Mammoth Real Estate Q&A — Can This Time Be Different?

This Mammoth Real Estate Q&A appears in the Memorial Day Weekend 2022 issue of The Sheet.

Q: I enjoyed your last “important things to pay attention to” column. I personally think the deck is stacked against the market. You seem to have a contrarian viewpoint on many things, so if a 2008 type event actually happens in the financial and real estate markets, how do you see it affecting the local market this time around? 

“The only function of economic forecasting is to make astrology look respectable”

-John Kenneth Galbraith  

A: The phrase “this time is different” is often joked about in discussions of economic markets and their cycles. It is about ridiculing denial. But the truth is that each time really is different in nuanced and unpredictable ways. The current dynamics are different from the 2008 era, and of course there are similarities too. But too many things make it all uncertain.

The biggest question will be; Where will the market distress come from this time around? And how intense will it be? This can often be a surprise. And conversely; Where will the market strength come from? Some of the key things have changed in the past 15 years.

Looking back to the market conditions that led up to the downward cycle that began in 2008, there are some real differences. First there was some totally screw-ball lending happening back then. Things like negative amortization loans, no income verification loans, and 125% loan-to-value lending including cash-out refinances. It was crazy and all too tempting for the risk takers and gamblers. And some people had no clue what they were getting into. The new Dodd-Frank laws of ~10 years ago made many (most) buyers in this market cycle actually qualify for a loan and put some money down (skin-in-the game). 

Most of the recent, new mortgages in the Mammoth market have been with at least 20% down. There have also been lots of cash buyers and tax-deferred exchanges into the market. There has been some highly-leveraged lending in the recent past, but nothing like what happened in the mid-2000s. And anybody who got a new mortgage up until a few months ago is now cherishing their low interest rate. Psychologically, these loans will be very hard to default on, even if an owner somehow ends-up underwater. If the market slides and there is significant distress, we could even see a “take over payments” era because of all of these low interest rate loans. That would be interesting.

The income expectations from nightly rental condos is different too. The term STR is now mainstream in the public consciousness, and with it all of the tools and discussions that swirl around it. There was no AirDNA data to analyze or focused Facebook back in the mid-2000s. The condo hotel sales process (a la Intrawest) promised (projected) wonderful streams of income for the owners. The problem; most of the projects were grossly mismanaged from the start which became general dissension amongst the owners and the guests. Lots of things went sideways, with owner revenue being a critical one. 

We now know that condo hotel projects need to mature, even under solid management. The revenues to the owners is not immediate like many had planned in the early 2000s. When values dumped many of the owners who purchased predicated on projected revenues ended-up going to foreclosure or short selling. Especially if they had some accelerated loan payment program.  

Today, new owners of condo hotel properties can move into solid revenue streams almost immediately (depending on timing). These properties are now well established and properly managed. This is a huge difference. The Airbnb era has also given new owners of STR properties the opportunity to ramp-up rental income much more quickly. Exposure and interest can be almost immediate, especially for quality properties. The Mammoth community relies heavily on the STR condo inventory for much of its tourism bed base (and bed tax production). This gives this segment of the market far more stability.  

At the end of the last local real estate cycle, late 2005 into 2007, there was tremendous hype in the market. Barry Sternlicht was the new Mammoth savior and everything was going to be turned into a heavenly bed. Roger Staubach’s company had paid over $50 million for the property next door to the Westin (now the proposed Limelight property). They were marketing the Ritz-Carlton Residences at prices in excess of today’s incredible values. Rusty was talking about a gondola down Main St.(or was it to the Airport?). Many buyers got caught up in all of it. The hype (or lack thereof) in this cycle is far more humbling, although some people still think they can become STR billionaires.  

Crazy lending, unrealistic revenue expectations, and classic hyperbole all pushed the market to the extremes in the last cycle. The prices/values were similar to today if adjusted for inflation. Some segments are even higher. So what are the likely stress points this time around? The recession /drought combination I mentioned in the last column could be the biggest factor. It is a one-two punch that Mammoth has seen before. In the past it has wreaked havoc on local businesses and property values. But the popularity of the IKON Pass and stronger summer tourism and even the rising geo tourism trend should alleviate some of the distress this time around. Many already argue for less tourism and greater quality of life. The balance may be a natural progression whether we like it or not.

Another unpredictable dynamic is the effect of all of this on local residential rents. Could it lessen demand? Increase supply? Both? Some squeezed owners could turn to long-term rentals for income stability. Especially if STR demand somehow decreases. The point that continues to be lost with many is that the beauty of STR ownership is revenue and usage. The illusive “cake and eat it too”. If times get tough, some STR owners may have to opt for more stable revenue and compromise usage. This could also include single-family homes. Poor economic times could solve the housing problem. It has happened before. It is the classic “be careful what you wish for.” But odds are that demand for housing in the Mammoth region will stay high. Housing has always been tight here. Rents will continue to be elastic based on demand and subsequent supply.

Another wildcard is government intervention. In the last down cycle there were increased opportunities to “save” distressed and defaulted properties. Many owners just threw in the towel. But along came a variety of programs to help owners. Through the whole foreclosure and short sale cycle the government and lenders gradually came to the conclusion that keeping owners in properties was the best thing. They worked with owners in a variety of ways. If the real estate market takes a big hit I expect the government to institute all sorts of programs to do loan modifications (including buy-downs), real forbearances, and all sorts of other crazy stuff. It is simply in the air (like student loan forgiveness). I’m not suggesting or condoning any of it. It is simply the current state of affairs. Bailouts are in vogue. And how it will happen in a market like Mammoth is a real unknown. 

One of the things that makes Mammoth “different” from other markets is the actual buyers and sellers. Many markets depend on first-time homebuyers and buyers who are stretched to qualify for the monthly payments. Higher interest rates impact these markets in a significant way. Buyers are simply priced out because of the increased payment. It is happening right now in many, many markets. Mammoth has far fewer buyers who are stretching to make payments. We have loads of cash buyers and others who make large down payments. These buyers don’t typically become part of the default and foreclosure crowd. Unless there is something behind the curtain that isn’t readily foreseeable.

Speaking of the Mammoth buyers and sellers, I often comment to people that this is typically a “don’t have to buy, don’t have to sell” marketplace. This is an interesting dynamic that many people don’t grasp. The majority of the buyer pool doesn’t ‘need’ to make the purchase here. They want to, but don’t need to (unless they are desperate to secure their “escape hatch”). And the sellers often don’t ‘need’ to sell. These are second or third homes or STR properties generating rents and usage. The higher prices of the past 22 months have alone enticed many owners to sell, but they didn’t need to sell. Some sellers become motivated to sell when they move to another state. Or maybe when their “Mammoth time” is up and they want a lifestyle/ownership change. And then there is the “let the kids inherit it” crowd of owners.

Based on past and ongoing interest in the Mammoth, there continues to be more interested buyers looking to buy than sellers looking to sell. This is why the available inventory remains low (this is why watching the inventory is critical). But many of the interested, potential buyers are shocked by the new price levels. But they too are looking for a lifestyle change and it includes the Mammoth region. In theory, if the prices were to come down there is likely to be a whole new volume of buyers seriously acting to buy. I see them on my website traffic all the time. The interest is not in speculation but in lifestyle and quality of life.  

And then we come back to the ugly topic of inflation (as discussed in the last column). The market conditions are such that serious upward inflation could outpace any natural real estate devaluation. It could especially happen in the Mammoth region if more and more buyers come to the market simply to hedge the inflation and satiate their lifestyle desires. It is a strange concept but here we are. I’ve been trying to wrap my head around it. It is the real unpredictability in the market. But such are market forces. Yes, this time could be different. Or not. Only time will tell.

Meanwhile, let us not forget the meaning of Memorial Day.

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