Sales Revive in Vacation Home Market : Prices Are Right, Interest Rates Down, Deductions Remain

This summer, when the threat of tax reform nearly killed sales of its Palm Springs-area vacation homes, Sunrise Co. offered buyers what it called “an unprecedented proposal.”

The Palm Desert-based developer offered to buy back homes from buyers--at the original price plus fees--through the end of 1986 if changes in the tax code limited tax deductions from mortgage interest on second homes, as had been proposed by President Reagan.

“We were trying to stimulate the market a bit,” recalls William Bone, chairman of Sunrise, noting that sales in the first six months of this year were “at a standstill.”

Today, such stimulation is no longer necessary, Bone says.

Sales Have Revived

Buoyed by lower interest rates, a stronger economy and indications that a new tax bill is not likely to limit interest deductions on second homes after all, sales of vacation homes have revived from a nearly year-long slump, housing officials say. From Maui to Colorado, Palm Springs to Florida, sales are returning to normal and in some cases are nearing record levels, far above the normal seasonal increases expected at this time of year for winter-oriented vacation areas, developers say.

“Our sales are 30% above a normal year and double over last year,” says John W. Temple, president of Boca Raton, Fla.-based Arvida Corp., a major developer of vacation homes in Florida.

The winter season from October through May “is going to be our best season since 1979,” Sunrise’s Bone predicts.

Bone, who also heads Residential Research Associates, a nationwide coalition of second-home developers, expects sales nationwide to total 125,000 units next year, the best year since the record years of 1978 and 1979, when Americans bought as many as 150,000 units annually. (Exact figures on vacation home sales are not officially recorded).

Off to Good Start

“All the key elements for a turnaround are here,” says Tom Dempsey, president of Mammoth Lakes-based Dempsey Construction Corp., a leading developer of vacation homes at ski resorts in California, Colorado, Utah and other states. “Interest rates are down, the prices are right, the economy is in good shape and the ski season is off to a good start, with good snow in all resorts.”

Such a revival comes amid continued strength in the housing industry overall, evidenced by recent gains in housing prices, starts, permits, sales of existing homes and other indicators.

“Housing is the one bright star in the U.S. and California economy today,” says Michael B. Salkin, head of California economic research at Bank of America.

Sales are now expected to revive even more, housing experts say, because the House Ways and Means Committee earlier this month approved a tax bill that would keep full deductibility of mortgage interest on second homes, as is the case under current law.

While there is no guarantee that the full House, the Senate or President Reagan also will support retaining full deductibility on second-home mortgage interest, some tax advisers say their clients are going ahead and buying anyway because homes bought today are likely to be grandfathered under current tax rules.

“Many people are saying, ‘What can I lose if I go ahead and do it?’ ” says Stan Ross, co-managing partner of Kenneth Leventhal & Co., a Los Angeles-based accounting firm specializing in real estate.

The sales slump started late last year, when the Treasury Department unveiled its first tax reform proposal, subsequently dubbed Treasury I. That proposal, along with President Reagan’s subsequent Treasury II proposal announced last May, sought to restrict deductions for interest on loans for cars, vacation homes and other purchases not including a primary residence.

Both proposals would have limited such deductions to $5,000 above the taxpayer’s income from investments, such as stocks and bonds. Thus, if a taxpayer’s investment income was $10,000, his deduction would be limited to no more than $15,000.

Scared Off

Some taxpayers buying second homes for investment purposes may also have been scared off by provisions in the Reagan reform plan to eliminate the investment tax credit and reduce depreciation write-offs.

Compounding the sales slump for developers was a glut of already built but unsold second homes on the market, a glut that further depressed prices, says Joel Singer, chief economist for the California Assn. of Realtors.

Prices of homes at the Mammoth Lakes ski area in the Sierras fell as much 40%, says developer Dempsey. “Construction came to screeching halt,” he says, adding that his sales volume fell 66% and many plumbers, electricians and other construction workers were laid off.

To stimulate sales, many developers offered concessions, such as allowing buyers to forgo payments for a few months, rebates for cash purchases and interest-rate subsidies. Sunrise’s Bone says his firm was the only developer to publicly offer to buy back second homes from buyers in the event that tax reform limited interest deductions. But others did it privately, he contends.

“We sold a lot more homes in September and October than we otherwise would have,” Bone says, adding that the widely advertised offer was ended in October after about three months.

Potential buyers also devised ways to get around any threatened reduction in interest deductions. Perhaps the most popular tactic was for a buyer to borrow from the equity in his primary home and use the cash to buy a second home. Thus the buyer would avoid heavy interest payments on the second home and be able to fully deduct the added interest payments on the primary home.

Bone estimates that 20% of the buyers during the summer followed such a strategy. “Normally, next to no one would do that,” he says.

Industry Optimistic

But in the past two months or so, industry experts say, sales began to revive as more and more people came to believe that tax reform would not be passed until next year, or that full second-home interest deductions would be retained. And now, with the House Ways and Means Committee restoring the full deduction, industry leaders are optimistic.

“This is the time to buy,” ski-area developer Dempsey says. “Prices are still depressed because we’re still just coming out of it (the slump).”

Developers report that interest rates of between 10% and 12% on fixed-rate loans are as much as two percentage points below their levels of last year, while prices are about the same as last year. Sunrise’s Bone notes that prices on two-bedroom condos in the Palm Springs area range from $75,000 to $150,000, depending on location, about the same as a year ago.

Still Weak

But despite signs of optimism, many segments of the industry are still weak. Many developers are still trying to work their way out from under a record number of foreclosures, the legacy of the latest slump and the housing-industry recession of the early 1980s, says John Fitts, chief executive of Sherman Oaks-based Colony Resorts Inc., which manages hotels and resorts in California, Hawaii, Texas and several other states.

Fitts reports that his firm is managing one foreclosed project on Mustang Island, off the coast of Corpus Christi, Tex., in which only 60 of 220 units were sold. The firm is managing at least three more projects in Hawaii that are under the threat of foreclosure, he says.

Ironically, Fitts says, some of these troubled projects are doing a brisk rental business. A 580-unit condominium project which his firm manages in Honolulu is enjoying a 94% rental occupancy rate, although the project is in the process of entering foreclosure proceedings due to slow sales.

“The rental market has been very strong,” Fitts says; now finally, he says, “the buying market is coming back too.”