Rising Mortgage Rates Are Putting a Damper on Second-Home Demand

Demand for vacation homes fell sharply for the second month in a row during March, and mortgage-rate locks for second-homes also dropped to their lowest level since May 2020, Redfin reports. After a surge in second-home demand throughout the pandemic, record home price growth is limiting prospective buyers who may now view vacation property as a financial burden rather than a sound investment.

Despite lower interest in second-homes ahead of the spring buying season, demand is still up 13% from pre-pandemic levels, especially as remote work makes second-home purchases a feasible option for affluent buyers.

Interest in vacation homes skyrocketed in mid-2020 as many affluent Americans started working remotely and mortgage rates dropped to record lows, with mortgage-rate locks for second homes reaching a peak of 88% above pre-pandemic levels in March 2021. Demand declined sharply over the last two months as mortgage rates shot up at their fastest pace in history, reaching 4.67% by the end of March, and some workers started returning to the office.

Another deterrent to demand was the impending rise in loan fees for second-home loans, which increased by about 1% to 4% starting on April 1. The change adds about $13,500 to the cost of purchasing a $400,000 home for the typical vacation-home buyer and will continue to cool interest in vacation homes in the coming months.

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