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Colorado
ski properties are enjoying a dead-cat bounce, although readers of a recent
article in the Denver Post might infer there is something more to it
than that. The article noted that in Eagle County, which includes tony
Vail, residential transactions were up 190% year-over-year for the first
quarter. That represents 276 properties changing hands, compared with
145 during the same period a year ago. However, as the article acknowledged,
the surge was from very depressed levels, and it still fell 27 percent shy of
the total for 2008 and 58 percent shy of the figure for 2007. And
nowhere was there any mention of price trends or rental costs. If these
factors had been taken into account, it would have made clear that valuations
will have to fall much further before ski homes and condos could conceivably
experience a sustainable bounce.
We
recently sat down with a Vail property owner who worked the numbers for us.
He said that even after collapsing from a peak price of $1.3 million to
around $800,000, a two-bedroom luxury condo in Vail is still a lousy
investment. Assuming the unit is rented 130 nights at $350 per night –
a fairly optimistic assumption, according to our source – annual gross
income would be $45,500. Half of that would go to the leasing agent, leaving
$22,750. Subtracting a further $15,000 for taxes, maintenance and homeowner
association fees would leave $7,750. Then there are mortgage costs of
about $30,000 per year. This is based on a 6.5% loan on 60% of the
property’s value. You should add a 6% opportunity cost, or
$19,200, on the 40 % not financed, since that’s what you could earn
– without all the hassles – on a closed-end muni-bond fund. Thus,
the investor who scooped up a $1.3 million property for a supposed fire-sale
price of $800,000 would still have negative annual cash flow of a little more
than $41,000. That might work if ski condos were appreciating in value by 15%
of more per year, as was the case before the housing market collapsed in
2007. But because prices have instead been falling, most speculators
who bought within a few years of the top have taken a bath.
It
Gets Worse
Things
are likely to get much worse before they improve for a couple of
reasons. For starters, listings in Vail, as well as in other Colorado
ski resorts, not to mention ski properties in California, Vermont, New
Mexico, Wyoming, Utah and other states popular with skiers, are said to be as
thick as the phone book – enough inventory to last for years, even in a
booming market. But what makes ski homes and condos particularly vulnerable
is that they represent mostly speculative investments that are the first to
be liquidated when property owners get on the ropes financially. It is
far easier for them to sell a ski-condo in Vail, Breckenridge or Winter Park
than to move their families into less affluent neighborhoods at home.
The bottom line is that for ski properties in Colorado and elsewhere, the 40
percent markdowns that have occurred so far are just the beginning of a real
estate collapse that will take years to play out.
Rick Ackerman
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Rick Ackerman is
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