We are asked a lot about whether any softening of the second home market will impact fractional real estate alternatives, such as destination clubs and private residence clubs. It depends.

As you might expect, there are two ways to think about it. A softening of prices could hurt the fractional players – reducing the market value of their homes (for destination clubs) or hurting the sale of new fractions (no fun being an owner in a PRC that is half-sold, perhaps half-built).

The other side of the coin is that when the market softens, it’s a great time to be fractional owner or destination club owner. As an owner/member you have not committed all your capital to one home in one market – perhaps making downturns more tolerable.

The April issue of Worth magazine has a well-researched story about luxury real estate and its current health relative to other markets [no link available since the story is not online – duh]. Bottom line: luxury real estate is bucking the trend, and prices are staying firm in many markets.

Lifestyle Decision

The reasons why make sense. Buyers of $3M+ vacation homes are largely unaffected by mortgage rate hikes, as they finance little of the purchase anyway. They tend to view the purchase as a lifestlye decision, so probably are willng to take the risk – not that anyone wants to lose money. Also, some of these markets still have limited supply – there are only so many lux ski-in/ski-out houses in Aspen, Telluride or Park City. However, in markets like Florida, even at the high-end, prices have softened as developers have flooded the market with product.

Also, as speculators are driven out by rate increases and softer prices, expect the real buyers to stay the course and help stablize prices – especially in these in-demand luxury resorts and destinations.

Tips for Prospective Buyers

• Look for unique properties, in markets that have shown long-term steady demand. Try to avoid fad locations.
• Consider locations that have 8-10 month seasons, or ski locations that are building their summer traffic – another summer jazz festival anyone? It’s not surprising to see the growth in markets such as Cabo San Lucas, Mexico – a ten month season and big houses can still be had for $2M.
• Follow quality. Look for resort developers that have a proven track record for quality development and on-going operations and service delivery. Fractional developers such as Timbers Company are starting to see their owners buy in more than one of their properties, as they have shown they can deliver in multiple locations.

Bottom line: Luxury vacation real estate, in all its many whole and fractional ownership options, is about family memories. It might be a good investment as well. Speculate at your own risk.