unglamorous military reputation didn't seem to matter much anymore. Rather, buyers fixated on the fact that Oceanside has some of the lowest beachfront prices in San Diego County, ranging from about $400,000 for a condo to $5 million for a single-family home. The median price won't get you anything on the ocean, but will buy a three-bedroom stucco fixer-upper built in the '80s, about five miles from the water.

New jobs in biotechnology have helped boost the year-round population to 173,300, but brokers say demand by second-home buyers is the main reason prices are rising so fast. Oceanside broker Marie Jebavy says vacationers are constantly offering her $850,000 or more for her three-bedroom ranch home/house with an ocean view, almost three times what she paid for it eight years ago. She turns them all down. "If I sold it, I couldn't afford anything near as nice close to the beach," she says.

Brigantine, N.J. (08203)

•  Five-Year Price Appreciation: 149.9%

•  One-Year Price Appreciation: 15.2%

•  Median Home Price: $358,500

Located just north of Atlantic City but without the casinos or glitz, this 6.4-square-mile town -- which comprises an entire barrier island -- benefited from a tunnel built about two years ago connecting it directly to the Atlantic City Expressway. Now beachgoers from Philadelphia, 67 miles away, can drive there in a little more than an hour without encountering a single stoplight; it's an easy ride from New York and Washington, too.

The island was once a refuge for pirates like Blackbeard and Captain Kidd and a launching spot for whalers, but now has a considerably gentler reputation. The big tourist attraction, ironically, is a Marine Mammal Stranding Center that cares for sick whales.

While it's still possible to snare a one-bedroom "condotel" in an old converted hotel for about $200,000, newer oceanfront vacation homes/houses sell for more than $4 million. The median price will buy a three-bedroom ranch  house/home on the town's only golf course, but without a water view. Two miles of the island's oceanfront remain undeveloped, part of the state's Green Acres program to preserve open space.

Although Brigantine's population doubles during the summer months, many of the 15,000 residents stay year-round because the town has one of the lowest property-tax rates in southern New Jersey.

And the town's slim infrastructure bills mean most of those taxes go directly into the school system, helping to make it a top-rated district. "I guess you could call us the anti-Atlantic City," says local real-estate agent Jean Warkala.

Newport, R.I. (02840)

•  Five-Year Price Appreciation: 141.9%

•  One-Year Price Appreciation: 17.7%

•  Median Home Price: $372,000

At the town's history museum this month, you can see an exhibit on 18th-century shoes, a reminder of the time when Newport was one of the leading ports in America.

But the town's economy was wrecked during the American Revolution, when British forces occupied it, and it never quite recovered as an industrial power. So throughout the 19th century, the town transformed itself into a summer resort for the wealthy, like the Vanderbilts and Astors, creating the swanky image that most Americans have of the place today.

But Newport is actually diverse, both ethnically and economically. Far more of the town's 26,000 residents are in the middle class than the yachting set. The second-home / house buyers who have flocked to Newport over the past few years tend to be middle class, too, paying around $300,000 to live in a condo chopped out of one of the city's many huge Victorian homes/houses. (The swells can still buy an intact one, but they'll have to pony up a lot more -- an 1891 home with eight bedrooms and 9½ baths is currently on the market for $14 million.)

Liz Taber, a local real-estate agent, says many of the city's second-home buyers are Bostonians and New Yorkers who have been priced out of Nantucket, Martha's Vineyard and Cape Cod. "They buy here when they realize that everything is half the price of what you pay in the city -- even the cocktails," she says.

Pompano Beach, Florida (33062)

•  Five-Year Appreciation: 134.9%

•  One-Year Appreciation: 27.1%

•  Median Home Price: $355,000

Compared with most of the vacation towns on our list, Pompano Beach is young -- the first two non-Native American residents didn't arrive until 1896, and then promptly named the place after the first fish they had for dinner. As the southernmost settlement in newly fashionable Palm Beach County, the town grew quickly, and now has a population of 88,000.

But it never managed to achieve the glamour of Palm Beach, 38 miles to the north, or the hipness of Fort Lauderdale, 11 miles to the south. The shopping areas grew bedraggled, and the '70s split-levels and older cottages weren't updated. "It wasn't held in high regard," says Ms. Dove, the local real-estate agent.

It did, however, have beautiful beaches and lots of deep-water dockage along canals for boaters, at prices much lower than its tonier neighbors. Over the past five years, brokers say, the town has been transformed.

Shopping areas and homes / houses have been bulldozed to make way for waterfront townhouses and condos costing upward of $500,000; about two-thirds sell within a month. And the median price? These days, it won't get you much more than a two-bedroom condo on the Intracoastal Waterway.

Sayville, N.Y. (11782)

•  Five-Year Appreciation: 117.7%

•  One-Year Appreciation: 10.8%

•  Median Home Price: $435,000

A Victorian time capsule about 50 miles from New York City, Sayville had a reputation in the mid-19th century as a summer destination for city dwellers, and even boasted an opera house / home at one point (it burned down in 1961). But the town lost out in the last half of the 20th century, when more families got cars and started driving to the Hamptons. Sayville became just a place where you bought oysters and caught the ferry to Fire Island.

In the past five years, however, jammed roads and sky-high prices in the Hamptons have caused second-home buyers to take a closer look at Sayville. Homes / houses are snapped up so quickly, local real-estate agents say, that inventory is about 20% below last year's levels, even though the median price buys only a nine-room cottage.

The town of about 17,000 has a quirky sense of showmanship. Capping the social season is the annual "boat burn," when officials at the local maritime museum recreate a Viking burial by finding an old boat and setting it ablaze. Last year, some 3,000 visitors came to watch.

Sayville's newfound popularity has been good news for Shannon and Leslie Davis. Just two days after they put their four-bedroom Victorian farmhouse, about a half-mile from the Great South Bay of Long Island, on the market, a vacation-home buyer purchased it for $899,000, more than twice what they paid for it nine years ago. Now the couple has found a new home closer to the water, which they expect will appreciate even faster. Says Ms. Davis, a homemaker, "It's hard to find a town this quaint."

The area that became Pompano Beach, Florida, was part of Palm Beach County during its early development, but the city is now in Broward County. This article noted the historical connection to Palm Beach County but didn't mention the later change of jurisdiction to Broward County.