Question of the Day!

QUESTION

 

I have some concerns about the US real estate market right now and am not sure if this is the right time to buy when the overall market is published at being 8% down.

 

ANSWER

 

First of all you have to remember that Breckenridge and Summit County as a whole is based upon ownership in a mountain valley where nearly all the land is National Forest Land, with a very small portion privately owned that has been and can be developed. The remaining privately held vacant land is predicted to be built out within the next 4-6 years. 

 

The Towns of Breckenridge, Frisco, Dillon and Silverthorne in conjunction with the County Commissioners and ski resort management held a conference a few years back and hired a consulting firm to help them forecast what needs to be done to maintain the quality of life in our County and its appeal. They studied other resort towns that are ahead of us and have or are at that total build out phase, where there is no more land left to build on, it is all used up and the only thing left to do is start knocking down old or existing buildings and re-developing (which is what Vail is currently doing).

 

This group studied traffic ramifications, water rights, schools, hospitals, affordable/employee housing etc. They got to the prediction of Breckenridge and Summit County reaching "build-out" by reviewing how many vacant and developable parcels of land there are left in the County, then taking the average number of building applications on vacant land there have been per year over the last 10 or so years and projecting going forward. That is how the within the next 4 to 6 years came about.

 

They then looked at towns similar to ours that have been through this phase and what happened to them. Examples are, Aspen, Vail, Telluride, Jackson Hole. As the supply gets ever increasingly slimmer, the demand continues to rise. Public opinion gets heavily weighted to prevent more growth, Town leadership and planning leadership positions get filled with staff and members with stricter philosophies about the quality and density of what should be built on the very last remaining parcels of developable land to maintain the quality and attractiveness of the mountain environment. This directly results in big increases in building costs, above and beyond the ever increasing costs of raw materials per year currently being experienced to build a home (review lumber, copper and building material costs that have risen over the last few years as China and other developing nations demand these materials too). This then has a direct affect on the values of existing properties, whereby the values start to go up significantly. Breckenridge and Summit County have not quite reached this stage, hence the huge average price differentiation between us and these other resorts. I am not saying that the pricing in our area will equal Aspen or Vail, but I think the gap will close considerably. As we get more exclusive and quality amenities the pricing of certain properties close by or having those amenities will go up. This in turn will bring the price of other existing properties up too, as the supply is now finite. Remember also, Breckenridge is currently the most visited ski area in the United States with many international visitors, also wanting to own property here.

 

When we had our last recession which was around the year 2000 or 2001, the market had a number of hammerhead blows. We had the dotcom crash, where the stock market took a huge hit. We had 9/11 where many, many people were afraid to fly which affected how many ski visitors would come. We had the Enron scandal, where the public now did not trust anyone with their hard earned money. We had war with Iraq and the uncertainty that would bring. We had a 4 year drought where we did not have much snow for skiing and we had Colorado forest fires.   I stacking all those detrimental market conditions on top of each other over a short period of time was a good test for our real estate market here. What happened to our market in Breckenridge was that we did not depreciate. We just stagnated for about 30 months where our prices did not appreciate, it took longer to sell properties and our skier visits went down and development slowed. It was very resilient.

 

I had been showing investors in the late 1990's properties and they would ask what the annual appreciation would be and I would say about 8% per annum. They would tell me that their mutual funds were getting as high as 30%. Many of them decided not to invest in real estate and keep investing in the stock market. Then in about the middle of that recession I would get some of these people calling me curious about how the real estate market was. I would tell them that it was slow, but the values overall had held. Many of them told me they had lost up to 30% of their investments over this period of time and that they wished they had put some of it in Breckenridge real estate.

 

That episode was great for Breckenridge and Summit County in retrospect, because it showed investors that our market is quite resilient to national downturns and market conditions. We may not have all those glamorous 30% yields and really since the 1970's if you average the property values in 10 year cycles it has been about 8% mean and 10% median per year. We do not have the high risk either.

 

Under current market conditions, where the rest of the nation is down the tubes with regards to property markets and values, Breckenridge, Vail and Steamboat Springs went up in values last year. We were the opposite. Why would that be? Some analysts see the huge development money coming in to complete the few remaining developable parcels left in Breckenridge and Steamboat anyway. In Vail, they are knocking down and re-building as they really do not have much vacant land left. Breckenridge is getting a lot of attention because of all the quality amenities being enhanced or developed, plus compared to nearly all the other ski resort towns in Colorado, we are one of the easiest to get too.

 

Many professional people will still earn significant income even in a recessed market. Drs, surgeons, dentist, lawyers, oil company execs, are still doing great. They are most certainly concerned about if they should put all their money on Wall Street currently. I speak with many clients in this category and they want to invest in something more tangible, like Breckenridge real estate. It may not yield as much as some of their other investments, but I think I can say right now, the ones that have bought here are doing better with their Breckenridge real estate investment than their mutual funds!!! In other words, they are wisely diversifying and not putting all their eggs in one basket. There are or can be significant tax advantages to owning a second home or investment property too. 

 

 

Also as the dollar has currently been weakening in the global currency markets, it has encouraged more foreign investment in our real estate market. This diversifies our micro economy here, where we are not just dependent on buyers or investors from one region. This adds to our resiliency in national US market downturns. 

 

The national real estate market downturn in the United States is in the primary real estate market. Primary real estate is property bought for someone to live in year round. That market was brought down as you well know by poor lending practices to people who could not really afford the home they were purchasing; sub-prime loans. In Breckenridge and Summit County, 70% of the real estate conveyed is investment or second home properties, where it is not possible to originate a sub-prime loan. We have not been directly affected by this.

 

Most of my clients upon reflecting on their ownership of property here are valuing the fun and memories they have with their friends and families more than they are their monetary appreciation potential. As long as they feel safe their money is harbored as securely as anywhere else, they end up just focusing on family, friends and quality time. Their Breckenridge or Summit County property is a catalyst for that!