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Vacation Homes' Popularity Tempting Fate

Demand from baby boomers may help buoy prices in some markets. In 2004, investment properties made up 36% of sales.

January 01, 2006|Greg Burns | Chicago Tribune Staff Writer

It has six full baths, 259 feet of Lake Geneva shoreline and a price tag that thumbs its nose at the recent slowdown in the residential real estate boom.

For sale at $10.4 million, this gated Illinois mansion, complete with boat dock and billiard room, is testing the underlying strength of a market that some expect to be the first to cool: second homes.

"It's a fabulous, fabulous house," listing agent Nancy Lehman says. But it may be too fabulous for the times, some experts say.

As investors cast a wary eye on the housing market, conventional wisdom suggests that such retreats will be early casualties. Wildly popular in recent years, these mansions, cottages and condos with their scenic views have come under pressure from simple economics, as the run-up in selling prices and interest rates suppress demand for such luxuries.

"The issue is whether we can afford it," said Paul Kasriel, chief economist at Northern Trust. "It's getting more expensive."

And it's far from a necessity, said Richard B. Peiser, a Harvard University professor specializing in real estate who considers second homes more vulnerable in a downturn. "It's still a discretionary part of a homeowner's budget."

Yet despite widespread reports of slowing sales and moderating prices, certain second-home markets could display remarkable staying power. The growing economy is providing what Fannie Mae chief economist David W. Berson describes as "underlying strength."

And significant additional support, he said, will stem from an irresistible demographic phenomenon that has helped make vacation homes and investment property more than one-third of all residential real estate sales. Demand from baby boomers as they enter the prime years for second-home purchases is likely to help buoy prices for the next decade and beyond.

It's a theory fleshed out in the research of Kenneth M. Johnson, a demographer at Chicago's Loyola University who foresees a "tidal wave" of boomers migrating to scenic, rural byways within striking distance of the metropolitan areas where they now live.

The sheer scale will buttress the market, Johnson said. "This is only the beginning. We're talking 18 years, 4 million people a year," he said. "There's only so much pretty land. This is a force to be reckoned with."

Second homes have been soaring for five years, as the stock market bust gave way to a real estate boom fueled by low interest rates.

Those buying properties for personal use make up a big part of the market. But throughout the country, an even bigger part has consisted of those seeking an investment return.

Some highly leveraged speculators have gotten squeezed when they couldn't get the rents needed to offset their carrying costs. Others have been luckier, buying and selling in short order to exploit rising values.

In spots like Oceanside, Calif., Pompano Beach, Fla., and Beach Haven, N.J., seasonal homes have become hot commodities. Prices have soared along both coasts, as well as in well-known ski areas and resort communities. "You see appreciation in unique areas that are simply irreplaceable," Peiser said.

In 2004, 1.8 million second homes -- 23% of all homes -- were bought primarily for investment, according to the National Assn. of Realtors. Another 1 million second homes changed hands for personal use. Taken together, that amounts to 36% of overall home sales.

In the Midwest, the second-home run-up has been steady, with fewer properties thought to be held by speculators and more by those who bought for themselves. That factor, some say, makes a bust less likely in hot spots such as Lake Geneva.

Just 90 miles from the city, Lake Geneva has served as a convenient getaway for generations of well-to-do Chicagoans, and the market remains healthy, said Linda Tonge, a realtor at Keefe Real Estate.

"You keep hearing the bubble is going to burst," she said. "It's been a really strong market. I don't expect it to stop."

Lakefront property values have more than doubled in the last five years, she said, but the rise has been more moderate than among properties in the nation's Aspens and Palm Beaches.

Lately, homes have taken longer to sell, but not so long that wealthy owners are feeling compelled to lower prices, said veteran Lake Geneva broker John Law of Re/Max Geneva Realty. "People will hold on. They can afford to wait," he said. "It's like Will Rogers said, 'They're not making any more real estate.' Scarcity is really the key factor."

Demand counts too, especially as the baby boom generation closes in on retirement. Former McDonald's Corp. executive Chuck Ebeling bought his home in the woods half a mile south of the lake well before exiting the burger business six years ago. Now that he's retired at 62, he spends most of his time there instead of driving up from Chicago only on weekends. "We used our place for 10 years as a retreat before I retired," he said.

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