This Mammoth Real Estate Q&A appears in the Easter Weekend 2022 issue of The Sheet.
Q: We think the Mammoth real estate market is nuts, and that many other real estate markets are just as nuts (especially with low inventory). And all of the mixed signals from the rest of the world are confusing too. That said, we still see owning a piece of Mammoth in the future. So besides the higher mortgage rates, what are the important things to pay attention to in the near and distant future of the Mammoth real estate market?
A: In the past year we’ve gone from “the craziest market ever” to the craziest world ever. But I will refer back to the points I made in the Thanksgiving 2021 Q&A, namely watching the inventory. The overall market dynamics have changed since then and will continue to change. The dance between buyers and sellers can be observed through the total inventory numbers, absorption of new listings and subsequent price support, lingering listings, overbidding, etc.. So far there is only a modest change in the overall market trend of the past 22 months. But don’t expect it to stay this way.
The significant changes of the past few months include the geopolitics and macro economics, the larger real estate and financing market including interest rates and mortgage fees, and even things locally. And the changes are likely to keep coming. Here are the things that I intend to watch for the balance of 2022 and beyond.
The local and regional real estate inventory is something I constantly report on. We’ve been in a low inventory environment for many months and this has certainly been the driver for upward pricing and overbidding. But Mammoth, like most second home markets, is a highly discretionary market. This isn’t talked about very much. People (and owners) are constantly changing their minds and their plans and their priorities. We’ve seen plenty of this in the past two years. And something I’ve experienced first-hand in the past few months –– when their children change their minds and plans, things can change even more quickly. Change is constant.
Taxation also plays a role in the discretionary aspect of the market. The majority of Mammoth real estate is either owned as pure second homes or as STRs or more generally property “held for investment”. This factor can help facilitate (accelerate) the decision for owners to change their minds. Second homeowners typically liquidate and simply pay taxes on any of their gains. And they move on. Investment property owners typically do tax deferred exchanges to other investment properties. This is where STR influences Mammoth and so many other resort markets. People are 1031 exchanging in-and-out of Mammoth all of the time. This flexibility can also make it quite discretionary.
There are plenty of things that can make owners change their minds about Mammoth. Laughingly, snow can be one of the most ambivalent subjects around. We love it, we hate it. It can be a thrill and can also be very expensive and troublesome to deal with. At some point many owners (and residents) just say “enough”. It can make desert or tropical properties look very attractive. This type of movement often occurs after “big” winters. But it also happens during a drought period (not enough snow).
And we haven’t had a good earthquake or volcano scare in awhile. These episodes, whether real or contrived, made serious market disruptions in the 1980s and 90s. But this is certainly out of anybody’s control (well, maybe Mammoth Lakes Tourism can “sell” it).
Changing macro economic conditions can also impact the local market in significant ways. There is plenty of historical proof. Recessionary periods can be brutal on all aspects the local economy and second homeowners alike. Ultimately, the market (including inventory volume) can be so much more fickle in a discretionary market like Mammoth. The drivers of any inventory increase (or decrease) is the key factor to watching the market going forward. And as I write, there are still many old and newer owners who are currently watching world events and economics and trying to decide if now is the time to sell. Some even think they are too late.
General inflation is certainly the front-and-center bugaboo at this point in time. But the impacts of inflation can cut both ways in the Mammoth real estate market. Tangible assets like real estate are considered a good hedge against inflation. There is no doubt this type of thinking has driven sales activity in the local market in the past year (including the propensity for overbidding). And while many of the luxury buyers in this market are cash buyers, financing purchases at very low rates made even more sense for many. This door has closed fast.
But the inflation is also driving up the cost of real estate ownership. Local HOAs are already raising monthly fees based on rising expenses and up-side-down budgets. All will be forced to follow. Any HOAs planning major renovations (roofs, siding, asphalt) are going to really feel the bite of increasing construction costs. Individual property owners will certainly see the “creep” too. And it will flow through to commercial tenants with triple-net leases. Historically, rising costs and assessments have triggered owners to sell. But will they want to lose their hedge on inflation? We’ll see.
And eventually inflation and higher costs will impact the volume of tourism. In the past some have argued that higher fuel prices have kept travelers “closer to home” and places like Mammoth actually benefit –– take the RV to the Sierra but not to Yellowstone. But reduced tourism is likely and it will eventually impact STR, TOT and local business revenues. The Town may not care about reduced revenues but the STR and business owners sure do. Especially after the roller-coaster of last two years and in the face of rising costs (the Town may care if the cost of their pet projects goes sky-high). All of this is going to have direct and indirect impact on local real estate.
With these dynamics in place the STR market will command closer scrutiny in the coming years. Today, how important is STR and ROI? –– short term rentals and return on investment? Recent listings to the market are already showing that some new STR owners from the past two years have already decided that this business isn’t for them. For some the returns aren’t adequate enough (what were they promised?). For others the headaches and responsibilities are more than expected. STR ownership isn’t for everyone. These properties have and will continue to come back to the market. Some of these “turn-key” properties may become good buys. As long as the cash flow is adequate for the new owner.
Watching the inventory is mostly about the supply and demand in the market, and this is always changing. There is now a new demand feature that has and should continue to impact the Mammoth market. Where this goes is anybody’s guess. There is no metric for it like interest rates or CPI. It is simply the increasing post-Covid attitude of many people, especially baby boomers, that their time on earth is getting short, and it is time to make a move to a more desirable lifestyle. And it is no longer all about account balances and what their financial adviser recommends. I’ve always referred to this as “more money than time”. Sound familiar? For many this includes having a place in the Mammoth region and spending more time here. And others are moving beyond Mammoth to some other location (more discretion). This movement will continue to affect supply and demand.
One thing we could see in the coming months is the market moving away from the “buy anything” environment of the past 22 months. For sellers this means that the opportunity for easily liquidating marginal properties, or ones with significant defects, is coming to a close. The last 22 months has been a great period for the owners/sellers of these properties.
Higher prices and higher interest rates should make buyers more discerning. Assessing basic real estate factors like location, solar aspect, view, construction quality, maintenance, etc., should return to the market. Remodeled and “turn-key” properties should still bring a premium. But going well over $1,000 per square foot for a remodeled 50-year old condo is pushing it.
Another factor I watch closely and will be important to watch in the near future is the flow of capital into Mammoth and the region. Now that the primary commercial air service is located in Bishop, they are certainly included. There has been tremendous investment into the residential market in the past months. But now let’s see what happens elsewhere in the face of inflation and a potential recession. The investment and renovation work by the new owners of the Sierra Nevada Inn is a good sign. New lifts this summer at Chairs 1 and 16 is another good sign. Alterra needs to be encouraged to keep investing in their crown jewel. Let’s hope to see more private side commercial investment and (re)development.
The drought period’s of the late 1980s/early 90s and of the early 2010s clearly slowed the local economy. They were also combinations of drought and recessionary periods. We could be heading into a similar scenario, especially with inflation and higher interest rates. But they were also periods of great opportunity on many levels. They also proved Mammoth’s resiliency. Today, Mammoth’s economic and tourism base should be stronger than those past periods. But this could always change.
Now if we can just get a few hundred workforce housing units completed.