Accepting that resort, second-home purchases are driven almost entirely by emotion, it is understandable that uncertainty around the proposed Tax Bill may lead to some level of concern. We validate that concern and offer a few thoughts as to how these changes may impact Tahoe real estate.
Wealth permitting, the ultimate driver of demand for second homes will always be the intrinsic value, or benefit, derived from owning this property. Referencing Tahoe specifically, these drivers often include:
- Health and wellness
- Family experience
Financial incentives to promote second homeownership are certainly helpful and may aid in affording incrementally more expensive properties, but are rarely the deciding factor for consumers much in the same way that interest rate fluctuations do not greatly impact our region. Investors directly motivated by financial incentives are more typically drawn toward conventional commercial offerings rather than the resort residential sector.
The most tangible economic driver of demand for second homeownership is overall wealth creation. Unlike primary home purchases, these acquisitions are made entirely with disposable income. Thus marginal changes to effective tax rates may not be enough to have a meaningful impact on overall demand so long as our Northern California feeder market continues to be such a powerful economic engine. Given the emotional nature of second home purchases, the greatest threat to demand is an erosion of consumer confidence relative to their own long-term ability to grow wealth.
The most meaningful shift in consumer behavior may be the re-classification of second homes to investment property. This trend has already been gaining momentum as demand for vacation rental property (otherwise known as nightly rentals), largely driven by the same wealthy Northern Californians, has grown exponentially in recent years. The phenomena enhanced by the upspring of rental management services including AirBnB has created an environment in which homeowners can offset carry costs making their own vacation time less expensive, or even profitable. While restrictions on personal use of investment property may be a limiting factor, tax advantages may push an increasing number of consumers in this direction.
In summary, we believe there may be some near-term correction to the Tahoe market as consumers adjust to their new financial realities, however the long-term demand for the region is likely to be unchanged though subject to typical market cycles.