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Keep or Sell Vacation Home?

Question: Hi, Chris. Perhaps you can help solve a debate between me and my husband. Here's the background: In 2000, we bought a vacation home in the Catskills, 3 hours outside of New York City (where we live). We refinanced in 2004 and got a 4.75% 15 year mortgage and our payments are affordable for us. The home is now valued at 2-3 times what we paid for it, but I'm worried that the real estate market in second home areas won't hold up under prolonged high gas prices and I'm thinking about selling (we could use the money for other things, such as buying a primary residence). My husband wants to hold on to the place indefinitely, thinking that our mortgage rate is very low and high gas prices might actually help vacation spots that are close to big metro areas, since people will still want to vacation but might want to stay closer to home. There does still seem to be plenty of wealth in New York City and prices in its ring of vacation-home areas seem fairly stable so far. Is there any historical precedent you're re aware of or advice you could give that could help us think through what might happen to the second home market over the next few years? Thanks, Erin. Brooklyn, NY

Answer: This is a truly intriguing question for the new world of high-priced energy. I hope Getting Personal readers weigh in with their thoughts.

I do think that high energy prices will impact real estate values over time. For instance, although it's commonplace for financial advisors to recommend that retirees downsize, few do. One reason may be that families often pay almost as much for a smaller home. A two bedroom condominium in an attractive part of a city with all the amenities typically sells for nearly the price tag of a comfortable four-bedroom home in a tony suburb. The same economics hold for moving from a McMansion to a villa.

That may be true, but I think the calculation will change. Large homes cost significantly more to maintain, and are subject to higher property taxes. The savings from running a smaller home compound over time. The combination of high energy costs and an aging population could signal a fundamental shift in the retirement home market toward small is beautiful. Bud Hebeler, who runs the website www.analyzenow.com, believes that over the next decade small homes are going to be relatively pricier than large ones, at least on a dollars-per-square-foot basis."

With that type of thinking in mind, I do think that vacation spots nearer a major metropolitan area like New York will do well, especially as fuel efficient cars become more commonplace. Demographic trends, such as the aging of the population, suggest that vacation homes will continue to attract buyers (once the current downturn reaches the history books). The problems with housing and energy will lie more with exurb developments and larger homes.

So, on this side of the investment ledger I am with your husband.

However, let's say you really want to own your own place. If you can find a good value in today's market (it's better to be a buyer than a seller these days) and you can end up with a conservative financing by selling your vacation home, then I'd sell. It's partly a question of how much you actually use your vacation home, and how much you want to own your own place near to where you work. If the answer is yes--we want to own a home--I'm with you. Sell.

In other words, you're both right. The answer then depends on what is a greater priority for you--a vacation home as an investment or owning a primary residence?

By the way, the vacation market isn't doing well after several years of hype and speculation. Last year, according to the National Association of Realtors, vacation home sales fell by more than 30% in 2007. Weakness in the market was also reflected in a 2.5 percent decline in the median price to $195,000. It's a pretty safe bet that the market is doing worse in 2008. Nevertheless, surveys consistently show that vacation homes are alluring to an aging population.

Anyone else have thoughts on thinking through this question?

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