By Amina Niasse

NEW YORK U.S. vacation home sales have fallen by nearly three-quarters from their frenzied pace three years ago as an inventory shortage spawns a wrenching correction in the second-homes market.

In markets like Hilton Head Island, South Carolina, or Lake Havasu City, Arizona, sales have all but dried up, data from mortgage services firm Optimal Blue showed, even though demand remains as hot as ever.

The reduction comes after a fervor of real estate investment in vacation locales during the pandemic. And as secondary home activity dwindles, some smaller housing-related businesses in leisure hot spots say they are feeling the pinch as well.

The current share of secondary homes within the existing housing market has fallen to 16% as of August, from a peak of 22% in January 2022, data from the National Association of Realtors (NAR) showed. That share is still somewhat above the 14% average from late 2015 through the first half of 2020.

The market for second homes is dominated by wealthier buyers less sensitive to the jump in interest rates and the persistence of high home prices, but inventory remains a barrier.

“Homes are just not available,” said Chuck Tuttle, vice president of sales at William Raveis Real Estate based on Cape Cod, a popular coastal vacation spot in Massachusetts.

Hilton Head Island and Lake Havasu City experienced the greatest fall in volume at 83% and 87%, respectively, compared with respective gains of 45% and 79% from early 2019 to the start of this year.

"When quality secondary homes come on the market and they’re prepared and presented correctly, they go quite quickly regardless of the price point,” Tuttle said.

Remote work policies and quarantine regulations that kept Americans in their homes during the height of the COVID pandemic stoked a frenzy of vacation-home buying as more people looked to invest in space.

Optimal Blue data shows vacation home purchases peaked nationally during the third quarter of 2020 when 30-year mortgage rates were on their way to record lows under 3% as the Federal Reserve moved to prop up the economy in the face of the pandemic.

HIT TO RELATED BUSINESS

With the Fed having shifted gears to fight inflation, rates on home loans have risen to two-decade highs, reaching 7.90% in the latest week, according to Mortgage Bankers Association data.

Higher borrowing costs and lower vacation home sales have also hurt some businesses that count on that activity to feed their own operations, said Tuttle, citing difficulties for realtors and home remodeling contractors.

“Services for existing rentals has grown, but services for larger ticket remodeling work on new vacation rentals has stopped," said Tim Allen, owner of Kopa Home Services, based in Flagstaff, Arizona. "I can't recall any large project or make-ready that we've done on a new vacation rental owner this year.”

With most buyers purchasing homes built in the 1980s, renovations on existing houses overall are rising, according to the NAR. But the decline in vacation home purchases cuts into the strong customer base for remodelers because second-home buyers often have higher average incomes than cash-strapped first-time home buyers, said Jessica Lautz, NAR's deputy chief economist.

Those who bought secondary properties during the pandemic as vacation rentals are now seeing declining occupancy rates and a loss of revenue as many markets became oversaturated.

Allen has had to decrease unit prices in his separate vacation rental business, Local Vacation Team, to keep occupancy figures above market. Since March of 2022, national short-term rental occupancy is down 8%. For Flagstaff, that figure is 14%, according to data from AirDNA, a short-term rental data provider.

“Our market is all about supply," Allen said.

"With the acceleration of the creation of vacation rentals during the pandemic, now if visitors are at 1,000, there are 3,000 rentals available,” he said. “My largest price decrease was a 20% fall from the time they listed it to the time it finally went.”

(Reporting by Amina Niasse; Editing by Daniel Burns and Bill Berkrot)