At The Money: Buying a Vacation Home with Jonathan Miller

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0:53Have you thought about owning or buying a vacation property? Would you like a place to take the family to on a lake, near the beach or up in the mountains? I have. And I know a lot of our listeners have also. So let's bring in Jonathan Miller, CEO and founder of Miller Samuel, a highly rated data analytics and research firm covering the housing market. He has written a number of pieces on vacation homes, second property, luxury properties, and what's happening in that market. So, Jonathan, let's just talk a little bit about what's going on in the second home market, whether it's the luxury market or not.

1:39Tell us a little bit about what's going on out there. Well, you know, we had coming out of the pandemic, we probably had the biggest second home purchase boom in history as people were coming, you know, sort of reengaging with the outdoors again after the pandemic. And then in the last couple of years, we've actually seen a big drop off in second home purchases. Now, I would describe it as more normalized, where it's more consistent with seven or eight years ago before the pandemic, and comparisons against the last few years are probably unfair to the market. So what's going on then with the supply of homes for sale?

2:26Obviously, 2021, 22, a lot of supply got sucked up. As a percentage of average home numbers for sale, that number seems to have plummeted, Has that normalized yet? It depends on location. The way I think of it is we are seeing a big uptick in supply, but it depends on where the uptick began. Did it begin at a record low number? And now we have some markets, a lot of markets that are still behind pre-pandemic inventory levels, but we have a growing number of markets that are sort of catching up or exceeding. But it is very location specific. Let me guess. Let me take a few guesses. I'm going to guess that we're seeing a big uptick in supply in Southern Florida and not as much supply in, let's say, the Hamptons or Jersey Shore off of New York or Newport or any of the vacation destinations off of Boston.

3:33That's just my instinct. I'm curious what your data shows. It shows exactly that. You know, and another way to really look at this simplistically is I think of Sunbelt versus everybody else. A Sunbelt, you know, new product can be built faster. You know, the whole moving away, you know, to something cheaper, you know, a cheaper housing market, which tends to be to the south, was sort of overdone. And now there's a big difference. Even within South Florida, you look at Miami-Dade is really seeing a lot of supply come in significant, about 50 % over the last year up. But then two counties to the north go Broward and then go Palm Beach County.

4:27Palm Beach County is seeing declining inventory. So I don't think there's a correlation with the further south you go, the more inventory is rising. But that seems to be what's actually happening in Florida. Palm Beach kind of reminds me of East Hampton or Sag Harbor, something like that. So it's more, east end of Long Island. Is it fair to say that a lot of parts of places like South Florida, just to become victims of their own success, there was such an exodus from California to Texas, from New York, New Jersey, Connecticut to Florida, that it just seemed to overwhelm the infrastructure and the supply.

5:11Fair statement? That's a very fair statement. And then throwing hurricanes on the Gulf side, the Gulf side with, you know, has has seen a much faster rise in supply than the ocean side of Florida. And I wonder, too, if that's part of, you know, Canadians tend to gravitate towards the Gulf side. And, you know, with the trade war that we're having right now, maybe that's playing into it as well. So we were looking in, of all times, January 2020 on the Gulf side in places like St. Petersburg for a winter home. And then the pandemic shut everything. And when everything reopened, I wasn't as surprised about the big increase in home prices as I was the giant increase in things like insurance, taxes, HOA fees, it got to the point, wait, if I'm going to spend 60 or 80 or $100 ,000 a year on everything around the house, not actually buying the house, hey, that pays for a lot of nice vacations.

6:20Maybe I don't need to own a place in Florida. I could just visit. How significant is the cost structure change in Southern Florida to what's going on there? and where else are we seeing that sort of spike in home ownership costs? Right. So, you know, when in the old days, when you bought a house and you were worried about the interest rate and the price of the house, the costs of home ownership beyond that were sort of a rounding error. You weren't thinking about the cost of insurance, real estate taxes, And what we've been seeing in the last several years is a big jump in not just the cost, but actually getting coverage in insurance.

7:13One thing, when we think about other parts of the country that are sort of struggling, I would characterize this as more of a national condition now. California is wildfires. The Midwest is tornadoes and the Southeast and Eastern seaboard is, and inland too, is flooding. So there just seems to be this sort of steady rising tide, no pun intended, but of it. And actually, the one thing that, you know, in all my research about this over the last couple of years, the most expensive insurance cost relative to home prices is the Midwest. It's not Florida. It's not, you know, wildfires in California because housing is so much less expensive in the Midwest.

8:14So as a percentage, it's a bigger chunk? It's a bigger, bigger liability. So we were just in Chicago a week or two ago. And what was so interesting. So I'm in Chicago every year for Thanksgiving for forever. I always find the Midwest and Chicago in particular, a smaller, more manageable, more rational, much more affordable version of New York City. But a lot of people we spoke to there in Chicago, in Detroit, in Milwaukee, there are all the Great Lakes. Like what we talk about on the East Coast with beach property, Hamptons, Fire Islands, Jersey Shore, Delaware, go down the whole list. They all talk about some people have homes on Lake Michigan, or if you're coming from Grand Lake Streams, there's just a run of vacation properties and the prices seem almost reasonable.

9:10What are you seeing in the Midwest market for real estate prices? So it's always really dangerous to sort of make a living in the East and then go to the Midwest and look at housing prices. And it's almost entertainment because the affordability, you know, to buy a vacation home in, say, Wisconsin, north of Chicago, where I used to live, you know, is, you know, reasonable, but not to locals. Right. My head trader in the office after this whole we had a big event in Chicago. He's like, oh, my God, I can't believe how reasonable everything is here. I'm like, you and your fiance should move there.

9:55The only catch is we have to cut your salary 40 % because that's the local wage. So clearly home prices track local median income. I don't remember if it was your research note that talked about, or maybe it was Paul Krugman's, talked about New Jersey as one of the densest populations in the country with one of the highest home price in the country, but an even higher median income on average. And so it turns out that But paying a high price for homes in New Jersey is actually cheaper than an inexpensive home in another part of the country relative to your income. So that really begs the question, how significant is local income to vacation properties, lakefront homes and beach houses?

11:00Well, you know, it's in danger of saying it depends, but it depends. You know, I think about a market that that I lived in and cover a market like Manhattan, which is known for lots of pied-a-terres, you know, places in the city that people in the suburbs buy homes there. If you look at the median income in Manhattan, it has no bearing on the price of housing because there's such an international and also, you know, affluence that gravitates there. So the median income doesn't really relate. It's, you know, it's like, you know, 70 ,000 or some, you know, and the median home price in Manhattan is about a million two.

11:52Right. Which gets you a studio. Right. Maybe a small one bedroom in a walk up. So since you're mentioning foreign buyers, let's talk about what's going on with the public policy and in particular, the dollar. We've seen the dollar fall off from its highs recently. You talked about this in a recent research note. What does the strength of the dollar mean for potential buyers of real estate from overseas. And what has, let's just call the damage to America, the brand, the black guy that we sort of see Uncle Sam having, what does that mean for outside purchasers? At least at this point, it's an offset.

12:39In other words, that we've had periods of time where if you're coming from Europe, you're enjoying a 50 % discount. off the currency play for a U.S. home. And so New York, you know, had a tremendous, would have a tremendous surge every time the dollar got weaker. We had periods, I want to say 2006, 2007, where I called it the Irish carpenter syndrome, where you had sort of, you know, people of modest means in Ireland getting 50 % discounts on million dollar condos in Midtown. What about the other coast? What about Japan, China, Korea, it's Asia buying San Francisco, La Jolla, San Diego, and even across the border of Vancouver?

13:32Well, a big driver is access to high quality universities. And so the Asian demand, that's one of the amenities they're really looking for, you know, sort of over the long run. The problem with the weaker currency or the weaker dollar is that the state of immigration and the sort of what I call the tariff tantrums and the uncertainty that is abound at the moment has essentially, at least, you know, in my anecdotal observation at this moment is, you know, it's offsetting the benefit of a discount, that we're not seeing the influx of international demand that we normally would expect during this type of dollar environment.

14:29Since you mentioned the tariff tantrum, that seems to be keeping mortgage rates elevated. It doesn't really matter to luxury properties,$3,$4,$5 million. Those are mostly cash deals, I've learned from reading your research notes. But what about younger folks in their, not in their 20s and 30s, but perhaps in their late 30s and 40s who want a vacation property? They're not spending tens of millions of dollars. They're spending something a little more reasonable, but they're probably putting 10, 20, 30 % down and putting a mortgage on it. What is these elevated mortgage rates doing to that market?

15:13So it's restraining it. The way to think of rates is they're sort of stuck at sort of just below 7 % on a fixed rate. When you're looking at a second home purchase, you probably want to add a half to three quarters of a percent to the rate of a primary residence. So it's more for a second home mortgage than a primary home. Yes. And the underwriting is a little tougher as well. There's ratios that are a little bit tighter. And that's a way to think of it. However, if you're looking for like a break in pricing, pricing now with the uncertainty and the rates being stuck at an elevated level, the rate of price growth has been really over the last few months starting to ratchet down a bit.

16:16So it's plateauing? Yeah, I would say plateauing is probably a fair term. In some markets, even slipping a bit. We still have markets that are rising, but those tend to be primary housing markets. Like if you're in New York City, Metro, Long Island grew 10 % last year. Big numbers. So let's, since we mentioned the non-luxury second homes, let's talk demographics a little bit. What about millennials and Gen Z? Are they, remember during the 2010s, they stared clear from the initial housing market. They were forming households at a very low rate along the same time as builders had kind of pivoted post-crisis to multifamily and away from single family homes.

17:10Not only are those generations now buying first homes, some of them, I hesitate to say many of them, but some of them are looking at second homes. How do you think about demographics and where these folks look at a vacation property? So you're right. We're absolutely seeing the millennials first just push into homeownership, not just homeownership, but second home ownership. If you think about this at a top level, one of the things that's been changing with the baby boomer generation is buying homes or giving what the kids would wait until their parents passed. We're seeing a lot, like 20, 30 years ago.

18:08Intervivos is the technical term. You're making the gift while you're alive. To bask in the glow, right? And that's a thing. And just sort of the quick observation is in the 80s when I started up my company, it was very common in Manhattan for parents to buy a studio apartment, sort of the size of a hotel room for their kids that were going to college, and it would become a pied-a-terre for the family down the road. Now they're buying three, four, five million dollar apartments. And as opposed to little efficiency type places, we're seeing a much bigger price tag on this as, you know, and that is giving this generation sort of a jumpstart.

19:10So you're kind of implying, I don't want to say fractional ownership or co-ownership, It's multiple generations of a family using the same second property. But what about those sort of things? We've seen business models of fractional ownership, or I've heard stories of close friends, two or three families co-owning a property. Is this a real trend or is this still a rounding error? To me, it's more of a rounding error. It's an interesting storyline, but I'm not seeing that. It's happening on the margin more than anything else. What's really interesting in the world of Airbnb and investor ownership, lenders, there's a higher rate for that, a higher mortgage rate if you're financing.

20:05but you know to my understanding you can as long as you on a second home as long as you control the house meaning you don't have tenants in it for more than six months you can claim it as a second residence what does that do for you tax-wise if it's a second residence as opposed to a business that I don't know you know every situation is so different but But I know that with with Airbnbs, if you're using a professional manager to manage it for you, then it's considered an investor property. It's it's not. And, you know, we've had like in the southwestern U.S., you know, there's a massive oversupply of Airbnb properties that are not sort of covering the the monthly costs.

20:53So I'm not necessarily encouraging that. But there's going to be some supply coming on the market when people say, hey, this just isn't worth the headache. Is that the implication? Yeah, yeah. That, you know, I'm not getting the returns that I that I thought I would get, you know, because everybody had the same idea at the same time. There's certainly a place for it. But I think it's been a little bit over overused. And, you know, the other thing is, and, you know, when we think about Airbnb versus being an investor, a pure investor and renting it out for, you know, for six months or a year is that you don't get to use the property, right?

21:35And that's been one of the selling points of Airbnb as a landlord. And then the other thing is that generally, when you look at their data, they generate about two and a half times the rent per square foot of a one-year lease. And some even generate more, like one fine stay is a sort of a luxury Airbnb. And it's like three times. Shorter term rentals are more expensive than longer term rentals. Yes. So let's I think everybody knows what are the super hot destinations, but I know the super hot vacation home destinations. But I know you crunch a lot of data. What do you see as sort of up and coming?

22:21What do you see is hot that are probably going to surprise most people who pay attention to real estate? Well, I think of New Hampshire and Vermont, which isn't really a. More a ski location than a beach place. Yeah, that's probably my built-in bias for going north when the kids are young for every vacation and not south. But there just seems to be, especially probably more New Hampshire than Vermont, a tremendous, at least in the Northeast, There was a from the pandemic through now, there was a tremendous boom in New Hampshire housing because of the second home phenomenon. And what's really interesting, something that I hadn't paid much attention to until the last couple of years is with the whole push for RTO, return to office.

23:19Some people that are buying second homes really want to be cognizant of their employers' future policies on how often you have to be in the office. I know I could take a cannonball from West Hampton into Manhattan, and it's marginally longer than my normal commute into the city. But it raises an interesting question. How has the rise of the remote work, work from home and the return to office? How is that impacting buyer preferences for vacation homes and where they're located? So there was a word that somebody, I was giving a presentation, you know, right after the sort of dark days of the pandemic.

24:13And I remember a real estate agent, you know, I was trying to describe that, you know, people moving to a second home market because they could work remotely. I called it co-primary. Basically, it was a co-primary residence. So what people what I found people coming out of a pandemic were looking for quality of schools if they had a young family. You know, they were looking at things that you normally don't consider Internet, you know, quality things that you normally don't consider when you're buying a second home. The holiday about second home is to get away from it all. But that's been sort of co-opted by the need to work or the desire to reduce commuting or who doesn't like to maybe work in their pajamas.

25:06Right. So how would you recommend, given all of the apps, all of the data, all of the things that are out there, someone shopping for a vacation property, how should they be using an app like, let's say, Zillow or Redfin in order to help them find a vacation property they really want to own? Right. So, you know, the apps make it all accessible pictures. You know, you can see lots of information. But this sounds old school. But once you have that information, you know, you have, you know, you've looked at, you know, online a dozen properties that sort of, you know, make sense to you. you really need to see an agent um you know you need to talk to a human being you know and someone that's a local expert in a market which is a whole nother thing um which you can through these apps figure out you know does their name pop up all over the place um and have them uh talk you through it uh if there's a moment in your life that you need hand-holding even though you think you know everything.

26:19I think it's home buying. You do. And all the sort of stories of, well, they're just trying to sell you out. Yeah, they're trying to sell you a house, but they're also a wealth of information and you can't get that online. Really, really interesting stuff. So final question in two parts, what sort of advice would you give somebody who asks, hey, I'm looking to buy a luxury property in a hot area? And what advice would you give to a millennial, someone in their late 30s or 40s? Hey, we'd love to have some reasonable vacation property. What do you tell those folks? So the first is incredibly obvious.

27:03There is so much information at your fingertips in terms of understanding the cost, the additional mortgage expense, if you're going that route, to think about the equity that you have in your existing primary residence, if you have one. Right now, we're basically looking at record or near record home equity because of the price growth that we've seen over the last five, seven years. and maybe that's a financing vehicle or an acquisition vehicle for your purchase. Certainly down payment, you could borrow from your home, even though it will have to be disclosed to the bank. Yes, yes. And banks, listen, if you have a boatload of equity in your home,

27:56I see this quite a bit where people use that to buy a smaller home, a second home. And, you know, as we've seen in the past, leveraging up your primary residence to buy a luxury property, how could that ever go wrong, right? Right, right, right, exactly. You know, and the sort of saving grace to that, unlike during the financial crisis, is that credit conditions remain tight. So lenders aren't just giving away loans if you have a pulse or fog and mirror like we had during the financial crisis. It's actually a thing. They're actually doing their due diligence. They're doing their jobs? Go figure.

28:45That's a crazy concept. It's kind of a crazy concept. Let me refocus you on the luxury question, because I know you bought a property not too long ago. I bought a property not too long ago. And I learned from your experience, I was completely frustrated by people making all cash offers for over the asking price. And I'm like, I can't believe we lost another house I thought we were in. So someone comes to you and says, I'm doing pretty well. I got a nice bonus this year. We'd love to get a vacation property. And we're looking over$2 million. We're not going to go crazy, but we have a decent budget.

29:26What advice do you give somebody like that? Well, the first thing is, if you're in a housing market with limited inventory, New York Metro, the share of bidding wars of transactions is in the 40-ish percent rate, meaning that 40 % of the closings, the buyer paid over ask. That's a reality. Still 2025 that's going on. Absolutely. It is not what it was. Six months ago, it was 50%, more than 50 % in the New York metro area, outside of the city. The city isn't seeing that. The city is a much lower number. But that's sort of the reality. But then, you know, if you go to other markets, like we were talking about the Sunbelt, you know, that that's almost non-existent.

30:17I just still think that the sellers are embedded with sort of a bravado that, you know, is still, you know, was built up during the pandemic. And I also think that buyers are sort of have a bravado that they're going to get the most amazing deal. And so that the gap between them, you know, is a lesson. And it takes the parties a while to, you know, to to sort of meet halfway. Both have to sort of capitulate to the actual market conditions. And part of what's happened, things have happened so quickly, just with the tariffs and the confusion, I have this sort of cockamamie theory that came up out of, you know, when we think about tariff policy having flip -flopped at least 50 times, there's this uncertainty that we're sort of all living with.

31:19And in some ways, that sort of chaos or uncertainty as it relates to housing becomes a constant as opposed to this new thing. It's sort of, you know, it's a reality. And if you're in the housing market, you have to be sort of aware that there is a chaos to it still. And don't be afraid of it. So to wrap up, for those people searching for a vacation property, a lake house, a beach house, a mountain house, we've seen some uptick in the amount of supply. And perhaps in some areas, prices have stopped going up, at least not going up as aggressively as they have been. But be aware, it's very regional.

32:04It's very geographic specific. There is a demand for more of these properties, especially from millennials and soon Gen Z. Keep your eye on what's going on, get informed, and work with a local expert to help find your dream vacation property. I'm Barry Ritholtz. You're listening to Bloomberg's At The Money.

32:36As our use of AI expands, how do we make sure it doesn't end up breaking the internet? I'm Hannah Fry, host of The Exponential Era a series that explores the real world impact of future network technology and I sat down with two experts to discover how we can support the massive connectivity needs of AI Find out what I learned at bloomberg.com forward slash Nokia