As the pandemic raged in recent years, the market for second homes surged to record numbers. From remote workers able to move more freely and for longer periods of time, to those looking for a quarantine escape, second home purchases soared. Demand for second homes peaked this time just one year ago, when mortgage rate locks for second homes reached levels amounting to 88% above pre-pandemic numbers in March of 2021. Now, it seems, that market has cooled. According to Redfin, the demand for second homes tumbled precipitously last month. This was the second month in a row to see a sharp downturn of mortgage rate locks for second homes, now sitting at their lowest rate since early 2020, signaling a definite shift in the real estate market.
Several factors could explain the sudden decline in second home purchases. An obvious explanation, which has been a hot button topic for months, is the rising mortgage rate. Up more than 1.5% since January, the mortgage rate can add huge costs to a buyer over the life of the loan. At these higher interest rates, many may not be able to afford the new monthly payments that will come as a result, and those who can may not see the value in accruing the burden of a high payment on a vacation home.
While most Americans are well aware of the rising mortgage interest rates, another - less widely known - measure was recently enacted which is also driving down second home demand. The Federal Housing Finance Agency (FHFA) has increased the upfront fees required on a second home loan. Effective as of April 1, 2022 the new upfront fees for second home mortgages sold to Fannie Mae or Freddie Mac increased by approximately 1%-4% on the loan amount. The actual amount is calculated on a tiered structure based on the loan-to-value ratio. This upfront fee can add thousands or tens of thousands of dollars to the purchase of a second home, depending on the purchase price. For many, this additional fee - on top of the increased mortgage interest rate - is certainly a reason to think twice before purchasing a vacation home. Economists predict a continued cooling in demand over the rest of the year.
Cash deals in the Keys not subject to any of these rising costs, as they apply only to financed transactions. If you are looking to buy a vacation home in the Florida Keys, it is important to remember to account for these additional costs in your budget if you will require a mortgage.
Broker's Edge Realty
92300 Overseas Hwy Suite 303
Key Largo, Florida 33070