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3 Issues That Could Affect Second-Home Sales

Financing for a second-home purchase could be limited, taxes could go up for 1031 like-kind exchanges, and policy updates are expected for national flood insurance.

WASHINGTON – The second-home market got a pandemic boost as more buyers turned to resorts and vacation hot spots, whether to escape the city, find a more leisurely area to remote work, generate extra income or to just simply shelter in place. But a few policy changes have the potential to dampen second-home sales over the coming months.

Russell Riggs, senior policy representative for the National Association of Realtors®’ (NAR) Advocacy Group, highlighted three advocacy issues the association is focusing on that could affect the second-home market:

1. Fannie Mae limits financing

On Dec. 7, 2020, Fannie Mae modified existing rules for how it finances and invests in second homes and investment properties. Besides placing a 7% limit on Fannie’s acquisition of single-family mortgage loans secured by second-home and investment properties, the rules also restrict the kinds of projects that Fannie will invest in.

For example, Fannie Mae said it won’t finance loans with a large number of short-term rentals. Riggs said that Fannie Mae is not completely pulling out of these markets, but it will more carefully scrutinize its financial investments in the second-home market moving forward. NAR says it’s had ongoing discussions with Fannie Mae to understand the full impact of this policy, and it’s conveyed concerns over the change’s potential effect on members and the second-home market.

Riggs says NAR is also looking to build coalitions with other organizations and create an industrywide effort to voice concerns about the policy change.

2. 1031 like-kind exchanges under attack

The Biden administration recently proposed a $500,000 limit on deferred gains in 1031 like-kind exchanges.

“This could impact all forms of real estate, including investment and resort properties,” Riggs said. “Putting this limitation on these transactions now is bad timing because like-kind exchanges could accelerate our economic recovery from the pandemic by preventing property from being underutilized and underinvested – an important tool in a Realtor’s® financial toolbox.”

NAR plans to share success stories and anecdotes of 1031 exchanges with lawmakers and point to their economic benefits, including promoting job creation, land and environmental conservation, generating state and local tax revenue, and aiding in retirement savings.

To move the initiative forward, NAR created a Like-Kind Exchange: Myth Busters webpage to explain common misunderstandings about the 1031 like-kind exchange tax benefit, which has existed since 1921.

3. Looming expiration of the National Flood Insurance Program (NFIP)

NFIP, set to expire on Sept. 30, 2021, provides flood insurance to more than 5 million homeowners in 22,000 communities nationwide. Many areas threatened by flooding events are located in second-home or resort areas. While a needed protection for many homeowners, however, NFIP is billions of dollars in debt and, and lawmakers have issued a lot of short-term extensions over the years to keep it afloat.

NAR advocates for long-term authorization of the NFIP as well as reform that includes more private flood insurance, mitigation and improved Federal Emergency Management Agency (FEMA) flooding maps (long the standard that lenders use in determining the need for flood insurance).

Riggs said there’s been progress on the flood insurance front. For example, last year, a searchable database from First Street called Flood Factor launched, providing consumers with information on an individual property’s flood risk, including heavy rainfall events and climate change data. Flood Factor has now been integrated into listings data at realtor.com.

Riggs notes another area of progress: NFIP Risk Rate 2.0, featuring a new federal flood insurance rate structure designed by FEMA to modernize the NFIP’s insurance pricing methodology and more accurately tie its rates to the flood risks of individual properties.

In a meeting with NFIP Chief Executive David Maurstad in March, NAR leaders said that Risk Rating 2.0 represents the first significant update to NFIP rating methodology in nearly five decades. New rates take effect Oct. 1 for new and existing NFIP policyholders who may want to opt in earlier to see a decrease in their premiums. All other existing policyholders would receive the new rates on April 1, 2022.

Source: National Association of Realtors® (NAR)

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