With more than 31 years of industry experience, a financial analyst/urban economic background and 16 years of living in Central Rockies, I have concluded that the financial success of resort property is primarily driven by consumer confidence in their overall financial net worth and workplace income which stimulates demand and ultimately drives prices higher, in combination with irreplaceable fixed supply lifestyle environments. Commencing early 2004 through mid 2007 consumer confidence was riding high but then took a precipitous dive to its lowest level since the index was created as the global banking crisis began to take hold. Unemployment has soared and is predicted to peak at 11% late next year; a level not seen since the Great Depression. Consumers are tapped out in terms of personal consumption and debt where the annualized growth rate went from 3% in 2006/7 to a negative 4% in 3rd quarter 2008 (deleveraging). Stock market wealth is estimated to have lost $8 trillion from 2007 peak values and in order to avoid a major market meltdown the US Government will ultimately issue $2 trillion in debt which is destined to limit future social programs, accelerate inflation and burden our children's children with legacy taxes. A stable economy is the most important factor for a housing market recovery. Buyers are not buying homes because of concerns over the economy, their jobs and depleted net worth from stock and home equity losses. Shadow ownership lenders continue to flood metropolitan areas with foreclosed and/or short sale homes and there is very little mortgage money available due to the collapse of the securitized secondary debt markets and falling collateral asset values. The S&P/Case-Shiller National Real Estate Price Index crested in 2006 although for resort property, which traditionally lags major market residential, 2006/2007 was the high water mark in terms of volume and recordations. Since that time the C-S Index shows a national tumble of 27% from the peak and fell a record 19.1% from 2008's 1st quarter. Vacation home market share of total property sales peaked at 12% and has fallen by 25% since 2007 according to the National Association of REALTORS (NAR). Foreclosure activity will not begin to decrease until 4th quarter 2010 and will remain problematic through 2015 when the trend line reconverges with historical default averages. What do all of these separate but interrelated indicators mean? The economy, real estate and capital markets are a long way from normalizing and continue to be in a complete state of disarray. Market highs may never again be seen in our lifetime but only time will tell as to the long term outcome. Our best guess projection for stability is optimistically 2011, notwithstanding unexpected events and we've had a lot of those lately, with job growth resuming in late 2010. The market should trough out in 2010/2011 with noticeable improvement taking hold starting 2012.
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Summit County dollar sales volume peaked in 2006 and 2007 as reported by Land Title Guarantee Company. The big slide started in January 2008 resulting in a 35% decline in dollar volume for the year and a 43% reduction in the number of closed transactions. The January-May 2009 numbers verified continuing weakness with volume off by 54% from the previous year. Overall market activity is a whopping 64% less than the 2007 high water mark confirming a transactional state of "buyer/seller gridlock". Why is this happening, besides the fact that the U.S and its global trading partners are experiencing the biggest real estate and economic correction in modern financial history? SPB's proprietary relative market pricing software indicates that most properties are priced at 7% above the trailing 12-month sold price per square foot averages. Translation; there has been no real discounting to date but with buyers unwilling to pay high water mark prices in these turbulent and uncertain times the market has effectively fallen even if there are few sales to verify this obvious conclusion. Buyers aren't buying due to pricing, net worth, mortgage availability, employment income and fear that prices will drop further with sellers insufficiently motivated to discount because they appear to have the financial resources to ride out the downturn. Based upon 4th quarter stock market losses, employee layoffs and capital considerations there was virtually no market for Breckenridge residences last winter. Price discounts may entice some buyer's to enter the market but until such time as consumer confidence improves, discounting may still not solve our "will it never end" gridlocked marketplace. Last but not least is a market trend that has to do with mentality of the wealthy. The runaway boom in property prices at the high end is not only gone but has shifted into high speed reverse as cited by the April 4th edition of The Economist magazine article "Dropping Bricks". Affluent markets were holding up relatively well until 3rd quarter 2008 but when the government allowed Lehman Bros to go under, the proverbial s--t hit the fan. Since then the luxury property market has been in a freefall with buyers routinely making offers at 40% below asking prices. Property discounting is already occurring in the 10 most expensive cities in the world and as cited in the "Dropping Bricks" article, and there continues to be "a real disconnect between what buyers are willing to pay and what sellers will accept". California million dollar homes fell by 43% between 2007 and 2008 according to MDA Dataquick with sales in Beverly Hills down by 30%. To make matters worse, loan-to-value (LTV) ratios have gone from 75% to 60% drastically increasing down payments further exacerbating the capital call hardship. Why is this problematic for high end luxury resorts? Because most of our destination guests come from affluent luxury home communities and what happens in their home towns not only affects expectations but contributes to an escalating fear that Breckenridge may soon experience a similar fall of value in the not too distant future.
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When asked by owners if the market has gone down in value, the statistical answer is "no" since price psf levels remain relatively unchanged. When markets are tranquil and consistent, predicting the future is difficult at best. During transformational times of high volatility and the occurrence of low probability events, historical data becomes almost irrelevant leaving prognosticators with no verifiable platform supporting their best guess forecasts. In an attempt to answer the "loss of value" question, SPB compiled a list of properties sold since January 1, 2009, priced $500k - $2m, and compared price per square foot averages with comparable high water mark sales during the frenzied 2006/2007 bubble peak. It now seems that the required discount to entice buyers to commit during 1st quarter 2008, one of the most uncertain economic periods in modern history, was about 15%-20% and although disappointing Breckenridge seems to be doing better than most other places around the world. That being said, the real question whether this discount range is sufficient to reinvigorate the market given the almost 3 years of available vacation home inventory. Many area REALTORS have expressed the thought that discounts will have to be in the 20%-25% range in order to stimulate buyer demand, but only time will tell whether this is ever going to happen. From my own point of view, I concur with this 20%-25% estimation. It is possible that the market will remain in gridlock, but given the depressed global economy it stands to reason that some owners will be forced to sell resulting in heightened liquidation pressure and subsequent falling prices. Projecting trend lines is empirically awkward since analyses typically look at past historical data in combination with current environment factors for the purpose of extrapolating future outcomes. If a rational buyer takes into account all of the aforementioned factors it would be difficult not to conclude that it's going to get worse before it get better. Lawrence Yun, NAR's chief economist and industry cheerleader, was in Vail last spring for the purpose of addressing the Board of Realtors at the Cascade Hotel & Spa. During the Q&A session one REALTOR asked if the current real estate downturn were a baseball game, what inning would it be. Yun replied that from a national perspective it's the 7th; but in terms of the vacation home markets, it's more likely the 4th or 5th due to the industry's lagging trend line characteristics. So is now the time to get into the market? It might be a bit early but our current strategy is to make offers for the purpose of identifying the motivated players. Our target discount to high water mark is 20% and if that can be achieved, and it works for the client from a lifestyle perspective, we would likely recommend they go forward. Why take this tactic? Because first of all it acts as a hedge against a falling market which could wipe out most of the down payment equity, and two, if the market does remain in gridlock, the purchaser could achieve an immediate return on invested capital. While 8 out of 10 sellers probably don't have to sell and can ride out the down turn, that still leaves 2 which may need to get out. The real puzzle is whether those 2 price motivated sellers own property that the client wants to buy. Yes, our approach does have a somewhat low probability for success but Summit County may never again go on sale and for value driven clients it's an effort worth serious consideration. So stay sharp, look around and get into the fray. More and more sellers are likely to come under pressure over the next 3-18 months and if the right property is not discounted or available today, it could very well become available tomorrow. As always, there is lot more to talk about and we welcome your further questions, comments and inquiries in this matter.
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