Vail, the largest owner of ski resorts not only throughout the world but also in…
Wow, it has been quite the run in Colorado Mountain real estate. Prices have been off the charts with many mountain communities roughly doubling over the last 2 years. For example in Summit county, home to Breckenridge, the median home price increased from 750k to 1.7m from April 2020 to 2021. Will the torrid pace in mountain real estate continue? What if anything will derail the party?
Why are the Colorado resort communities appreciating so quickly?
Before talking about what will happen in the mountain communities, it is important to understand what is driving the craziness in mountain real estate. There are three primary factors:
- Demand: Before Covid, the Colorado resort communities were popular but Covid supercharged this demand. Many high net worth individuals flocked to the resort communities with ample cash from the run up in the stock market to buy at all costs. This trend has continued for the last two years as stock market gains continue and the desirability of the resort towns is extremely high.
- Supply: At the same time demand supercharged, there is limited supply to meet any increase in demand. Every resort community in Colorado is land constrained either from natural features (mountains, rivers, etc…) and/or national forest that is undevelopable. This limited supply is what made each town popular. Unfortunately with increased demand and constrained supply this was a recipe for a crazy market with huge jumps in prices.
- Building costs: Not only is there limited land to build on in each of the communities, but also building costs are extremely expensive. From labor to building materials, costs to build in a resort community are double or triple the costs of a larger metro market. The overwhelming majority of building is at the higher end of the market due to the costs, further constraining supply.
Will the double digit growth in Colorado ski real estate continue?
In the short term, I think the party will continue albeit at a slower pace. Demand will wane as cities reopen and people spend more on services as opposed to goods. Look for travel to accelerate which will shift spending. The mountains will remain desirable, but the panic buying should subside.
On the flip side there is basically zero inventory in every mountain town and I don’t see that changing anytime soon due to the limited supply of buildable land and extreme building costs.
What will derail the astounding appreciation in the Colorado Resort Markets?
By any stretch of the imagination every mountain town has become frothy with values surpassing even the highest expectations. Anyone who is involved in mountain real estate is wondering when and how the recent party ends. Here are some scenarios:
- Jump in interest rates: Although most transactions in the mountains are cash purchases, a rise in interest rates will impact the market. As interest rates rise, there historically has been a correction in the stock market. High net worth buyers will feel less wealthy due to the market decline and pull back on discretionary purchases like a 4-million-dollar ski home.
- Demand tapers: As the world reopens there will be competition for discretionary spending. Instead of buying a ski home, buyers might opt for international travel and other spending on nontangible items. Furthermore, as vaccines roll out the necessity for an escape from urban markets will wane.
- Prices rise to a tipping point: At some point prices will rise to a point where alternatives are more desirable. For example, as the median price in Breckenridge approaches two million, many other markets could act as a substitute from Jackson hole, WY to Bozeman, MT to various other markets. Essentially the high prices will become a limiting factor to demand.
What happens when the party ends?
I would guess that a combination of the three items above will eventually slow the mountain markets. Items two and three would lead to gradual slowdown. The million dollar question is could there be a shock due to a major stock market correction.
When I look back on the 08 real estate crisis, the number one driver of the correction was overleveraging by borrowers. Fortunately, in the mountains most purchases are made in cash with zero leverage which will limit the downside real estate risk. When properties are owned in cash or very low leverage, there typically is not a rush to the door if there is a change in the market. Furthermore there is basically zero excess inventory which will further help limit the fall.
There is no way for prices to continue at their torrid pace for much longer. Although a major correction in mountain real estate is not in the cards, a slowdown is imminent. The most likely drivers will be a jump in interest rates, a tapering of demand, and the rise of alternatives as prices reach a tipping point. What do you think will be the driver to slow down Colorado mountain real estate? Do you see a major correction or a slowdown in demand as I am predicting?
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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