To Buy or to Rent?

THE Napa Valley ranch house, built in the 1970s, wasn't much of a looker. And with a price tag of nearly .4 million, it wasn't cheap either. But its location on Highway 29, the main drag through wine country, on an acre of land in the undeniably quaint town of St. Helena caught the attention of Jocelyn Singh. She had spent the last 12 years driving north from her home in Modesto, Calif., to stay in rental homes and increasingly expensive hotels during her regular wine country retreats.

Skip to next paragraph Photographs by Gordon M. Grant for The New York Times

Properties all over Montauk, N.Y., offer vacationers the option of buying or renting.

Related The Bottom Line: Weighing Finances and Feelings for a Decision (December 29, 2006) Enlarge This Image Gordon M. Grant for The New York Times

See any bargains? Homes in the upscale Hamptons are on display at a real estate office in East Hampton, N.Y.

For Ms. Singh and her parents, the time was ripe to buy.

Buy? In this market?

"We ended up getting it for 5,000," said Ms. Singh, noting that the seller's final price wasn't too far from her initial offer of 0,000.

With the money saved on the purchase price, she was able to plow 0,000 into renovations, raising the ceilings and ripping down walls, and will soon plant grapes on the land. "By the time we are done with it, it will look very wine country," Ms. Singh said.

Thirty percent price cuts in asking prices for homes aren't the norm, but stories like this - with sellers willing to negotiate or even drop their asking prices - are increasingly popping up in suddenly cooling vacation home markets.

Among second-home shoppers these days, to buy or to rent is often the question. Until this year, the answer was pretty straightforward. Why rent when real estate prices in desirable areas - from coastal enclaves in Florida to beach towns in the Northeast to desert hideaways out West - saw a steady annual appreciation of 15 to 20 percent or more?

The surge in prices had buyers lined up at developers' doorsteps, eager to pick up a condo (or two or three), and even the noninvestor types were patting themselves on the back watching their equity rack up.

But it's no secret that real estate activity has nearly ground to a halt this year. Sales volumes are down, inventories of homes on the market are up, and it's simply taking longer, a lot longer in some cases, to move listings.

Now, in many areas where second-home buyers flock, prices are trending downward. Home prices have already taken well-publicized hits in areas like South Florida and the Phoenix area.

Similar areas have witnessed a slowing in sales and an increase in inventory, and price drops may be on the way in those places as well, according to Cynthia A. Kroll, a senior regional economist at the University of California, Berkeley.

Since different factors motivate sellers of second homes (after all, a vacation home seller usually doesn't have to unload a property immediately to, say, move to a new job), they simply might take their homes off the market or wait longer to reduce prices.

"That's one of the reasons the price effect can lag," Dr. Kroll said. "It can take awhile for the sellers to accept the reality of lower prices."

While second-home buyers aren't as sensitive to pricing as other buyers, slower appreciation sent investors - who had fueled much of that appreciation - out of the market. The National Association of Realtors predicts that 30 percent of all home sales for 2006 will have been second homes, down from 40 percent last year, and attributes much of that drop to the exit of investors.

And the places that saw the biggest influx of investors and the most heated activity are likely to see the biggest price drops. "Areas that had the highest appreciation and that were the hottest can cool the most," said Edward E. Leamer, an economist at the University of California, Los Angeles.

Of course, the decision whether to rent or own might require the assistance of a crystal ball. After all, is 0,000 for a summer rental in East Hampton ever a wise financial move? Buyers hoping to swoop in on Hamptons bargains will probably be disappointed.

"The sky is not falling," said Cee Scott Brown, a senior vice president of the Corcoran Group in Sag Harbor, N.Y. "There really are no good deals."

He said prices haven't budged much one way or the other because of "the standoff": "The seller is saying ‘I'm willing to sit here,' and the buyer is saying ‘I don't want to pay what the last person paid,' " he said.

A result is that the number of transactions in Hamptons towns like Sag Harbor are off 20 percent from last year, although Mr. Brown said there had been a small surge in recent weeks.

Farther south, the rental decision seems much clearer.

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