“If you have the money and plan on staying put for the long term, now may be a good time to buy” a vacation home, according to a recent article in the Wall Street Journal. As supporting evidence, the article, written by Jessica Silver-Greenberg, refers to National Association of Realtors data indicating that median second-home prices were down an average 25% last year compared with 2006 prices. Nowhere in the article is there any reference to what effects a potential U.S. default on its obligations would have on the housing market, and specifically on second-home ownership.
One likely outcome of a default, according to many economists, is that the costs of borrowing money would rise, perhaps significantly. Those current 5% mortgage loans could conceivably double, making anyone who locks in a low-interest loan today (say, to purchase a golf community home) look like a genius tomorrow. (I recall my wife and I held a mortgage at a rate of 13.5% in the 1980s.) The U.S. does not even have to default for interest rates to rise; if the currency markets perceive a half-baked solution to the nation’s ongoing debt issue -– entirely likely to come out of a gridlocked Washington –- an ensuing lack of confidence in the dollar will also drive up interest rates.
One thing is for certain: Interest rates are almost assuredly not going any lower, a fact that should give those considering a mortgage to finance a golf vacation home today some small measure of confidence about tomorrow. However, be aware that the geniuses in Washington have begun talking about a possible elimination of tax deductions on mortgage interest for second homes. The abandonment of the deduction could result in downward pressure on vacation home prices. Whether home prices will drop before or after interest rates rise is anyone’s guess at this point.
