As home prices rise to new record heights and mortgage rates surge, homebuyers this spring are desperate to get their dream homes before they become even more out of reach. To do so, more are turning to a riskier type of home financing that was one of the causes of the Great Recession.
Adjustable-rate mortgages, commonly known as ARMs, entice borrowers with lower initial rates compared with traditional fixed-rate mortgages.
At a time when home prices are quickly rising, this can help some buyers become homeowners, which is why they’re becoming more popular with borrowers. But unlike traditional mortgages, which have a fixed interest rate for the life of the loan, ARMs can grow more or less expensive over time. That’s because the rates reset after a previously agreed upon period of time to more closely reflect the current market—and this can result in much higher or lower housing payments.
So are ARMs worth the potential risk?
For starters, they’re cheaper. Last week, the average contract interest rate for a five-year ARM was 3.9%, compared with 4.66% for a 30-year fixed-rate mortgage, according to the Mortgage Bankers Association. (A five-year ARM means that the rate will readjust after five years.)
Worth noting: ARMs are just a drop in the bucket of the overall mortgage market. They made up just 1% of all mortgage purchase applications for the month of February, according to MBA data. But out of all the people taking out mortgages last month, the share of people taking out ARMs was up a staggering 70% from a year ago, according to the MBA.
“Adjustable-rate mortgages are seeing a surge in popularity because they provide buyers with much-needed flexibility when they need it,” says Tim Schroeder, a Realtor® and owner of Agent Marketing Essentials, a group that helps agents market listings.
ARMs can be a smart move for buyers who are planning on living in a place for a shorter amount of time and won’t be holding on to the loan as long.
“One of the biggest advantages of an ARM is that it’s considerably cheaper for the first three to seven years than its fixed-rate counterpart,” Schroeder says.
But buyers beware: Taking out a loan could cost them down the line if rates continue to climb. The rates reset every few months or years depending on the terms based on the most recent rates. That number is capped between 2% and 5% depending on the lender and the terms agreed to. That means the interest rate can never be that many percentage points higher than the initial rate agreed to.
“When ARMs first came out, one of the huge advantages of getting one was that your rate could go down,” says Rocke Andrews, a mortgage broker with Lending Arizona in Tucson.
But mortgage rates are largely forecast to keep rising, so that will likely be seen in their monthly payments down the line.
The good news is that even though most of these buyers will see rates on their ARMs increase, the uptick in these loans isn’t expected to trigger another foreclosure crisis.
Since the Great Recession, lending practices have gotten more strict, to avoid another economic downturn. Buyers who want an ARM need to go through the same strict lending standards that are required for traditional loans. Plus, there is far more education about how these types of loans work. There are also limits to how much the interest rate can rise over the lifetime of the loan, and there are no longer prepayment penalties for folks who want to pay off the mortgage before the term of the loan is up.
“Before, when people were not able to qualify [for a mortgage] because the payment was too high for their income, the loan officer would spin it in an ARM to squeeze them in homes when they were just qualifying,” says Andrew Russell, owner and founder of RCG Mortgage.
Lenders have smartened up and are being more cautious about whom they give loans to. That’s a big difference from the 2000s when homebuyers were talked into loans that they couldn’t afford—then defaulted en masse when their initially low mortgage payments ballooned far beyond what they could afford.
“Statistically, homeowners refinance or sell every five to seven years, so why not take advantage of a seven-year ARM?” asks Ricky Pok, president of Wabi Sabi Realty Group, a real estate solutions and investment firm based in Houston, TX, and a former mortgage lender. But, he warns, borrowers should go in with open eyes and a clear plan.
“My most successful long-term clients utilize ARMs successfully by having exit strategies in place in case rates go up,” Pok says.
Home prices nationwide have just broken yet another record, with the national median listing price soaring to $405,000 for the first time ever, according to a recent Realtor.com® report.
This price is up 13.5% compared with this time last year—and up a whopping 26.5% compared with March 2020, when COVID-19 was officially declared a pandemic.
And yet even as the novel coronavirus recedes and spring’s homebuying season heats up, buyers are frustrated to find that there simply aren’t enough houses for sale.
“Home prices continue to rise because housing demand outpaces housing supply,” says Danielle Hale, chief economist of Realtor.com. “And the way the market balances that is by pushing prices up.”
Indeed, the number of active listings nationwide in March was down 18.9% from a year earlier—and down a whopping 62.3% from two years ago. That means that for every five homes that were for sale in March 2020, today there are just two.
Mortgage rates hit nearly 4.5%
As if high home prices weren’t bad enough news, homebuyers today are also contending with rising interest rates. The mortgage rate jumped to 4.42% for the week ending March 25 for 30-year fixed-rate loans, according to Freddie Mac. That’s the highest it’s been in three years.
And since the Federal Reserve is expected to raise its rates several more times this year, mortgage rates are expected to follow by continuing to climb.
Facing rising mortgage rates, record-high home prices, and very few homes for sale, more and more buyers are reaching a breaking point and calling off their house hunt, at least for now.
“In this month’s data we see signs of demand moderating in response to higher costs,” says Hale. “We’re seeing at least some buyers think twice in today’s housing market, given the high costs they face as home prices and mortgage rates both climb.”
Will home prices keep rising?
With homebuyers losing the will to forge ahead in this hostile market, does that mean that home prices might finally be near an inflection point where they start trending downward rather than up?
“As for where home prices may go from here, that depends on several factors,” says Hale. “First, even though construction is starting to catch up, we have a huge 5.8 million home deficit to build out of. For context, that would be five-plus years of construction at the recent pace, so that’s a long-term issue.”
In other words, the sluggish pace of new construction might continue to keep home prices high. Plus, homebuyers who’ve benefited from this hot job market might even have the extra cash to pay up.
“While demand has shown some signs of moderation, if buyer incomes start to rise faster because of the tight job market, that could help keep demand and home prices high,” Hale explains.
Seller expectations also play a role. Now that they’ve seen just how high home prices can go, they might not settle for anything less.
“Home prices are what economists call ‘sticky,’” says Hale. “Once they go up, people get used to the idea of a certain price, and for homeowners thinking about selling in particular, that becomes what they’re looking for in the market.”
Cities with a growing number of homes for sale
Rising mortgage rates and a hyper-competitive market might also be driving buyers to snap up homes at a faster pace than ever. Nationally, typical homes spent 38 days on the market in March, down 11 days from a year earlier and 21 days from March 2020.
Most places saw a decline in listings. In March, the number of homes for sale in the 50 largest metropolitan areas shrank by 16% compared with the same period last year. (Metros include the main city and the surrounding suburbs, towns, and smaller urban areas.)
The nation’s housing market has been a cascading series of crises for the past several years, and renters are feeling the pain. With rents skyrocketing across the country, even in previously affordable Sun Belt cities, more people in the market for a reasonable amount of space at a reasonable monthly fee are feeling like they are running out of options.
A new study from RentCafe tracked how much space $1,500 a month gets for renters in the 100 largest cities. (Apartments only in buildings and complexes with at least 50 units were included using Yardi Matrix data.) The clear winner? Wichita, KS.
The Kansas city of nearly 400,000 was the only metro that promised more than a square foot per dollar. So $1,500 nets renters a 1,597-square-foot apartment, the equivalent of a four-bedroom house.
“We’ve had a lot of people moving here from other coastal-type states because of the cost of living versus cost of housing,” says Jeffrey Schnell, managing broker of Keller Williams Signature Partners in Wichita. “People get here and are extremely shocked at how much space their money buys them.”
At the other end of the spectrum was Manhattan in New York City. A typical $1,500 rental would net just 262 square feet of living space. (You’d better sell the sectional.)
Overall, the coasts were heavily represented in the bottom 20 metros for overall apartment space. Chicago was the only metro to buck the trend of relatively affordable Midwest cities, butstill offering more than double the amount of space as Manhattan, which landed in the worst metros for square footage alongside San Francisco and Washington, DC.
The unprecedented spike in housing costs has been driven by an extreme surge in demand over the past year during a nationwide housing shortage. Vacancy rates on rentals are lower than they’ve been in three decades, and that’s driving up the cost of available rentals as seekers scrap for space.
“Millennials are renting longer. They want larger apartments,” says Doug Ressler of RentCafe parent company Yardi. “Cost of housing has gone up, and it forces millennials to rent longer duration. And if you have a family, you’re looking for more square footage.”
That demand comes from a multitude of factors, including would-be homeowners waiting out the overheated housing market, the rebounding economy pushing more people back toward their jobs, and former homeowners selling during the upturn in prices to become renters. Some in-demand cities have seen as much as a 50% jump in rental prices in just the past year.
All of this is exacerbated by a shortage of supply. Last year, the gap between households and new homes grew to 5.8 million. While a pandemic slowdown in new households might help builders catch up with demand, similarly pandemic-spurred kinks in the supply chain complicate matters.
“Anywhere between 4 [million] and 5 million houses are required in the next two years,” says Ressler. “We know that that amount of housing is not being built for either rentals or houses.”
Kevin Santana, 32, and his partner were living in an upscale rental building in downtown Chicago for a few months when he got an email from his landlord about a new opportunity. The developer of his building was advertising a rent-to-own program for a brand-new condo in a similarly posh high-rise being constructed next door.
The advertising agency analytics director had been planning to stay in his rental in the up-and-coming Printer’s Row neighborhood for two years while saving to buy a home. But this program promised to give him a big head start at owning his own place, and he jumped at the chance.
He moved into a brand-new unit in a building with amenities such as a pool with cabanas and game rooms. The deal will cover up to 2.5% of the purchase price by applying 50% of his monthly rent toward the down payment. When he finally closes on his two-bedroom, two-bathroom unit next fall, he will have accumulated an additional $15,000 to $16,000 to put toward closing costs.
“Not having to put down that additional money for closing was really appealing,” he says.
The rent-to-own real estate concept has existed for decades, but over the past several years it has grown substantially in popularity. A number of new products and companies have popped up, including Divvy Homes, Home Partners, Dream America, and more. They’ve formalized what once were mostly one-off deals created by landlords and tenants into an entire business model.
Now the industry is booming, particularly as record-high home prices and bidding wars are making it harder for many first-time buyers to become homeowners. Inflation and runaway rental prices are also making it difficult to save up for a down payment.
How good of a deal these opportunities are depends on each potential buyer and the specifics in the contracts they sign. These programs can help buyers in a competitive housing market. However, in most cases, folks could ultimately wind up paying more than if they just bought a home outright. And the majority of folks involved in rent-to-own scenarios never close on their intended homes, despite often paying a markup.
“The pitch is, this is a way for the consumer to get into the market with 1% to 2% down,” says Barry Zigas, a senior fellow at the Consumer Federation of America. “But the question is, what is the cost for that money and how does it compare to a mortgage?”
How do rent-to-own programs work?
Santana’s program, for example, was set up by the developer, Lendlease, as a way to increase preconstruction sales for its newest condo building. As soon as a tenant at the Cooper rental building, where Santana lives, signs the contract, half of the rent gets applied toward 2.5% of the purchase price for the new condo at the Reed, the new building next door—up to $25,000. Unlike with most of these programs that charge extra fees on top of the monthly rent payment, the future Reed homeowners who are residing at the Cooper do not pay anything on top of the rent they had already locked in before signing up for the deal.
In Santana’s case, half of the monthly $2,950 he pays for his townhome—which is significantly below the current market rate of $4,000 to $5,000 because he signed the lease for his “pandemic special” in early 2021—is being applied toward his purchase. (The lease was locked in when renters were leaving the big cities in 2020, so landlords offered deals.) So half of his already reduced rent goes toward paying for the unit he is going to buy.
Lendlease, the developer of The Reed and The Cooper, admits the deal was designed to sell new units quickly, which was especially important given that the city’s condo market never fully recovered from the 2008 crash.
The Lendlease model, which offers 50% of the market-rate rent to go toward the purchase, is a stark departure from traditional rent-to-own setups, where tenants pay an additional fee on top of the market-rate rent that goes toward the down payment on the home.
There are different ways of structuring lease-to-own deals. Most include either an upfront option fee (usually 1% to 5% of the purchase price) and/or higher than market-rate rent that is applied to the principal for usually one to three years. In most cases, those extra fees cannot be recouped by buyers who don’t end up buying the property.
Why folks should carefully evaluate rent-to-own arrangements
The uptick of these long-established contracts where renters pay an extra monthly fee that is intended to contribute to a down payment has some real estate experts concerned.
“Rent-to-own schemes are seldom the most economically efficient way for a consumer to buy anything from furniture to houses,” says Zigas. “Generally, a borrower will have more security and more access to wealth building if they have a simple purchase agreement with the seller and get a mortgage to buy a house.”
When real estate expert John T. Reed first started researching single-family lease options in the early 1990s, he discovered the conversion rate—the percentage of lease-option tenants who successfully ended up purchasing the home—was just 5%.
That’s “horrible,” he says.
Most of these renters who cannot get a mortgage or down payment together at the beginning of the agreement are still unable to get it together when the time comes to exercise the option. That’s why the conversion rate overall has not changed much over the past 30 years.
Divvy Homes, a venture capital darling estimated to be worth $2 billion, claims nearly half of its customers end up buying properties. (Realtor.com® was unable to independently verify this figure.)
After a customer fills out an application, which includes a soft credit check and questions about income and current rent, the company offers the customer a pre-approval and a budget for finding a home. Like any regular real estate deal, the customers seek out properties with help from their real estate agent. But instead of going through the traditional mortgage process, the company makes an offer to buy the home with the customer putting down between 1% and 2% of the purchase price of the home.
So buyers still need to come up with a down payment—it’s just significantly lower than the regular 10% or 20% of the home price.
The deal is laid out in a three-year lease that includes two different prices for buying back the house—within 18 months or after 18 months—that are determined by the company’s evaluation of the market.
There is an appreciation cap, says Thomas Egan, Divvy’s chief financial officer.
Divvy makes its money off of that appreciation as well as the market rent it is charging customers. So the company is essentially acting as a landlord who not only has the monthly mortgage covered by the renters but then makes money off the increased value of the home when it sells.
The average buyback period falls at right around two years, says Egan.
Most frequently, a major life change like a job relocation, divorce, children, or other event is what prevents customers from buying the homes. Less often, it is about their inability to qualify for a mortgage, says Egan.
“In most circumstances, it’s the customer saying, ‘this just is not for me anymore,’” says Egan.
In those cases, the customer gets back 100% of the equity they contributed (an amount that gets paid on top of rent and is put into an escrow account that should equal 3% to 10% down by the end of the three-year lease) minus a surrender fee of 2% of the original purchase price. On a $100,000 house for which a customer puts down $2,000 for a three-year lease that has built up $10,000 in savings equity, the customer would get back all of the money minus that $2,000 down payment.
Rent-to-own companies aren’t always as strict as traditional lenders
Companies like Divvy often have more lenient approval processes than typical banks. The minimum credit score to qualify is 550 (which can work for an FHA loan, just with a much higher interest rate than a borrower with a very good score), and the maximum debt-to-income (DTI) ratio the company approves is 50%, which is right at the top of what FHA will approve.
“A lot of folks who use Divvy need a down payment to buy a home,” says Egan. “Other customers use the product because they’re moving to a new city and want to try out a neighborhood, or [they] just started a new job and need six months of income for a loan.”
Dream America, another rent-to-own specialist, accepts a minimum credit score of 500 with a 50% maximum DTI as long as the applicant has the income and funds needed for an FHA or VA loan (which requires a minimum 580 credit score) approval and an upfront payment equal to 1% of the 12-month purchase price.
Home Partners is a bit more stringent on the DTI, with a maximum of 45%, but its website claims the minimum credit score requirement varies by market and it takes the average credit score of all household members who will contribute to rent. Renters can exercise their right to purchase at any point during their one-year lease, which automatically renews every year up to five years in most states (three years in Texas). There is a predefined price to purchase the home for each year of the lease; however, if the home appraises for less than the purchase price, Home Partners is willing to terminate the contract and return all the earnest money.
What consumers should consider before entering a rent-to-own arrangement
While these programs have certainly come a long way in the past three decades and do accommodate some gaps in the conventional mortgage market, potential customers need to be wary and ask themselves and the companies some serious questions.
What happens if the price of the home exceeds its market value at the time of purchase? And what do they stand to lose if they can’t pull their finances together to qualify for a mortgage?
“If they were unable to buy a home when they started the lease option because they didn’t have a down payment, credit, or income, there’s a good chance that at the end of the option that situation has not changed,” says Reed. “They’re not likely to ever get a mortgage.”
But for folks like Santana, who have solid finances and some sort of life situation that makes rent-to-own worth their while, it can sometimes work to their benefit.
“Rent-to-own wasn’t a make or break for me,” says Santana, who just wanted the free money to buy a place in the kind of building that he already enjoys living in. “I still would have been able to put together a down payment in absence of the program.”
President Joe Biden hopes to throw money at the housing crisis, where homeownership is increasingly out of financial reach for many Americans while families are struggling with hefty rent increases. But are Biden’s proposals enough to truly make a dent in the housing market?
The Biden administration plans to increase the U.S. Department of Housing and Urban Development’s funding by 21% bringing, it to $71.9 billion in his latest budget proposal. The aim is to expand rental assistance to more low-income tenants struggling to pay their landlords, increase the number of affordable housing units available, and help more Americans become homeowners. There is also money in his budget earmarked to fight housing discrimination.
But does it go far enough?
“We are prepared once again to turn a moment of crisis into a breathtaking opportunity. We are stronger today than we were a year ago— and we will be stronger a year from now than we are today,” Biden wrote in the budget message.
The budget must still be approved by Congress, which can adjust the funding levels, before it can be enacted.
“It’s good, but it’s not enough. It’s good, but it’s not bold,” says Edward Goetz, the director of the Center for Urban and Regional Affairs at the University of Minnesota in Minneapolis, of the increase in HUD funding. “We need the implementation of new ideas. We need to go beyond incremental increases in rental vouchers and other programs we’ve been running for the last 20, 30 years.
“We need to see families that are stably housed,” he says. “We need families who can find affordable homeownership opportunities in their communities.”
Biden’s budget would increase rental assistance for low-income Americans
The new budget would add an additional $6.4 billion to its rental voucher program to help an additional 200,000 low-income families afford housing and move to communities with more opportunities. This would include emergency funding for renters who need help covering their rent for a month due to unforeseen circumstances, like losing a job or missing work due to an illness.
But the increased rental assistance might not help as many families as intended with rental prices up 17.1% in February compared with the previous year, according to the most recent Realtor.com® data. Prices surged even higher in many large cities.
And some argue that more housing assistance could drive prices up even further.
“At the end of the day, when you make more money available for things, it makes it easier for prices to rise,” says Jonathan Bydlak, director of the governance program at the R Street Institute, a right-leaning think tank. “That’s part dangerous at the moment when we’re in an inflationary environment.”
More money would be earmarked to put up new affordable housing
One of the biggest problems in the for-sale and rental housing markets, if not the biggest issue, is the dearth of available housing. The shortage has resulted in skyrocketing home and rental prices as would-be homeowners and renters battle it out over a limited supply of housing.
“Our investment in affordable housing hasn’t been strong enough. It’s resulted in people spending exorbitant percentages of their incomes on housing,” says Goetz. “After paying the rent for the month, they don’t have enough funds to cover other expenses.”
The budget aims to increase the amount of available affordable housing in various ways. Biden would like to put almost $2 billion (roughly $600 million more) toward the construction and rehabilitation of reasonably priced affordable rental homes. It is supposed to also provide homeownership opportunities.
His administration would like to use $180 million to create 2,000 new units of affordable housing for the elderly and those with disabilities. And there would be $50 billion in funding and low-income housing tax credits to make it more appealing for developers to erect more affordable housing.
“Today’s housing markets suffer from over a decade during which we did not build enough new homes to accommodate a growing population,” says George Ratiu, manager of economic research for Realtor.com. But “the majority of decisions controlling new residential developments is made at the local level. While the White House’s renewed focus and increased spending on housing programs is welcome for millions of families, the proposed budget’s impact is likely to be muted on overall market dynamics.”
The budget would also provide money to reduce homelessness; assist communities in modernizing their infrastructure, offering social services and economic development opportunities, and building parks; and invest in housing in Native American communities.
In addition, it provides funding to address lead-based paint and health hazards in the homes of low-income families with children. Remediating lead paint in homes was a priority of the previous HUD secretary, Ben Carson.
The budget aims to help more Americans become homeowners
The new budget provides money for the Federal Housing Administration to guarantee loans for underserved borrowers and would also fund down payment assistance pilot programs for first-generation as well as lower-income buyers.
“We need a well-functioning homeownership market so people who want to can take the step from renter to owner and open up units in the rental market,” says Goetz. “When that becomes difficult … then it stops up the entire housing market and the repercussions flow downward.”
Some worry that making homeownership more attainable to buyers on the margins might prop up a real estate bubble.
“You may have people who are ultimately not able to [financially] sustain homeownership,” says Bydlak. In the run-up to the Great Recession in the 2000s, “we basically encouraged homeownership and it was clear there were a lot of people owning more home than they could afford, and we ended up in a bubble.”
Ending housing discrimination is another priority of the Biden administration. The budget would provide $86 million for fair housing enforcement, education, and training on how to spot it, prevent it, and address it. The money would be awarded to local and state fair housing organizations in the form of grants to help them do their work.
The president’s “FY23 HUD Budget charts a course for a better future—one where every person has access to a safe, stable home and a fair shot at opportunity, security, and a better life,” HUD Secretary Marcia Fudge tweeted on Monday.
Another wave of COVID-19 infections appears to be on the way thanks to a contagious, new variant—but this one is not expected to disrupt the housing market like during the onset of the pandemic and the previous surges.
About 35% of COVID-19 cases in the U.S. are now this new, highly contagious BA.2 variant, according to the U.S. Centers for Disease Control and Prevention. However, this latest development in the two-year pandemic is not expected to lead to another mad dash out of the big cities and into the suburbs—or to push home prices even higher than they’re already rising.
The shortage of homes for sale, which is reaching crisis proportions—along with record-high prices for homes for sale and rent, and surging mortgage interest rates as the nation barrels into one of the busiest times of the year for real estate—is expected to weigh more heavily on homebuyers and sellers.
Moreover, high inflation, spiking gas prices, the war in Ukraine, and the U.S. Federal Reserve raising interest rates are the bigger factors at play affecting the economy, which could then spill over into the housing market.
“It’s going to take something catastrophic to really affect housing like we saw two years ago,” says Lawrence J. White, an economics professor at New York University.
While the BA.2 variant appears to be even more transmissible than omicron, experts don’t think it makes people as sick as with delta. It’s believed to cause milder sickness, similar to omicron’s, with vaccines and booster shots providing some measure of protection against severe illness.
Those who previously had omicron aren’t likely to become reinfected with this latest strain of the virus.
“The combination of available vaccines, treatments, and increased immunity means that [the nation] is on the road toward a post-pandemic reality,” says George Ratiu, manager of economic research at Realtor.com®. “The war in Ukraine and the disruptions to geopolitical stability, as well as supply chain routes, is a larger concern for the U.S. economy and real estate markets.”
The pandemic initially helped to push mortgage interest rates down to record lows. That helped homebuyers to afford surging home prices. But that’s not likely to happen again anytime soon.
Mortgage interest rates have jumped up to nearly 4.5%, the highest they’ve been in three years, as a result of the Federal Reserve raising its interest rates to tame high inflation. The Fed is expected to raise short-term interest rates a few more times this year to tamp down on inflation, which will likely push mortgage rates up even higher.
Rates fell at the start of COVID-19 because investors who were spooked by the virus moved money out of the stock market and into bonds, including mortgage bonds. In addition, the federal government bought up mortgage bonds as well to help to stabilize the economy during the early days of the pandemic as unemployment initially soared.
However, with the Fed continuing to raise rates, mortgage rates will likely keep climbing.
“Mortgage rates are going to be driven by the Fed’s interest rate policy,” says White. “The Fed is concerned about inflation at the moment. That means higher interest rates and that means higher mortgage rates.”
The good times brought on by low mortgage rates aren’t the only thing that’s likely over.
The days of mad dashes to the suburbs and more remote areas seen at the onset of COVID-19 have likely come to an end, or at the very least are slowing. Americans have had two years to sort themselves out and may be more reluctant to move farther out now that many white-collar workers are being called back to their offices.
“However, the suburbs will continue to attract millennials, as they move toward their 40s and, with children in tow, to look for good public schools,” says Ratiu.
If homeownership is a defining dream of most Americans, then purchasing a vacation home is something deeper still: the American fantasy. After all, in these fraught times, who doesn’t crave a private oasis to retreat from the world? Kids kicking back in a charming rustic cabin! Zoom calls on the lake! A sweet country home far from the usual grind of urban or suburban stress. What’s not to love?
But transforming this particular fantasy into reality has become tougher than ever.
Like the rest of the real estate market, vacation homes are getting far more expensive, putting them further out of reach of many would-be buyers. Some urban dwellers are even choosing to buy a secondary home before securing a primary residence because they can’t afford the type of home they home would like to buy, sending prices even higher. So the Realtor.com® data team went in search of the places where folks can find the most affordable vacation home right now.
These cheaper destinations might not have the name recognition of Cape Cod in Massachusetts or Lake Tahoe on the California-Nevada border, but they’re relatively affordable, not too far from larger cities, and typically near water or the mountains. They offer premium outdoor fun and relaxation at bargain-basement prices. And even as the COVID-19 pandemic (hopefully) winds down, they can serve up still-alluring respites from the crowds.
“We’ve seen rising demand for homes in vacation destinations within a three-hour drive of major metro areas, especially in mountain and waterfront areas where people can be outdoors and there’s less [population] density,” says Daned Kirkham, senior director of real estate at Vacasa, an international vacation rental management company. “Even as urban markets have seen tourism return, the popularity of off-the-beaten-path getaways hasn’t wavered.”
After peaking in 2020 at the beginning of the pandemic, the number of vacation home sales is down 15% so far this year compared with the year before, according to Realtor.com analysis of mortgage application data from Optimal Blue, a real estate analytics firm. But that’s not due to low demand. Sales are down at least partly due to the lack of inventory and high prices.
As an investment, vacation homes are still delivering big-time. Many buyers are choosing to give up a few choice weekends so they can rent out the properties on websites like Airbnb and Vacasa to help pay for them.
“Vacation rental home buyers often have more range in their budget, because of the anticipated rental income to help cover costs,” Kirkham says.
The median sales price for a vacation home in the U.S. was $429,000 last month, according to Optimal Blue data, compared with the $392,000 median list price for all homes. The data does not account for sales made in cash (a typical method of buying vacation homes for the wealthy).
To be considered a vacation area, second-home sales had to make up at least 20% of all home purchase loans in January and February. (Investment homes were not included.) Each place needed at least 25 second-home purchases the first two months of this year to earn a spot on the list. The list was limited to one metro per state to ensure geographic diversity. (Metros include the main city and surrounding towns, suburbs, and smaller urban areas.)
While the hit Netflix show “Ozark” might have tarnished this region’s reputation for some, Branson is actually a popular, family-friendly vacation destination for those who love the outdoors. Sure, it’s still best known for the dozens of places to see country music and rip-roarin’ live attractions like Dolly Parton’s Stampede, a western-style dinner theater, but Branson is located along 43,000 acres of water, perfect for paddleboarding, kayaking, or boating. Trout fishing is also a big sport here, especially in the clean, cool waters of Lake Taneycomo.
It’s consistently ranked high on our annual Most Affordable Lake Towns list, because of the many different types of properties and price ranges available.
“The Branson area has a very diverse inventory of homes,” says Jim Viebrock, a broker with Murney Associates Realtors in Springfield, MO. From lakefront cabins to condos, there are plenty of options no matter the price range.
About halfway between Scranton and Allentown, East Stroudsburg has long been a destination for people from Philadelphia as well as New York and New Jersey looking for an escape.
It’s located in the Pocono Mountains, where there are plenty of things to do year-round, including four-season hiking, lake swimming in the summer, and skiing in the winter. Buyers here get good use out of their vacation homes.
While many vacationers tend to keep to their cabins, East Stroudsburg’s downtown is dotted with quaint shops and restaurants, ideal for spending the day.
About an hour from Milwaukee and situated along the Kettle Moraine State Forest, Whitewater is a fine spot for hiking, mountain biking, or horseback riding through its dappled woods and vast prairies.
In the summer months, locals have access to public beaches and picnic areas, as well as plenty of golf courses. They can also enjoy a free waterski show on Whitewater Lake put on every week by the Minneiska Ski Team. In the winter, the lake becomes a popular ice fishing spot, especially during the annual Fish-A-Ree competition in February.
Home to the University of Wisconsin-Whitewater, this college town has lots of cultural activities as well. Theater productions are put on throughout the year, and there are a host of galleries to explore. Folks who like to entertain can snag a three-bedroom, single-family home with room to spread out just listed for $364,900.
This golf and beach mecca was recently ranked No. 1 on U.S. News & World Report’s Fastest Growing Places in the United States list, and it’s not hard to see why. There are endless options here.
Besides enjoying the long, pristine beach, visitors can play golf on one of 86 courses, stroll the breezy boardwalk, or just chow down on some classic Carolina barbecue.
This coastal city has 60 miles of continuous sand, and builders have been putting up townhomes and condos (popular among second-home buyers) at a rapid pace. A construction boom in recent years keeps prices relatively low since there’s less competition for homes.
“There’s a lot of stuff on the market, a lot of new construction everywhere,” says Tom Parry, a Realtor® at Century 21 in North Myrtle Beach.
For those who don’t mind a short drive from the beach, a three-bedroom new build on a corner lot is on the market for $309,000. An oceanfront one-bedroom condo with plenty of amenities is listed for $184,500.
Nestled in the Great Smoky Mountains, Cullowhee is about an hour west of Asheville, another popular vacation area in North Carolina. It’s a college town, and students at Western Carolina University keep the area busy, with sporting events, art shows, and events throughout the school year.
Outdoor enthusiasts can kayak, hike, and mountain bike in Great Smoky Mountains National Park, or take a scenic drive along the idyllic Blue Ridge Parkway. Water lovers can spend the day at Lake Glenville, which has swimming, water-skiing, and three breathtaking waterfalls to cool off in.
Located in Central Florida, a little more than an hour from Orlando, The Villages caters to a very specific market. At least one resident has to be 55 years or older to live in this master-planned, retirement community—the self-proclaimed and unchallenged “Active Adult Retirement Community” capital of the U.S. with well over 80,000 residents. Most live here full time, but that’s not deterring buyers from scooping up second homes here.
It is so large, it counts as its own metro, and it was also the fastest-growing one in the entire country over the past decade, according to the latest census data. Every day feels like a vacation with complimentary golf, pools, and plenty of bocce and pickleball courts to choose from. And events and clubs throughout the year keep residents’ social calendars busy.
An oasis in the desert, Lake Havasu City is a mecca for both spring-breakers and retirees. While that might seem like an odd mix, with 290 days of sunshine per year and year-round recreational activities, it all starts to make sense.
Situated at the junction of Arizona, California, and Nevada, Lake Havasu attracts visitors from all three states, with many Californians tempted by the comparatively affordable real estate and low taxes. This two-bedroom, single-family home with lake views is on the market for less than $500,000.
This quaint coastal community east of the Chesapeake Bay is filled with historic towns, crab shacks, and natural beauty, including its sandy beaches. Salisbury is a haven for boaters, anglers, and swimmers alike. The bike-friendly city also has plenty of green spaces and woods for landlubbers. A newly constructed four-bedroom home a quick drive to downtown is on the market for $360,000.
Nearby Ocean City, which is part of the Salisbury metro area, is a summer hot spot for city slickers making the three-hour drive from Baltimore and Washington, DC. Located on a barrier island between the Atlantic Ocean and the Isle of Wight Bay, O.C. as the locals call it has miles of beaches to explore. A one-bedroom condo close to the boardwalk was just listed for $180,000.
Claremont might not exactly scream vacation destination, but Bostonians have been making their way there in earnest since the pandemic days. While the 1.5-hour commute might be a bit unrealistic once people start returning to the office, second-home buyers are able to enjoy their investment all year.
Outdoor lovers can kayak and fish along the Connecticut River in the summer, hike among the orange-red leaves during the leaf-peeping season in the fall, or ski at the Arrowhead Recreation Area in the winter. A two-bedroom farmhouse along the river in nearby Weathersfield, VT, is listed below $300,000.
This vacation spot might be under the radar for some, but it’s an idyllic spot in the Great Smoky Mountains that attracts more than 10 million visitors per year.
About 30 minutes east of Knoxville, Sevierville is also the hometown of Dolly Parton (nope, not Branson) and the inspiration behind her hit song “My Tennessee Mountain Home.” Her eponymous theme park, Dollywood, is a short drive away. The region is also popular among people who love to boat and fish. Nearby Douglas Lake is known as one of the best lakes for largemouth bass fishing in the country.
Cabins are key, and they vary from log cabins to chalets to Craftsmans.
Most buyers want the full mountain experience, says Ron Laughlin, a real estate agent at Century 21 MVP, but centrally located properties with community amenities tend to sell at a premium.
“The ones that are closest to town generate the best income,” Laughlin says.
For those looking to spread out, a traditional log cabin on more than an acre of land is on the market for $349,900.
During the COVID-19 pandemic, Americans traded cold, expensive parts of the country for cheaper, warmer ones in the South.
The counties that saw the biggest population growth were predominantly in the South, according to a recent U.S. Census Bureau report. Five of the top 10 counties seeing the most new residents were in Texas. Some counties, in Arizona and Florida, were also popular with retirees.
And many of these new “hot spots” were the more affordable, suburban counties where those leaving the bigger, more expensive cities could snag a larger home with some land—a place to ride out the pandemic.
“Texas is like an open door. You can get a 2,000-square-foot house for a lot less than in the Northeast or the West Coast,” says demographer Ken Gronbach, of KGC Direct, based in Bonita Springs, FL. “And there are endless places to work.”
Maricopa County, home to Phoenix, saw the most new residents move in between July 1, 2020, and July 1, 2021. The county added more than 58,000 new residents. As a result, median home list prices in the country were up about 8.4% from 2020 to 2021, according to Realtor.com® data.
It was followed by Collin County, TX, just outside of Dallas; Riverside County, CA, just outside of Los Angeles; Fort Bend County, TX, right outside of Houston; and Williamson County, TX, just north of Austin.
Rounding out the top 10 were Denton County, TX, in the Dallas suburbs; Polk County, FL, home to Lakeland; Montgomery County, TX, in the Houston suburbs; Lee County, FL, home to Cape Coral; and Utah County, UT, home to Provo, which is outside of Salt Lake City.
Nearly three-quarters, 73%, of U.S. counties experienced a natural decrease in residents due to more deaths and fewer births during the pandemic, according to the report.
The largest population declines were in the nation’s most expensive cities, including Los Angeles, New York City, and San Francisco. Many white-collar workers who no longer had to commute to their offices during the pandemic relocated to cheaper, warmer parts of the country.
Four of the five counties that make up New York City lost population as did three in California’s San Francisco Bay Area.
“California’s housing is ridiculously [high-priced]. It’s not affordable,” says Gronbach. The Northeast is “cold and expensive. People want warm.”
Los Angeles County, CA, lost the most residents, at just under 185,000, according to the report. It was followed by Manhattan (New York County, NY); Cook County, IL, home to Chicago; Brooklyn (Kings County, NY); and Queens County, NY.
The rest of the top 10 were San Francisco, CA; Silicon Valley’s Santa Clara County, CA; Bronx County, NY; Alameda County, CA, just outside of San Francisco; and Miami-Dade County, FL.
“Baby boomers are moving out of the Northeast because it’s cold, and their kids are moving out of the Northeast because they can’t afford to live up north,” says Gronbach.
For a buyer in search of extra credit, this week’s most popular home on Realtor.com® may be the perfect project.
It’s not really a home—it’s a former elementary school in Ohio that’s landed on the market with a five-figure price tag. Built in 1898, Prospect Elementary School offers 17,000 square feet of space. With a list price of $95,000, the math works out to a stunning $6 per square foot.
The historic schoolhouse is waiting for a savvy buyer to transform it into a one-of-a-kind residence. The classrooms, offices, and gym are still intact, so you’ll need to apply some creative thinking to turn the school into an A-plus home.
Away from the classroom, you also clicked on a castle-like home with wild decor in Detroit, a modern Cape in Virginia, and the $40 million California mansion featured in the movie “Scarface.”
We won’t make you stay after class, but we strongly urge you to scroll on down and check out all 10 of the week’s most popular homes.
Price: $400,000 (sale pending) Why it’s here: Built in 1812, the Reuben Maxfield House offers more than 1,500 square feet of living space. It comes with a separate studio and several outbuildings.
Modernized and expanded over the years, the three-bedroom Cape is in a prime location about 20 minutes outside of Portland. The bright and airy home has cathedral ceilings, two fireplaces, restored hardwoods, exposed beams, and built-ins. It appealed to a buyer and went into contract in less than a week.
Price: $195,000 Why it’s here: From the outside, this brick home looks like a castle. But the inside is a time capsule of sorts with a number of interesting paint and flooring choices, from the pink bathroom to the golden carpeting.
This five-bedroom home features a living room with a stone-front gas fireplace and a solarium clad in colorful Pewabic tile. Being sold as is, the home will need a fair amount of TLC.
Price: $1,999,900 Why it’s here: This architectural delight overlooks Little Cedar Lake.
To take in the views, the three-bedroom, timber-frame home features walls of windows. The open floor plan includes a chef’s kitchen with new quartz countertops, and the maple flooring was recently refinished. There’s also a large custom bar, home theater, and game room.
Price: $39,995,000 Why it’s here: Located in one of the nation’s most coveted towns is the mansion known as El Fureidis. It was memorably featured in the 1983 movie “Scarface.”
Sitting on 10 verdant acres, the gorgeous 11,547-square-foot mansion was designed as a classic Roman villa. Still camera-ready, the seven-bedroom home was designed by Bertram Goodhue, and the grounds feature specimen trees and Persian water gardens.
Price: $1,299,900 Why it’s here: It’s picture-perfect! Built in 1861, the adorable home dubbed Pumpkin Seed sits along a canal.
The three-bedroom home features original hardwoods, exposed beams, and a stone fireplace. Modern updates include a chef’s kitchen with a custom stone countertop, a wraparound deck with a hot tub, and a built-in grill.
Price: $864,000 Why it’s here: Has a clam, seashell, or flying saucer landed in the Outer Banks? The iconic design of the Foy Home has folks talking.
Besides its odd shape, this four-bedroom house features cedar shakes, copper flashing, and aluminum metal roof. Inside, you’ll find coconut palm flooring, hand-carved teak columns, and imported granite kitchen counters.
Price: $475,000 Why it’s here: Is this another case of decor run amok? For lovers of maximalism who aspire to become landlords, this art-filled triplex located across from Corbin Park offers two one-bedroom units and one three-bedroom unit.
Inside, you’ll find wood paneling, bright colors, oodles of mosaic wall tiles, and retro carpets.
Price: $4,999,990 Why it’s here: Fans of retired Nashville Predators goalie Pekka Rinne helped elevate this modern home in the Music City. Following our report on the Finn selling his luxury six-bedroom home, the news spread to his homeland. As a result, clicks on the listing came pouring in from hockey fans.
Located in West Meade, the custom home sits on a 2-acre lot. Elegant appointments include oak floors, shadowbox baseboards and trim, a marble-wrapped bath, illuminated stairs, and smart lighting throughout.
Price: $95,000 Why it’s here: Could you class up this joint? You can (literally) kick it old-school at Prospect Elementary School for the bargain price of just $6 a square foot!
Built in 1898, the historic school building offers nearly 17,000 square feet of space for a new buyer to play with. Its low, low list price means the buyer will have plenty of dough left over to transform the classrooms, offices, and gym into a cool home.
Los Angeles homeowners have more than a few reasons to knock on wood.
The City of Angels just topped a list of the nation’s most termite-infested metropolitan areas, according to a recent report from pest control company Orkin. L.A. knocked off perpetual champion Miami to claim the dubious honor for the first time, with Washington, DC; Tampa, FL; and Chicago rounding out the top five.
Termite infestations can cause dangerous—and expensive to fix—structural damage to homes if the problem goes untreated.
The list was based on metropolitan areas (that’s the city and surrounding towns and suburbs) where Orkin performed the most first-time termite treatments between Feb. 1, 2021, and Jan. 31, 2022.
The “winners” of this year’s list all shared similar climates that made them ideal homes for both subterranean (in the ground) and dry-wood species of termites.
“Miami and Los Angeles are very similar as coastal cities,” says Orkin entomologist Glenn Ramsey. “Both have subterranean and dry-wood [termites], so that compounds termite activity. High humidity, high moisture in the ground, will elevate the ability of termites to survive in larger numbers.”
Termites are drawn to sources of cellulose, including the wood inside of homes. They range from a 16th of an inch to about an inch long. That small size doesn’t mean they are an entirely hidden menace, however. Termite infestations will show telltale signs that can be spotted with a bit of vigilance.
Dry-wood termites produce holes in the wood they are eating, kicking out a pile of pellets through the hole. Subterranean termites will build mud tubes from the ground to the wood that can be spotted along the foundation of a home.
Even well-hidden termites will show signs of their presence like warped flooring, rippled paint, and hollow-sounding wood in the areas where they are feeding.
Luckily, there are steps homeowners can take to make even the hidden parts of their home less appetizing to these pests. Ensuring that moisture is not collecting around the foundation of your home is a good way to ward off termite species that need moist ground to live.
“A good thing that homeowners can do is just inspect their yard,” says Truly Nolen Pest Control branch manager Ed Baker. He’s based in Pompano Beach, FL. “In my yard specifically, I noticed that my fence was starting to come apart. When I did a very close inspection, I saw that it had termites in it. If you have any stumps around the property, you can also drill into them and see [if there are] termites in there.
If you spot termites in your home, it’s not the end of the world. Termites consume wood relatively slowly. It takes around five months for 60,000 termites to eat a foot of a two-by-four. A difference of a few days between discovery and treatment won’t do much harm.
“There’s nothing you need to do today to prevent more damage,” says Ramsey. “The best thing you can do is write down where you saw the termite activity, for when pest control comes.”