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Real Estate Bubble In Mammoth?
Q: We own property in Mammoth and we are really not interested in buying or selling but we keep hearing about real estate bubbles in other markets, like San Diego, Las Vegas, etc., and we know prices have gone up quite a bit here in Mammoth the past few years. We know you have touched on this subject before but it seems like it could be ready to happen here. We want to know what you think?
A: Like the changing of the seasons, it must be that time of year again. I am hearing this question over and over. The answer hasn't changed much. But there are reasons for concern, and reasons not to be concerned. Those who know any history at all know that real estate markets have boomed and busted, especially in California, and in Mammoth too. I'm hardly oblivious to the concept like so many real estate professionals in Mammoth seem to be. I remember what the Tax Reform Act of 1986 did to an already beaten up Mammoth market. And I had just started my company in early 1991 when things really went in the tank from then until late1998.
Some things have changed; like the current credit and lending policies, like FICO (credit) scoring and their ramifications, like web logs (blogs) with lots of information and mis-information, and maybe even a change in the ownership and direction of Mammoth's largest industry. Some things haven't changed: fear and greed, baby-boom demographics, and basic fundamentals.
The people who are predicting the bursting of bubbles (not necessarily here but in real estate markets in general) are looking at certain indicators, so let's take a look at those indicators and see how they affect the Mammoth market. The first thing bubble observers look for is the available inventory of homes for sale, especially in relation to the number in escrow and the period of market absorption. This is a market specific relationship. This is a tough one in Mammoth. Lately, we have an inordinate amount of owners who are just dangling their properties out there for sale to see if a big fish comes by. Is this really viable inventory/listings? These owners range from old time owners to relatively new owners, but they really aren't motivated and even if they reduce their prices by 15 to 25% their properties still aren't likely to sell.
Even with these listings in the inventory the number is "normal" for this time of year. That is they are higher than the peak demand periods of the last few years but half of what we typically had in the 90's, and a lot more units have been constructed since then. We'd probably have more properties in escrow but many sellers have their prices at the "next level" rather than "today's level", and the real buyers aren't going for it. All in all the market has fallen into a "traditional selling cycle". That cycle shows strong sales and diminishing inventory in the late summer and fall with the anticipation of winter, and the same in the late winter/early spring while the families are vacationing here. Conversely, sales slow and inventory builds during the late spring and summer. For the most part real estate sales in Mammoth are predominantly driven by the enthusiasm for winter recreational activities. So right now there is nothing about the inventory that is abnormal.
The second thing bubble observers look for is the level of speculation in the market. There is some small amount speculation in the Mammoth market, mostly in the new, pre-sold Intrawest properties. Most of these speculators are repeat customers of Intrawest and have done very well in the past. And from my observation they are the kind of people that are not going to depend on the profits from these speculative sales for their next trip to the grocery store. A few others have apparently speculated in the fractional projects, and I wish them well. But for most that own here, speculation has a different context, they are speculating on another great winter, or bigger trout, or the opportunity to spend more time here, or maybe even spend the rest of their lives here. Bottom line–people are buying in Mammoth because they want to be here, whether they are here in person or here in their minds.
The next thing bubble watchers look for is the volume of rentals in the market and the price of those rentals especially compared to the cost of ownership. Now Mammoth is very different from most markets. Year-round rentals are very tight. The new affordable and employee housing projects probably won't make a big dent in that, but a year from now we will know. Some of the less desirable places do sit vacant in the summer. The vacation rental business is a whole different matter. Lately, we have seen another wave of potential buyers looking for investment/vacation properties that make economic sense. In fact most of these potential buyers want to put very little down and recoup their costs with managed vacation rentals. It is very tough to do. Well, more like impossible. Utility costs, homeowners fees, reservation company fees, cleaning fees, and more, all take a big bite. Some owners are successful doing the rental part themselves through the Internet, but the costs are still there. If you're looking for a cash-on-cash investment property, forget Mammoth. Try Tennessee.
But the vacation rental business does work for plenty of people. Perhaps they've got low entry costs, or they bought with 1031 money, or many just don't have super high levels of expectation–they want the rentals to cover some of the expenses while they or their family enjoy time in the property. Ultimately, it's hard to make a correlation between the rentals in Mammoth and any potential price bubble.
Another thing bubble watchers say is that vacation home markets are the first to fall on their face when the national (and international) bubble starts to lose air. They say vacation homes are "discretionary". But for many hard working southern Californians their vacation home in Mammoth and what it represents to them is their "sanity". It is the background screen on their computer, the bookmarks on their browser, and what they look back-to and forward-to in the middle of their workweek. And there are a whole lot of them. Why else would the demand for early-bird passes be so high? For many, owning a place in Mammoth is cheaper than psychotherapy.
Bubble observers also watch "consumer psychology"–whether the public's perception is that the market is going up or down. That's almost a laugh in Mammoth. The people I've sold property to in the past half-dozen years really don't even ask whether their values are up or down, they want to know how the skiing is, or how the fishing is or what time I can meet them for a drink. They want to know what's going on in "their" town. You see ownership makes them part of the community–a community they really want to be a part of. They don't want air service because they perceive their property values will go up, they just want to get here quicker.
And what about the boomer generation and this whole phenomenon that we have talked so much about the past few years? The bubble watchers never talk about the $16 trillion dollars they stand to inherit. What are they going to do with it all? Most likely they are going to enjoy themselves, maybe move to the mountains part-time, maybe full-time, and they also plan to leave vacation homes to their children. Legacy properties, and the inevitable trusts that will perpetuate them, are big in Mammoth, bubble or no bubble.
And what about all of the properties bought with cash and 1031 money? Even if there is some loss of value, they're not going to de-fault. And has anybody seen any foreclosures in Mammoth lately? A few maybe? They're likely to be the result of an ugly divorce or a horrendously run business. And what about the overall scarcity of land? In this county more land is reverting back to public ownership than being converted to private ownership. We've got less than 4 square miles. Without some restraint the place might look like Manhattan.
So will we see a real estate price bubble here in Mammoth? Only the future will tell. But I can tell you that many of the people who have bought real estate here in the past few years are a whole different breed from the years before. Most of it is real affluence, not people tapped out on their credit lines. And more and more of them are coming all of the time. You can be sure that the structure of potential sale of the Ski Area has them in mind.
A year ago I said the local real estate market was fragmenting. Some market segments are doing well, some are just sitting, and some do have the potential for decline. That should continue to play out. We don't like to talk about price reductions, just price corrections. To hedge against a potential price bubble, buyers and sellers should defer back to the fundamentals of the business. And they better know the market with an ear to the lessons of the past and an eye to the vision of the future.
Paul Oster is Broker/ Owner of RE/MAX of Mammoth. An archive of his past Q&A columns can be found at www.remax-mammoth.com. You can send him your real estate related questions to P.O. Box 2618, M.L. 93546-2618 or email him at pauloster@earthlink.net. All questions will be researched and presented with the greatest care but accuracy is not guaranteed. For legal, accounting, construction, etc., advice, seek out the appropriate professional.
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