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The Honolulu Advertiser
Posted on: Wednesday, April 5, 2006

Second homes account for 40% of sales

By Noelle Knox
USA Today

Americans snapping up second homes as investments or vacation properties accounted for four out of every 10 sales of existing homes last year, a record that helped drive the real estate market to new highs, according to a report being released today by the National Association of Realtors.

Nearly 28 percent of homes bought last year were for investment purposes, and another 12 percent were vacation homes, the figures show. Most buyers were baby boomers in their top earning years, looking toward retirement and hoping to build wealth or find a more desirable place to live.

The typical investment buyer last year was 49 years old with annual income of $81,400. He or she paid $183,500 for the median-priced investment home, up 24 percent from 2004.

"Real estate, over the past five years, has outperformed virtually every other investment vehicle," said Ron Peltier, president and chief executive of HomeServices of America, the country's second-largest residential brokerage firm. "A lot of people have just speculated in real estate."

The trend really started after 1997, when Congress changed the tax code, allowing most homeowners to duck capital gains taxes when they sold their homes. The exemption is $500,000 for married couples, $250,000 for singles, if it was their primary residence for two of the past five years.

Under the old system, the only way to avoid the tax was to "roll" the gains into another home of equal or greater value. now, they can downsize and use the equity to buy second homes.

"David Lereah, the NAR's chief economist, thinks the trend crested in 2005. With rising interest rates, tighter lending standards and slower price appreciation, Lereah expects second-home sales to drop this year to 30 percent of existing-home sales, and maybe into the 20 percent range.

Sales of vacation homes are expected to stay strong for years, because the youngest baby boomers are only 42 this year.