Renters Can Afford to be Picky
When Choosing a Vacation Home

With no bottom in sight for the U.S. housing market and recession fears growing, one slice of the real-estate industry is holding surprisingly steady: the summer-rental market.

$200,000 a season in Sag Harbor, N.Y.

But outside the luxury sector, shadows loom. In many popular coastal areas, the inventory of off-water, midpriced rentals has swelled despite brisk demand. Newly constructed vacation homes -- the end of the decade-long building spree -- are on the market and putting pressure on rates. A glut is likely to grow, as more owners who would have flipped homes rely on them longer for rental duty while waiting out the sluggish residential-sales market. Older, smaller properties are being pinched first, as people increasingly vacation with extended families and look for newly built large homes with central air conditioning, hot tubs and other amenities.

An aerial view

Signs of Strength

In North Carolina's Outer Banks, the average summer rental rate is running at $3,107 a week at Outer Banks Blue Realty Services -- a 5% increase over last year, says the owner, Tim Cafferty. In Galveston, Texas, where rental demand has soared alongside the Houston oil economy, Sand 'N Sea Properties says it has just one August week left for "Wind Song," a large beachfront home renting for about $5,775 a week -- 7% more than last year. In the Hamptons, Greg Stuart, an Internet advertising entrepreneur, recently rented out his five-bedroom house in Bridgehampton, N.Y., for $75,000 for all of August -- a 15% increase over last year. "It's a great deal," Mr. Stuart says. "Economically, the smartest thing I've ever done is buy this house."

$1,395 a week in Avon, N.C.

Demand for rentals on Cape Cod, in Massachusetts, is running about 30% ahead of last year, but rates are flat. Bett McCarthy, vice president of Kinlin Grover, which manages about 2,000 summer properties, says demand is strongest for properties renting at or above $2,000 a week. While few landlords have raised their rates this year, they aren't cutting, either, she says. "I think people won't start to get nervous until May."

Elsewhere, some landlords feel pressure to cut now. Patrick Chamberlain, owner of Villa Rentals, in Newport Beach, Calif., says he noticed customers were tightening budgets. To hold on to repeat clients, he has encouraged owners to shave 5% off weekly rates, which range from $1,100 to $7,000 a week.

Landlords who don't want a pay cut are adding amenities. Susie Portz, who owns a $7,000-a-week oceanfront home in Newport Beach, says she and her husband did without their usual 4% cost-of-living increase this year and bought new living-room furniture, after renters last year made "nit-picky" complaints about the velour-covered furnishings. "We personally didn't feel it warranted complaints, because it really is a great place," Mrs. Portz says about the seven-year-old, 3,000-square-foot cottage with granite countertops and a rooftop terrace.

Of course, it's too soon to say where the market will go, since heavy leasing won't start until March in some places. An oceanfront Southampton home recently fetched $400,000 for August, according to Corcoran's Tim Davis -- a rate that fell short of the $500,000 a comparable home fetched last year. A Malibu beachfront house that Paris Hilton leased last summer for $65,000 a month is priced at $80,000 this year, a 23% increase. No offers yet, says Coldwell Banker broker Sandro Dazzan.

Where the Deals Are

But in markets with lots of new construction, there may be bargains on older properties. "Mad Hatteras" -- a four-bedroom shingle-style house in Avon, N.C., with a view of Pamlico Sound -- rented for 18 weeks at a peak rate of $1,395 a week in 2003. Since then, the owners have taken a $50-a-week haircut on the rate and added wireless Internet, new linens and a videogame player. Even so, the house isn't likely to rent for more than 10 weeks this year, according to Stewart Couch, owner of Hatteras Realty, which manages 550 Outer Banks properties. There are "several hundred houses that are exactly the same," he says.

$2,000 a week in Ocean City, N.J.

Elsewhere, strong rental demand is giving some would-be home sellers a welcome windfall. In Healdsburg, Calif., in the Russian River Valley wine region two hours north of San Francisco, Stephanie Domenichelli and her husband couldn't sell their five-bedroom farmhouse despite whacking $500,000 off the $1.75 million asking price. "We were just losing money every month on it," says Mrs. Domenichelli, who had bought another house, expecting to sell the farmhouse quickly. In desperation, the couple in May listed the property on an online rental site and quickly had four bookings. This year, they raised the weekly rate 15% and the house is still booked nearly solid, earning a net profit of about $2,000 a month. "We think that now we can afford to keep it," Mrs. Domenichelli says.

Others are left to wait. Ron Wilson gets $1,800 and $2,550 a week for his two Hilton Head, S.C., condos. Competition from new construction has hurt, just as his adjustable-rate mortgages reset. He expects both units to be fully booked this summer, but he'd like to sell anyway. "I bought them at sort of the wrong time, but that's OK," he says. "I'm not in a panic to sell. I'm not going to get scared. I'm not going to run."

Renters Needed

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