The purchase of a vacation home or a residential investment property is influenced by many factors that are often different than the motivations for the purchase of a primary residence. Especially during a period of weak home sales and considerable uncertainty about the economy, it is important to gauge how the economic environment is affecting each segment. To assess the state of the vacation and investment buyers market in 2008, NAR Research recently released the latest survey of home buyers specifically addressing the motivations of second-home buyers and characteristics of the vacation and investment property market.

Primary Residence Buyers

In 2008, 70 percent of home buyers indicated that they purchased a home to use as their primary residence, an increase from 67 percent in 2007 and up significantly from 60 percent in 2005. Most often, buyers purchase a primary residence based on job relocation needs, formation of new households or changes in family circumstances necessitating a larger or smaller home or a home in a different location. These factors are present - perhaps to a larger or smaller degree - whether the economy is expanding or contracting. Consequently, sales of primary residences fell by 13.2 percent, somewhat less than the 16 percent decline in the combined sales of existing and new homes, overall.

Vacation Home Buyers

For the remaining 30 percent of home buyers, the motivation to purchase an investment property or vacation home is influenced by a variety of factors. In an environment of economic uncertainty, discretionary purchases such as vacation homes can be more easily delayed than the purchase of a primary residence as evident from the decline in the share of vacation home purchases to 9 percent in 2008 from 12 percent in 2007.

Vacation home sales fell 30.8 percent to an estimated 512,000 units. The median price of a vacation home also fell sharply to $150,000, a decline of 23.1 percent from 2007. A significant majority of vacation home buyers - 89 percent - purchased a property for their personal use, while one-quarter also considered the rental potential. Twenty-six percent purchased a vacation home with the expectation of converting it to their primary residence in the future. Vacation home buyers expect to own their property for a median of 12 years. Slightly fewer than one-third of vacation home buyers paid cash for their property.

Residential Investment Property Buyers

For buyers of investment properties, the potential financial gains are far more important; the purchase of a home is a dollars-and-cents decision resting in part on current cash flow from rental income and expectations of future price appreciation. Even in a difficult economic environment, investment opportunities exist. During the past three years as the overall housing market softened, residential investment properties accounted for just over one in five purchases each year.

In 2008, residential investment property sales fell 17.2 to 1.117 million, less than half of the sales level in 2005. The median price fell 28 percent to $108,000. Eighty-four percent of investment property buyers purchased an existing home, up from 71 percent in 2007. Investors may have been attracted to distressed properties rather than new homes as suggested by the 16 percent of properties that were purchased through the foreclosure process. More than half of investment property buyers indicated that they purchased the home to rent to others and 38 percent considered the property a good investment opportunity over and above any income generation potential. Forty-two percent of investment property buyers paid cash, up from 35 percent in 2007.

Overall, then, it appears that the speculative level of home buying that was evident in many markets mid-decade has subsided. Home buyers, most who are in the market to purchase a primary residence, continue to make up a significant majority of all home sales. As the economy recovers, no doubt many investors will take a second look at the investment property segment of the market while potential vacation home buyers consider purchases when confidence and a more normal flow of credit return to the market.

For more on the 2009 Investment and Vacation Home Buyers Survey, click here.

Investment