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Vacation-Home Market Faces Long Road to Recovery

The buyers’ market for vacation homes is likely to continue for years, with activity largely limited to buyers with enough cash to circumvent a tighter, post-recession lending environment.

Row of beach houses
Erik Von Weber | Stone | Getty Images
Row of beach houses

Thirty-six percent of all vacation-home buyers in 2010 did not use a mortgage— versus 29 percent the year before — while more than half of them financed less that 70 percent of the purchase price, according to the National Association of Realtors. Of those who bought a second home as a rental investment, 59 percent paid cash.

“Mortgage lending in the past three years has been pretty rough, with much higher underwriting standards,” says Paul Bishop, NAR’s vice president for research. “People drawn into the market at this point are buyers with substantial cash, or people not dealing with a mortgage. If your credit is strong and you put down a sizeable down payment, lenders are more interested.”

Vacation homes remain the hardest-hit sector of the U.S. real estate market. Sales fell 1.8 percent to 543,000 in 2010, according to the NAR’s 2011 Investment and Vacation Home Buyers Survey. The median price was $150,000 in 2010, down 11.2 percent from $169,000 in 2009.

“Vacation homes are one of the truest forms of discretionary purchases,” says Bishop. “No one needs one.”

“Anywhere you look, you are going to find prices we haven't seen since 2001," says Michael Sanders, a Sarasota, Fla. broker active in second-home sales. He say that's largely because of foreclosures and short sales of homes for less than what's owed on them.

The market decline has slowed but it was fast and furious at its worst. By 2008, sales of second homes and investment properties at resorts were down to half of their 2006 highs, when a better economy and easy credit turned over 1.7 million units.

CNBC Investor Guide to Spring Real Estate 2011 - See Complete Coverage
CNBC Investor Guide to Spring Real Estate 2011 - See Complete Coverage

“That was the peak of a very robust market,” says Bishop. “After the tech-stock bust, there was a desire on the part of many people for another way to invest. As we saw, many people took equity out of their primary residences and bought another.”

For years, anyone affluent enough to cover the monthly costs was rewarded by the eventual sale of that unit, adds Ralf Garrison, owner of The Advisory Group, a Denver-based resort consulting firm. “That model is broken. Anyone who bought a vacation home in 2007-2008 is not very happy about it.”

Now, as with other parts of the housing market, negative equity and foreclosures are common. Foreclosure or trustee sales in 2010 amounted to 11 percent of vacation home sales.

Bargain hunters also appear to be selective. Sales and prices are up at least in the high single digits over 2009 at such well-known resort areas as Hilton Head, Palm Beach, Cape Cod and Palm Springs, according to brokers there. Ditto for Lake Tahoe, Napa Valley, Scottsdale, Oahu, Pebble Beach and the Pocono Mountains.

Today's buyers are also different than the past, when many bought a second home as an investment.

More than eight in ten buyers of vacation homes plan to use their property for vacations or family retreats. Three in ten expect to convert their vacation home to a principal residence in the future.

In many other areas, any rebound is still down the road.

“In some areas of the country – California, Arizona Nevada, Florida – there was unrealistic growth based on cheap money and little risk,” says Garrison. "

Now, the depressed second-home market threatens the very health of some U.S. resorts, where real estate and construction provide the main lynchpins to the local economy.

In Colorado ski country, the Vail area employed 31,000 people in 2008. By the third quarter of 2010, employment was down 20 percent, with construction jobs down 46 percent.

“If you lose construction, you lose the locals,” Garrison said. “It’s a fragile economy, with an imbalance that’s particularly acute in those areas that have all their eggs in the one basket of real estate and tourism.”

After his $200-million residence hotel project in Telluride, Colo. ended up in bankruptcy, Alain Longatte, a veteran resort developer and founder of Scottsdale-based Resort Advisory Group International, is now concentrating his efforts in Brazil and Uruguay.

Langatte said. ““Since year end 2008 development for destination resorts has come to a screeching halt in this country. The money dried up. There are lots of very good projects in the U.S. at standstill. I suspect it will remain nonexistent for the foreseeable future.”

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.