Middle Class Drives Soaring Purchases of Second Homes

Second-home sales surged 16.3 percent, to 36 percent of the total market, in 2004, the National Association of Realtors says. (F. Carter Smith -- Bloomberg News)

House prices rose in 2004 at their fastest rate in 25 years, according to a government report released yesterday. The average price of a single-family home financed through secondary mortgage giants Fannie Mae or Freddie Mac rose 11.2 percent over the year, the strongest annual growth rate since 1979, according to the government's quarterly house price index.

The appreciation rate slowed dramatically, however, in the fourth quarter, to 1.7 percent, barely a third of the rate for the previous three months, according to the report.

Investments in housing depend largely on continued price growth. And while economists debate whether housing is currently in a bubble akin to the tech bubble that burst in 2000, there's little argument about what can happen to such highly leveraged investments when the growth arrow goes flat or starts pointing downward.

For much of the 1990s, for instance, many area home sellers found themselves bringing cash to the settlement table to make up for the difference between what they owed and what they could sell for. Also, recent experience to the contrary, single-family dwellings and condos are not liquid investments, with trading desks operating 24 hours a day around the world.

When sales slow or prices flag, would-be resellers often become reluctant landlords, relegated to dealing with what the property management community has dubbed the world of "tenants and toilets." Meanwhile, tapping out the equity in one's principal residence can affect one's ability to get credit for other purposes.

To be sure, for the past several years, home prices have climbed steadily in the metropolitan region. Last year values grew 24 percent, according to the Office of Federal Housing Enterprise Oversight. Economists predict continued, but moderated, price appreciation for this year.

John Tuccillo, former chief economist of the Realtor group and author of the recent book "How a Second Home Can Be Your Best Investment," said the large increase in house values is a major reason people are being tempted by second-home buying.

"The tremendous run-up in prices in certain markets -- with Washington being one of those markets -- has given people a lot of money to play with," Tuccillo said. "There's been a very strong wash-over effect."

That's how Lou Charlip and his wife, Catherine Snyder, financed a two-bedroom condominium in Rehoboth last year, by tapping into the equity they had built up in their single-family home in Rockville.

"Our house had appreciated so much, we wanted to do something with that money," Charlip said. "It didn't even cross my mind to put it in the stock market."

But built-up equity in a primary residence is only the second source of funds for second-home purchases, Lereah said. Savings are the primary source.

Has the surge in second-home activity further fueled the run-up in house values?

Economists say yes.

"A huge bulge of investors means more people buying and so an increase in demand," said Jason Schenker, an economist at Wachovia Corp., one of the nation's largest lenders. "And when demand goes up, prices go up."