Vacation Home Market is Heating Up!

If you're thinking of buying a second home in the next five years, this might be your best opportunity.

After being battered during the housing bust, the vacation-home market is showing signs of life. Reports of bidding wars are trickling out of some of the locales that bore the brunt of the housing bust, and brokers in other markets, while not sounding the "all clear," at least say conditions aren't getting much worse.

Near-record-low mortgage rates, bargain prices and dwindling home inventories are bringing some once-untouchable markets within reach for the first time in a decade, say housing-market experts.

Those factors are "creating a sense of urgency," says Pam O'Connor, president of Leading Real Estate Companies of the World, a broker network. "People feel like they might miss this window."

Salt Lake City resident Donna Peeters says that is one of the reasons she wants to step up her search for a second home in Santa Barbara, Calif. She and her husband started thinking about buying a vacation home a couple of years ago, she says, and have seen prices fall as they waited. They are looking for a place close to the beach, and expect to spend about $2 million cash.

"It definitely feels like a good time to jump in," she says.

Signs of a Bottom

Sales of vacation properties fell 56% between 2006 and 2010, but climbed 7% in 2011 to 502,000, according to the most recent survey by the National Association of Realtors, a trade association. Yet prices remain soft; according to the NAR, the median price on vacation homes dropped more than 19% in 2011 to $121,300.

Realtors say some buyers—those who plan to keep a home in the family for generations—are snapping up homes now, even though prices might have further to drop, to take advantage of low mortgage rates. The average rate on a 30-year fixed-rate loan stood at 3.97% for the week ending May 1, according to Keith Gumbinger, vice president at mortgage tracker HSH.com. Buyers with strong credit who can put down more than 25% should be able to find rates near 4%, he says.

The bottom for vacation-home prices will be clear only in retrospect, but there are signs one might be forming, says Mark Zandi, chief economist at Moody's Analytics. Some markets in California already are seeing price increases, while hard-hit markets like Phoenix and Scottsdale, Ariz., have seen slowing declines, he says.

"From a long-term investment horizon, vacation homes will do very well," Mr. Zandi says, citing low interest rates and expected price appreciation in many markets.

The shorter-term outlook for vacation homes is murkier. Moody's Analytics forecasts overall U.S. home prices will drop next year—by a scant 0.8%—but the nationwide figures mask sharp geographical divides in popular second-home markets.

Miami, for example, which already has seen prices of all homes drop 54% since 2007, according to Moody's, is expected to lose about 0.1% annually over the next five years. Meanwhile, Napa, Calif., whose prices have also been slashed in half, could see prices rise nearly 10% a year.

Realtors say they are even seeing such dichotomies within markets, with sales in more-desirable locations starting to perk up. In New York's Hamptons, for example, homes positioned north of the Montauk Highway are languishing on the market for months, while well-maintained homes south of the highway, which are closer to the ocean, are sometimes getting multiple offers within days, says Nicholas J. Planamento, president of the Hamptons and North Fork Realtors Association.

Factors to Consider

There are a number of factors to consider when deciding whether or not to buy a vacation home. The first: momentum.

If you considered an investment in the stock market, looking at how prices moved over the past year would be a poor way to estimate future performance. On the other hand, research by Yale University Professor Robert Shiller, widely credited with predicting both the stock market crash of 2000 and the housing bust, has shown that momentum in home prices has staying power.

Then again, prices have been dropping in many markets for five years already, and most experts believe the steepest drops already have taken place. And some stronger vacation-home markets, such as Burlington, Vt. (up 1.3% in the past year), have momentum on their side.

A second point to consider: financing. Even though rates are low, lenders' standards for making loans are tight. And real-estate agents say deals are falling apart even after buyers obtain initial mortgage commitments.

That means buyers who can offer all cash have a leg up over those who make offers contingent on financing. Buyers who don't want to tie up that cash forever might consider purchasing the house with cash and then taking out a mortgage later.

All-cash sales dominate in some of the most beaten-down markets. One member of the broker network Leading Real Estate Companies of the World in Sarasota, Fla.—where overall home prices have dropped 43% in the past five years, to a median $174,900—reported that 70% of her home sales were cash-only, says Ms. O'Connor.

Here are some vacation-home spots that look primed for a breakout, according to five-year price forecasts by Moody's Analytics, along with some that are still bouncing along the bottom.