Why Low-Cost Beach Towns
Will Continue to Lure Buyers

Question: In the past few years, we have seen huge gains in the prices of vacation homes in Galveston, Texas. How much will the housing boom's demise affect secondary or vacation homes?

-- Sandra F. Harris, Houston

Sandra: During the late, great housing boom of 2000 to 2005, many coastal cities saw hefty annual price gains. Now, however, the bloom is off the beach rose. Indeed, the housing market seems to be softening fastest along the coasts, according to the latest statistics. In San Diego, for instance, sales are down 24% in June from the year before, and prices have fallen by 1% -- the first year-over-year drop since 1996 for the city -- according to DataQuick Information Systems. On the Florida Panhandle, in May, year-over-year prices dropped 9% in Fort Walton Beach, 2% in Punta Gorda, and 1% in Panama City, according to the Florida Association of Realtors. Several regions recently have seen huge declines in sales -- which usually leads to price declines. Among them are Palm Beach County, Fla. (down 39% in June), the San Francisco Bay Area (down 24% in June) and Hilton Head, S.C. (down 46% in May).

Although it's not always the case that the highest-flying cities fall the farthest and fastest when housing markets weaken, it's certainly true that once prices rise above the affordability levels of local working people, they can't be sustained. Sooner or later, the investors who have been propping up the market flee, flooding the market with listings and depressing prices. According to housing economist Thomas Lawler of Vienna, Va., that's not what is happening in Galveston, which like the rest of Texas, has been benefiting from a steady influx of oil money. "There's a lot of wealth going into the state," he says.

The Real Estate Center at Texas A&M University, which tracks Galveston's home prices, shows that median home prices reached $166,900 in April, the latest month reported, from $162,400 the year before. Compared to many coastal cities, those prices are very low. Even high-end homes are relatively cheap: the highest asking price I found is $3.25 million, for an impressive-looking four-bedroom plantation-style home on a two-acre beachfront lot. And new home builders still are gambling on Galveston: the Houston Chronicle reports that a $70 million beachfront condominium project is slated to break ground by year's end.

So do I still feel bullish on coastal cities? Well, the nation's 78 million boomers drive this market, and with many of them close to retirement-- 330 of them turn 60 every hour -- it's likely that interest won't completely die out in low-cost beach towns.

But last year's hurricane scares have convinced many folks to give a second look at mountain rather than beach resorts for their second home. And sadly, the shadow of Galveston's history as the scene of the nation's worst natural disaster, when 6,000 people perished in a hurricane in 1900 (nearly six times the number who died in Katrina), still hangs over it. So if this year brings more intense storms, as predicted, I think it will frighten away many potential buyers -- even if Galveston isn't directly in their paths.

-- June Fletcher is a staff reporter at The Wall Street Journal and the author of "House Poor" (Harper Collins, 2005). Her "House Talk" column appears most Fridays on RealEstateJournal.com. Email your questions about the residential real-estate market. Please include your name, city and state. If you don't want your name used in our column, please indicate that. Due to volume of mail received, we regret that we cannot answer every question.

Email your comments to june.fletcher@wsj.com.