By Joe Gose © Investor's Business Daily

Thursday, March 29, 2007: The housing slump may be wreaking havoc among builders, home sellers and mortgage banks, but it is giving vacation and retirement home purchasers the best buying environment since before the housing boom began early this decade.

Housing analysts report that buying activity in the second-homes niche has slowed in once-hot markets such as Las Vegas and South Florida, largely paralleling primary-home sales trends. Yet they're quick to voice the view that the decline is creating opportunities in desirable resort and vacation markets.

Second homes include a wide range of single-family and condominium properties typically bought for either rental income or pleasure. Baby boomers nearing retirement are fueling vacation home purchases in a variety of settings -- from mountain and beach resorts to some metropolitan downtowns.

Boom Times

Over the past few years, demand for residential properties pushed up prices and constrained supply in many markets. Recreational and leisure communities popular with second-home buyers in South Florida and Northern and Southern California and other regions were hardly spared, says David Hehman, chief executive of EscapeHomes.com, an online marketplace for resort home buyers and sellers.

Essentially three groups have been driving the second-home market, he says: the over-40 set seeking a family vacation home, older active boomers nearing retirement and speculative investors aiming to flip properties for quick profit.

During the boom, many vacation and active adult buyers accepted properties that fell short of what they really wanted, Hehman says. But now the pressure's off. Flippers have backed away, and some would-be second-home buyers, too.

"A few years ago it was very difficult to find what you were looking for in most resort destinations, and what was there was overpriced," Hehman said. "Buyers had to make an offer that was usually over the asking price, and sellers demanded that closing take place in 30 days. Now the market is much more balanced -- if not in favor of the buyer."

This means second-home purchasers can take more time researching areas and perusing homes to find what they want. There's a wider choice of properties, which stay on the market longer. Over the last year, second-home prices have typically remained flat or dropped around 10% in many resort destinations, estimates Hehman. Second-home prices in such markets average about $500,000, he says.

Two Kinds Of Owners

Studies by the National Association of Realtors have found that second-home owners fall into two general categories: recreational owners and investment-minded owners. The former includes buyers of vacation homes. Less than a quarter have any interest in ever renting out their properties, and more than that plan to retire there. The second group of buyers includes short-term speculators and long-term owners seeking regular rental income.

Second-home sales accounted for about 40% of overall selling in 2005 -- above historical norms, according to NAR spokesman Walter Molony. But investment-minded buyers appear to have curtailed their purchasing last year, he says, and that likely will nudge the final tally of 2006's second-home purchases back to a more traditional 30% share of total sales activity.

"Our sense is that the second-home market has declined along with the overall market," Molony said. "But the primary motivation among boomers looking for vacation and pre-retirement homes is lifestyle choice. So that component of the second-home market should hold its own."

Still, the market is spooking some potential buyers. In the Fort Myers and Cape Coral areas of Southwest Florida, for example, existing home sales plummeted 34% between January 2006 and January 2007, according to the Florida Association of Realtors. The median sales price of existing homes fell 7% to $266,900 over the same period.

Tropical Doldrums

WCI Communities (NYSE:WCI - News), a builder based in Bonita Springs, Fla., has witnessed the downturn firsthand. In 2006, WCI saw "practically zero" interest in three of its Florida developments, Chief Executive Jerry Starkey said last month on the company's fourth-quarter conference call with analysts. The communities in question, in the Fort Myers, Naples and Sun City areas, target active adult and second-home buyers. WCI said net income plummeted to $9 million in 2006 from $186.2 million in 2005.

While Starkey told analysts that the company was beginning to see "traction" in the markets, he anticipated another year of tepid sales performance. Why? Company surveys indicate that active adult and second-home buyers are delaying purchase decisions for up to a year, which is a six month increase over previous survey findings. Additionally, the general housing slowdown has increased inventory, which must be pared before any meaningful recovery can take place.

"I think when we start to see those inventories on the resale market shrink, then we'll at the same time see a pickup (in interest) and an increase in urgency (to buy)," Starkey said on the call. He remains bullish on Florida, pointing out that some 78 million baby boomers are reaching their peak second-home ownership and retirement years.

"When America wakes up from this slump and this fear of buying homes," Starkey added, "I think we'll see Florida return to one of the top home building markets in the country, as it has been historically."

In mid-March, investor Carl Icahn offered to buy WCI for $22 a share -- 16% more than the stock price at the time. WCI said it would review the bid. At the time, Icahn owned nearly 15% of the company.

Copyright 2007 Investor's Business Daily, Inc.