This Q&A appears in the Fourth of July issue of The Sheet.
Q: We’re looking to purchase a condo in Mammoth sometime in the near future but are now concerned about how the drought, gas prices and inflation will affect values in Mammoth. What do you think?
A: Good question, but personally I’d be more concerned about overinflated asking prices and pushy agents. But seriously, in the past couple of years most of the concern in the Mammoth real estate market has been about local issues; from the Town’s legal and financial problems to assorted (and distorted) other dramas. With all of that behind us, or at least out of the news flow, the buyer concerns are larger in scope. But I hear the phrase “it’s always something” more and more these days. And it is always something. (Potential) buyers have always found reasons not to buy.
Of your three concerns I think inflation is primary on many buyer’s minds. Let’s face it, with today’s “hall of mirrors” economy, massive public and private debt, and an ever expanding Federal Reserve balance sheet, serious inflation is expected by many. We are probably already seeing it despite what the government says. It feels real to me. They keep changing the CPI calculations to keep us confused. There is good reason to doubt any “numbers” today. And some will argue that the stock market and real estate values aren’t going up, it’s that our dollars are just worth less. And if you look at the Fed’s own chart of the declining velocity of money there is also argument for dis-inflation.
But I have no doubt the threat of inflation has driven many real estate acquisitions in Mammoth in the past few years. People with discretionary cash (and stock market profits) are looking for real assets to protect against inflation. There really are property owners in Mammoth that simply have cash “parked” in a piece of local real estate. And often times high-end real estate. It is one way they hedge against possible inflation. And they know they have a place to spend New Year’s (if the snow is good). They also know they have a place to escape to if “something” ever happens around home. Quite frankly, I’m surprised the condo hotel properties in Mammoth haven’t increased in value more because that isn’t a bad place to park some cash; owners can pretty much sit back and let the management run the show AND the property can generate some revenue too (mainly to offset expenses). And the owners can even use the property from time to time.
The low-interest rate economy also drives many local real estate purchases. Many people aren’t in “park” mode but are “chasing yield.” They actually need their cash reserves to generate some return (what a concept). It has become so bad that many believe we have entered an age of “malinvestment.” People are buying things (investments) with the “hope” that it will turn out all right. But the underlying fundamentals aren’t so good. If we experience serious inflation then owning some real estate should be a reasonable position. But I see buyers making poor real estate decisions just for the sake buying and hoping the yield or return is there. In Mammoth, I see it primarily in two places. First, I see people buying expensive ($1-2M) vacation homes that have incurable defects like substandard neighborhoods or poor locations, etc.. Instant, classic real estate regression. Despite what many believe, Mammoth is not all the same.
Secondly, I see people purchasing substandard income properties. These properties were built in the 1960’s and 70’s or earlier. The problem is the ultimate vacancy factor. The property “pencils” well at 11-12 months of occupancy. The problem is that Mammoth is still a very seasonal and transient market. The best year-round tenants gravitate to better properties (and typically stay). The older, less desirable (and normally frigid in winter) properties are the first to be vacated in spring, and the last to be rented come fall. And not to the best tenants. This “takes the income out of income property” as I like to say. And some of these income property purchasers are first time landlords. Owning these type of properties is a good initiation. But if inflation rages then they should be okay.
Inflation, like higher gas prices, can have bad but also positive effects on Mammoth and the local economy. It is like what economics calls substitution effect. This is actually one of the distortions of today’s inflation numbers. The folks in charge think that because steak has become too expensive that I am fine eating soy-burger. They think that is perfectly acceptable and does not impact the quality of my life, and does not represent inflation. But substitution effect does help Mammoth in many ways. If the cost of vacationing goes up, vacationers look for more affordable alternatives. Mammoth can do well in this regard (it has in the past). Rather than fly to the Rockies to ski they drive to Mammoth instead. Rather than drive the motorhome to Canada they can rent a condo in Mammoth. While Mammoth isn’t a cheap place to vacation, it can be done intelligently and frugally. Mammoth condos with full kitchens and the myriad of online rental opportunities makes it even easier. And don’t forget a quick stop at Costco on the way up. On the other hand, inflation and higher gas prices can make plenty of people just stay home (now known as a “staycation”).
And yes, higher gas and fuel prices can cause problems for Mammoth real estate. All of that snow that is being pushed and blown around in the winter is being done with petroleum products. So the cost for snow removal to the Town, the Ski Area, the HOAs and assorted property owners would go up. And more and more of Mammoth is heated with propane, so that creates an additional burden. Inherent higher operational costs can certainly impact real estate values. Just look at some of the condo projects with very high common area fees, they typically have lower per-square-foot values.
Inflation and higher gas prices would certainly throw a monkey wrench into any proposed new developments. The pro formas would be impossible to get a true grasp on. Mammoth is already a very expensive place to build (as Intrawest discovered). Last summer many of the local specialty contractors were working on bids/estimates for a proposed new development. Nothing is happening, yet. My guess is that the numbers don’t work. But the anticipation of increased building costs may very well be driving the hottest part of the Mammoth real estate market; new “spec” homes in the $1M+ range. Savvy people with that kind of buying capacity are clearly betting on higher construction costs in the future. Many others are also thinking it could be the prime time to get that remodeling completed before the cost increases.
The drought is another macro economic concern. It can be a real “Who Knows?” issue. During the drought of the late 1980’s and early 90’s (and that was very similar to now) the market actually moved up in the late 80’s and then down as the recession of the early 90’s started. The late 1980’s were similar to now in that Mammoth was exiting a period of prolonged recession and many foreclosures. That was also a period of very high interest rates. But the drought wasn’t a determiner of real estate values (or maybe it actually held back the increases?). If anything, it might have helped.
Drought can have some positive effects. The local HOAs save on snow removal expenses and can re-allocate the money to needed capital maintenance projects, or not. The special assessments for snow removal in 2011 are now a distant memory. Drought also drives some projects and property owners to rationally decide to become more water conservative and make intelligent landscape changes. Water can get expensive here in Mammoth, especially when it is in limited supply.
Meanwhile, buyers and sellers should be attentive to the local market conditions, not just the hyperbole. Inventory is rising and sales volume/velocity has slowed. But that might be seasonal; late spring and early summer are not typically the busier real estate period in Mammoth. We’ll know more as we head into the late summer. There are still plenty of underwater properties with sellers unwilling to offload via short sales even though the need for “hardship” has become a myth. And there are still plenty of potential sellers who are “mentally underwater”; they paid more than the property is worth today but have little or no debt on the property. Their psyche (or ego) simply won’t allow them to take a loss (although their accountant might tell them that the loss will absorb that pesky depreciation recapture).
For many years the local market tried to draw analogies to the Southern California real estate market. Old brokers use say things like “the Mammoth market lags the Southern California market by 6 to 8 months.” Some of that is still true today but there are so many other dynamics in play. Who really knows anymore? Chinese buyers aren’t sweeping into our market and Silicon Valley doesn’t seem to notice us (even though we are so close). Meanwhile, some buyers are priced-out, some are not seeing anything attractive, and some are still sitting on the fence. But the age-old reasons to be in Mammoth remain. And they have endured all of the micro and macro concerns. And the advice to “choose wisely” rings as true as ever.
Happy Fourth of July!