Vacation-home buying supported the mortgage market during the pandemic, but the market still faces challenges

The pandemic triggered major changes in the United States’ housing market right from its inception. Changes in the behavior of those buying and selling homes were particularly striking as buyers’ typical tendencies altered and the urgency to sell heightened.

The onslaught of the pandemic caused many people interested in real estate to hurriedly purchase vacation homes as investment properties. Now, about a year later, these individuals could be facing challenges related to financing those properties.

One major issue testing the real estate market’s resilience are regulations put in place by mortgage loan companies Fannie Mae and Freddie Mac. The mortgage giants, who get a large percentage of their support from the government, began to restrict how many of the loans they could purchase.

According to the set limitations, no more than 7% of the mortgages that lenders sell to either of the top lenders can be linked to vacation homes. The restriction is based on the total dollar value of loans purchased by Fannie and Freddie, although the two companies are fulfilling the rules on lenders that directly sell loans to them.

This is particularly noteworthy because in the mid-2000s lax mortgage-lending standards enabled borrowers with subpar credit histories to buy homes that were well beyond their means, often with mortgages that, at first, required low payments. This, in turn, led to the construction of new homes and a booming oversupply of residences.

Financial companies, in turn, marketed these risky mortgages as securities and sold them to investors. When more homeowners started falling behind on their payments, lenders suffered huge losses, putting the entire real estate and financial system in jeopardy.

Between 2006 and 2014, a domino effect ensued and approximately 9.3 million households went through foreclosure, forcing homeowners to give up their homes.

While the pandemic has left many Americans cash-strapped, most white-collar professionals managed to keep their jobs, many even prospering, allowing them to purchase vacation homes.

Other sources point to the influence the pandemic has had in lowering mortgage rates, causing potential homebuyers to find owning a vacation home both attractive and affordable. Many companies shift to remote working in light of the pandemic has also led to the newfound flexibility of professionals to work from home.

According to real estate agents, this triggered bidding wars across America’s vacation hot spots. Because the market has been buzzing with activity, it has attracted investors, many of whom rake in the cash by flipping houses.

Taylor Marr, a Redfin economist told the Redfin Press Center that the popularity of vacation towns is not a fad. Americans have realized remote work is here to stay, allowing many people the ability to work from anywhere.

Although those who have purchased homes are generally fortunate, the rule change by Fannie and Freddie is still pushing up mortgage rates and could continue to do so for as long as the real estate market remains unpredictable.

Others are opting to draw from the equity in their primary residences to pay for their vacation homes. Many wealthy buyers can afford to make the extra payments and won’t be affected if they have to pay extra interest rates each month if needed.

Economists told The Wall Street Journal that the current housing boom is more stable than the last one and poses fewer risks. However, the downside is that there are many more barriers, leading to additional challenges for buyers who aren’t already homeowners looking to make their first home purchase.

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