by as much as 50 percent in some areas of the country -- as wary buyers wait to see whether Congress approves tax revisions limiting mortgage-interest deductions for second homes, according to real estate and construction industry sources.
The Reagan administration has proposed a limit of $5,000 on deductions of all personal interest payments, including those on second homes. The deduction for primary residences would be exempted.
"Sales came to a screeching halt" last November, when the president's tax proposals were announced, said Edward J. Crowley, vice president of Kettler Brothers Inc., a Gaithersburg-based development firm with resort properties in Pennsylvania. Sales rose somewhat in January and February, when "there was exceptional snow" that attracted skiing enthusiasts, but dropped off again in March, Crowley said.
Kettler's 1985 resort sales are running 50 percent below 1984's, and the company expects to lose "well over $1 million" on its vacation properties, he said. Developers of second homes all over the country are having similar experiences, according to Crowley and other industry leaders.
Resort-home agents report sales off 40 percent in some areas of the country, and most say they believe that much of the decline is the result of fears of tax changes among potential buyers, according to Allen Shark of the American Land Development Association. Uncertainty about the kind of legislation Congress will pass may be worse than the reality for many prospective buyers. "If they knew what will happen, they could get around it," Shark said.
The impact of tax fears on vacation-home sales may be one reason housing starts rose at a slower pace last month than industry experts had expected, said Warren Lasko, executive vice president of the Mortgage Bankers Association of America. Between 70,000 and 80,000 of the residential construction starts annually are on second homes, but the number has dropped by about "30 to 50 percent" this year because builders fear they will not be able to sell as many resort homes as they have in the past, he said.
The National Association of Home Builders estimates that the second-home market consists of 75,000 new homes sold and 200,000 existing homes resold annually. Other estimates place the total number of second homes at between 4 million and 6 million.
Predictions of how much the loss of interest deductions will add to the cost of second homes vary widely. The National Association of Realtors' estimate -- on the high side of the spectrum -- is that the after-tax costs of second homes could go up by between 25 and 60 percent.
Potential buyers who are afraid to buy now are predominantly middle-income families for whom the tax deduction often determines whether they can afford second homes, according to Richard Peach, an economist with the real estate group.
Investment income can be added to the $5,000 limit to increase the tax deduction allowed, but middle-income owners are less likely to have enough of this income to shelter their mortgage-interest payments.
"If the reason for the cap is to go after the wealthy, they administration officials have missed the target. They are exempting the wealthy," said Robert D. Bannister, senior staff vice president of the home builders group.
A reason often given by the Reagan administration for capping interest deductions at $5,000 is that most second homes are luxuries enjoyed by a relatively few affluent owners. In fact, development and real estate industry spokespersons contend that the majority of all vacation homes are owned by middle-income families, Peach said.
Several developers said most of their lost business was in moderately priced property.
"Our customers typically are in their 30s and 40s" with family incomes of about $40,000, usually from two wage earners, said Kettler Brothers' Crowley. Many purchases are made by two couples who pool their resources to buy a house, usually in the $80,000 price range, he added.
"A second home is a major purchase for them, so they will be conservative. They do not have a lot of discretionary income," Crowley said.
Emil Hanslin, a New England resort planner and developer, said vacation homes sold by his company range in price from $100,000 to $250,000. Sales have dropped by about 15 percent, all in the lower-cost houses, he said.
"The higher-priced properties don't appear to be substantially affected, particularly once a little of the confusion has been cleared away," according to Hanslin. When prospective buyers "talk to their accountants" about the potential tax consequences, they go ahead and buy, he said.
Passage of the president's tax proposals could have a devastating effect on local economies in many parts of the country, particularly in major resort areas, some industry sources predict.
Second homes make up about 20 percent of the housing stock in one out of every 10 counties in the United States, according to the NAR's Peach. Vacation-home owners are a major source of revenue for many communities, which would suffer from a decline in such ownership. Ocean City, for example, "would be pretty hard hit," Peach said.
The City of Rehobeth Beach on the Delaware shore got almost 10 percent of its $3.6 million budget this year from the transfer tax collected when vacation homes are sold, according to City Manager Gregory Ferrese. "There's no doubt" that a big drop in sales would hurt the city's 1,800 permanent residents. The population of Rehobeth Beach swells to about 40,000 a day during the summer, providing the major source of revenue for central business district merchants, Ferrese said.
Vacation-home sales have dropped in Rehobeth Beach, said William C. Stuart III, vice president and sales manager for Anderson-Stokes, the largest real estate firm working on the Delaware and Maryland shore. He said he has "worked the figures" to find out just how much the sales have dropped. Other Rehobeth Beach real estate firms are experiencing declining sales.
"Our firm sponsored a seminar for the public last month" in an effort to alleviate buyers' fears of the tax changes, Stuart said. "We think the fears are false . . . and that buyers don't understand" the proposed legislation.
The impact on local economies in all vacation areas "will be felt from the banker to the barber," said Bannister of the National Association of Home Builders. Savings and loans that make construction loans "could be in serious trouble" when their portfolios are devalued as declining sales lower the market value of homes, he said.
Others financial industry officials are more optimistic, saying lenders even could benefit.
"Lenders may be better off holding fewer mortgages on vacation homes since these mortgages are considered riskier than liens on primary residences," Carolyn Brown wrote in the current issue of a Federal Home Loan Mortgage Corp. publication.
She said refinancing vacation property is "particularly risky in the absence of an active resale market for comparable properties, because the lender must depend solely on the appraised value rather than on the market price."
Although the number of new loans issued for second homes is likely to drop, lenders "would benefit from owners refinancing their primary residence or taking out a second mortgage to reduce their interest bill on the second home's mortgage," Brown said.
Lasko of the Mortgage Bankers Association believes the vacation-home industry will bounce back even if the proposed tax changes are approved. In the long term, the second-home market will not be affected, he said.