Higher interest rates deter potential second-home buyers, pushing them into the rental market and thus increasing demand. This increased demand, combined with a potentially tighter supply as owners hold onto properties, puts upward pressure on rental prices. Consequently, both buying and renting a vacation home become more expensive.
A massive surge in construction in high-end vacation spots like the Hamptons is directly linked to strong Wall Street compensation in recent years. This has created a daily "trade parade" of contractors and workers commuting long distances, a clear indicator of a highly localized economic boom driven by the finance sector.
Consumers increasingly treat vacation rentals like on-demand products, making last-minute bookings the new norm. This behavior upends the traditional model where properties were secured months in advance, with peak interest now occurring after major holidays like Memorial Day, a structural change likely to persist indefinitely.
The vacation rental market is bifurcated. Affluent consumers, less sensitive to interest rates and more influenced by financial market performance, sustain strong demand for luxury properties. Meanwhile, the middle of the market softens as rate hikes make both homeownership and expensive rentals less accessible for middle-class consumers.