NAGS HEAD – Throughout the fourth quarter of 2021 and into the first months of 2022, demand spiked among one segment of the real estate market: second homes.  But a new analysis of mortgage-lock data from national real estate brokerage firm Redfin found that this demand is falling, potentially due to rising mortgage interest rates.

Often called a vacation home, the “boom” in demand for second homes that was observed throughout 2021 now appears to have slowed, despite demand remaining 13 percent higher than prior to the onset of the global COVID-19 pandemic, the Redfin analysis found.

“The pandemic-driven surge in sales of vacation homes is coming to an end as mortgage rates rise at their fastest pace in history, causing some second-home buyers to back off,” said Taylor Marr, deputy chief economist at Redfin.  “When rates and prices shoot up so much that a vacation home starts to look more like a burden than a good investment and a fun place to bring your family on the weekends, a lot of prospective buyers have second thoughts.”

Nationally, the growth in demand for primary residences outpaced the demand for second homes in March and in February 2022, Redfin’s analysis found.  Mortgage-rate locks for primary homes were up 34 percent compared to pre-pandemic levels.  A mortgage lock occurs when a prospective borrower “locks in” a specific mortgage interest rate with a lender.  According to Redfin, about 4 in 5 people who lock in a mortgage interest rate go on to complete the transaction.

Beach or mountains? There’s a rush to buy vacation homes

What’s happening along NC’s coast

Along North Carolina’s coast, there were fewer homes available for sale in March 2022 than there were in March 2021, and far fewer than in March 2020, according to data from the Outer Banks Association of REALTORS.

Last month, there were 266 homes available, down 30 percent from March 2021, when there were 380 homes available.  But in March 2020, there were 1,360 residential properties available on the market, the data shows.  Still, even with the low inventory, there may be signs that demand along the Outer Banks is slowing.

“With low inventory and higher interest rates the market appears to be cooling off,” the March 2022 report from the association reads.  But even if demand has slowed, prices appear to remain high in the region.

“In the entire MLS, there are only 50 residential listings that are priced less than $400K and only 19 of these properties are on the Outer Banks between Corolla and Hatteras,” the report notes.

Redfin image. Source data from a Redfin analysis of Optimal Blue data.

Demand for vacation homes spiked last year

Demand for primary residence mortgages has remained consistent, since June 2020, according to Redfin.  But demand for vacation homes spiked in the middle of 2020 and remained high throughout 2021.  At the demand peak, said Redfin, the demand for second homes was up by 88 percent compared to pre-pandemic levels.

But, workers are returning to offices, including some hybrid work environments, which may decrease demand for second homes, Redfin noted.  Mortgage interest rates rose last week, after increasing throughout March as well, and are now up nearly 1.6 percentage points compared to last year according to Freddie Mac data.  That’s an important factor, Marr noted.  Other factors may be contributing, as well, said Marr.

“The new second-home loan fees that kicked in on April 1 were also a deterrent,” said Marr.  “Plus, some buyers’ down payments–and their nerves–probably took a hit when the stock market dipped over the last few months.”

The rise in loan fees for second-home loans increased by about 1% to 4% starting on April 1, Redfin noted, which means that there’s an additional cost of roughly $13,500 on a typical $400,000 vacation home for the typical borrower.  And a mortgage rate increase would further reduce a would-be buyer’s purchasing power, which Redfin previously said is already impacting homebuyers in the Triangle.