Mammoth Real Estate Q&A — Is It 2006 All Over Again??

This Real Estate Q&A column appears in this weekend’s issue of The Sheet

Q: Some Mammoth real estate agents are telling me that the big winter and the Ski Area sale are driving up local real estate prices. But I feel like the conditions are similar to 2006. And we know what happened after that. Where is the market in your eyes??

A: While the conditions may be similar there are some stark differences. There is no doubt that the big winter and the potential merger of ski resorts that include Mammoth have created some buzz in the market. The similarities to 2006 are uncanny — big winters mixed with ownership change and all the promise that comes with it. But how high values will be pushed and how long it will last is anybody’s guess.

Decades ago I was taught about Mammoth’s 11th Commandment; Don’t set yourself up for disappointment.

Mammoth does have a history of boom and bust. It was part of the California gold rush in the 1800s. And the migratory native Americans who came here in the summer probably had their plentiful and not-so-plentiful years too. And as long as I have lived here the powers-that-be have been trying to “smooth out” the local economy. Seasonality is simply the nature of the place.

So let’s look at what makes 2017 different. I may sound like a broken record but the one critical thing to understand about today’s Mammoth real estate values is that they have only rebounded to ~70% of the mid-2000s. Some more and some less. The Mono County Assessor recognizes the spring of 2006 as the peak of local values back then. There might have been some really peak sales beyond that, but this was generally the peak in the aggregate. The Starwood ownership brought great expectations. But it didn’t last.

Unlike most of California, especially most of the coastal communities, values in Mammoth and Mono County for the past 18-24 months have remained stagnant at about 60-70% of the 2006 values. But in the last six months there has been some real upward movement.

I can make educated guesses as to why. The 2012-2015 drought years did not help. The condos offered for short term rentals got crushed on revenue during that period. Even the summers weren’t that much fun with very little water in our creeks and lakes and all of the vegetation turning brown and burning.

The “Mammoth Malaise” didn’t help much either. Ownership of the Ski Area by private equity interests did nothing for the ski experience or the community. Few entities can thrive under that type of management. The Economic Crisis of the late 2000s and the drought simply made things worse. The current potential to move away from the private equity style of management is enough to significantly move real estate values in the whole Eastern Sierra.

Another difference is inventory. Inventory has a couple of faces in the local real estate market. In the handful of years prior to and including 2006 there were hundreds of new units brought to the market including the condo hotel properties, numerous Intrawest condo projects, the completion of Snowcreek 5 and Snowcreek 6 (The Lodges) as well as plenty of new single family construction. The market absorbed a significant amount of inventory in a relatively short period at increasingly higher prices.

But in the same number of years prior to today there has been almost no newly built properties; a negligible percentage compared to 2006. There have been dozens of custom homes built by individual owners. These don’t typically carry much risk in the market; these are affluent owners and most are built without financing. There has been the new homes in the “Grey” subdivisions. But as most properties have been selling well below replacement value, development has stood still. So very little new inventory has become available.

There is another aspect to inventory. Inventory is the supply side of the real estate market. Buyers buying is the demand side. Realtors love it when there is good supply of both; it means lots of transactions. The available inventory (supply) in some of those early 2000s years was incredibly low. Some people were even flipping the pre-purchased Intrawest units. But sales volumes were high despite the low inventory. Statistics show that this was true in most of the nation during that period.

The local market slowed in the summer of 2005. It was somewhat exhausted. But the October announcement of Starwood Capital purchasing the Ski Area launched it another 10-20% in the following 18 months. And there was plenty of inventory for the buyers to choose from.

So here we are in 2017 and the inventory is low. Significantly lower than a year ago. And sales volumes are up. And there is buyer demand. The rising values are also enticing some current owners to become sellers. Many new listings are owners who purchased in the mid-2000s when values were peaked. They are apparently seeing it as good time to sell. Their accountant may “make it work” for them.

But so far the demand is outstripping the supply. The normal summer “inventory build” in the market that peaks at Labor Day is not happening. This fall will be interesting. Many of the new listings are getting sold, and rather quickly. As values rise there will be more owners becoming interested in selling. This isn’t like 2006, it is more like 2000-01. It is an interesting equilibrium, certainly one worth watching. (As a note; the 2000-01 timeframe saw the stock market crash and real estate values in Mammoth almost doubled.)

And who knows what will happen when the new KSL/Aspen company is finally formed and the pre-IPO hyperbole begins. And what if some truly meaningful development is proposed or proceeds here in Mammoth? (Remember “The Place To Be Is About To Be”?).

Another significant difference is that buyers in the condo hotel segment have had to be cash buyers since 2010-11. Fannie Mae essentially redlined conventional financing in most of the condo hotel segment. They deemed the vacation nightly rental properties to be too risky. A significant volume of the properties foreclosed on in the past REO cycle were condo hotel units. They were leveraged and not producing sufficient revenue to make the payments. They were also purchased for some pretty high prices. Some as much as twice what buyers are paying today.

But that segment of the market has changed dramatically since then. Today the condo hotel units are producing solid streams of income. They certainly had not “matured” to this point in 2006. If they had, the Mammoth defaults would have been minimized. But most of today’s condo hotel owners have no loans. Many “found” the condo hotel properties while searching for “returns” in the recent low interest rate environment. That segment of the Mammoth real estate market is far more stable. But selling prices aren’t up to warrant developing more. Not yet.

The increasing popularity of Mammoth in the summer is changing many dynamics also. Summer and other off-season rental revenue has grown for local condo owners. So much so that this alone has created more demand for vacation rental properties. Summer is much more dependable. It has also stabilized the Town coffers. And we have also seen an increasing number of summer-oriented buyers.

2006 was also the peak of “sub-prime” lending. The following financial crises spun into stricter lending practices (Dodd-Frank) including qualifying ratios and appraisal. It appears the lending has loosened in the past 12-18 months but it is nothing like 2006. That was the true “fog a mirror and qualify” era. If values rise significantly and lending moves in that direction, then that will be telling.

And through the past few years of very low interest rates, a large percentage of Mammoth’s real estate acquisitions have been purchased with cash. Financed transactions have been with greater down payment requirements. Any significant lingering debt is likely to be why so many mid-2000s buyers (who haven’t been foreclosed on or did short sales) are now looking to unload the debt. Immense amounts of debt typically causes instability. Most of the massive debt and higher interest debt from the 2006 era is long gone. That is a good thing.

I look forward to what the next year(s) potentially bring. The hype should be impressive once it gets going. If and when the new ownership goes to the public market to rival Vail Resorts the Mammoth ski pass holders (like all the other resort pass holders) are likely to be aggressively solicited to purchase stock in the initial phases. It is right out of the old Intrawest playbook. Madison Avenue is probably drooling.  “Own a piece of your favorite Mountain” and on and on.

There may even be a program that rewards certain privileges for certain levels of stock ownership. Own 20,000 shares and you get free tie-down service for your jet at Mammoth Airport. Years ago having a season pass was real bragging rights. Now pass holders will have the opportunity to say they are part owner too. That should generate a new level of enthusiasm. And as we learned in the last cycle, “selling real estate is the transfer of enthusiasm.”

If we look at Mammoth’s boom and bust history we know there is significant upside potential in today’s Mammoth real estate market. Where it really goes is dependent upon many factors including the national and global economies, snow, and what the Ski Area’s new ownership really does. Oh, and if there is unfavorable geologic activity. Starwood clearly set us up for disappointment. Hopefully the new Ski Area enterprise doesn’t.

The old real estate guys that worked in my company in the 1990s and 2000s always said you knew the peak of the market had been reached when the local Realtors are buying properties from other local Realtors. That happened in the mid-2000s. And I don’t see it happening now. I’ll let your know when it starts happening.

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