The Estin Report: Aspen Real Estate Early Winter 2007/2008:

By EstinAspen.com, Unfiltered 12-11-07

The Estin Report: Early Winter 2007/2008:
The Aspen RE Market and Trends
By Tim Estin | MBA, GRI | Broker Associate | Mason Morse Real Estate
(Updated from original article, Mountain Business Journal, Jan 2, 07)
To download this and other articles on Aspen and Snowmass & Pitkin County real estate issues, go to Tim Estin's website: http://www.EstinAspen.com

The Current Facts
 2007 will be either the best or second best year ever for the local real estate market, according to a Land Title Guarantee end of October Report on Pitkin County deeds recorded with the Clerk’s Office.
 Sales volume for the year, January through October ‘07, was up 3%, at $2.22 billion, ahead of last year’s record pace of $2.16 billion for the same period. Last year’ total record sales was $2.64 billion.
 2007 October dollar sales volume fell nearly 37% year over year, $183 million compared to $289 million in October 2006, and the number of transactions were down 30%.
 However, a per unit monthly count of properties under contract only from Jan. through September 30th increased 15% over 2006. Under contracts only provide a snapshot of actual market activity in real time, not solds which have already occurred. (This data was provided by Phil Miller of Mason and Morse).
• It is difficult to know if sales are in fact slowing, or if the October fall-off is merely a more pronounced case of off-season blues. It is not yet apparent, although everyone here pretty much agrees the frenzied record pace of the past 4 years will slow to a more normal - and healthy - pace.

There may be some reverse psychological comfort in knowing that for the year, as of now, Aspen is showing some resiliency to the national housing downturn.

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Summary

Whether Aspen’s past four year’s of unprecedented high demand, limited inventories and significant price appreciation can be sustained remains to be seen. Things could change over the next 3-12 months in light of problems in the credit markets, gyrations in the debt market that have led to a reduction in the availability of large mortgages, high oil prices, Iraq/Iran, and volatility in the stock market. But typically, there is a significant lag time for Aspen to feel the effects of national/international events.
If history is a guide, even if the Aspen market slows down or flattens, price decreases – and specifically ‘deals’ – will be minimal or unlikely except in rare individual circumstances. The
average sold to list price is above 95%, and over 70% of transactions are cash. Owners are generally under little pressure to sell, to lower prices significantly, and they can afford to wait it out.

Buyers, on the other hand, will have more property choices if inventory levels increase. This may be a better opportunity than any other in the past four years for Buyers to be selective with more and better product to choose from.
If there is a cooling off period, it should be regarded as a healthy sign. A return to a
more normal, versus hyper, market pace will be either “the pause that refreshes’, (like other prior flat Aspen market periods) or “business as usual”. It is a cyclical interval consistent with Aspen’s history of rapid price appreciation followed by market lulls, but not fall-offs. This step pattern is
representative of Aspen’s long term investment strength. This time, however, a market lull may be the calm before a long sustained wave of demographic and economic trends bear down on us like a rolling tsunami. These will be discussed in the next few pages.


National and Local/Regional Trends Affecting the Aspen Market

National Trends:

• Baby Boomer Wealth: According to Forbes Magazine, an estimated $30 Billion is expected to transfer from the WW II generation to baby boomers. Combined with retirement incomes, this generation is easily financially secure enough towards making their vacation/second homes their primary homes.
• Interest Rates: At the end of October, the Federal Reserve lowered the Fed Funds rate .25%. Rates have been trending downwards. The yield of 10 yr Treasury bonds is 4.3%.
This means that home equity lines and credit card rates will go down as they are based on the Prime Rate which is Fed Funds +3. More important to the housing market, however, is that lending standards are on the rise, (Jumbo mortgage rates in excess of 6%), while home equity levels are on the decline (the opposite in Aspen), making it much more difficult for buyers to find a lender or maximizing the size of a loan.
• Stock Market: The stock market is down from its year’s highs, but the Dow Jones is up 9.1% and S&P up 6.4% for the year (November 5, 2007).
• Job Growth: As of yet, there is no evidence in the employment data that suggests the economy is in the midst of a major meltdown, especially with the release of 2nd & 3rd Quarter Gross Domestic Product (GDP) growth at an annual pace of 3.9%
• Fall of the Dollar to record lows: US properties are now trading at a significant discount (40% compared to five years ago) from a European perspective. Not only has foreign purchasing power increased but from an international viewpoint, Aspen prices aren’t that out of line when compared to London and New York City prices, amongst others.
• New Global Wealth: There has been a huge ratcheting up of global and US wealth accumulation. China, India and Russia are obvious international examples. In the US, the hedge fund industry is remaking the world of wealth.
• Surge of New Money: According to a recent New York Times article, this new money is “reshaping wealthy communities as drastically as did the dot-com boom a decade ago…in less than a decade, hedge funds have created a class of centimillionaires…in Greenwich, Ct. super luxury home sales increased even as the total number of homes sold fell over 15%.”
• Technology and the Footloose Economy: Advances in information technology, communication infrastructure, the emergence of the service economy and the aging
demographics have created a “footloose economy”. The economy is no longer bound by
“space” and geography. Ten to fifteen years ago, people followed jobs. Now, they move wherever they want and jobs follow to these desirable areas.
• High End Real Estate Resilience: Traditionally, upper end real estate markets tend to hold their own even as the rest of the housing market slows. Wealthy buyers are
seemingly buffered by market volatility. An October 2007 article in the NY Times stated, “The very very high end of the communities such as the Bay Area, LA, NYC, Miami and to a lesser degree Chicago, Seattle and Washington that have global appeal have held up much better than rest of the housing market…much of their buying is done with cash and not affected by the global financial turmoil and its impact on the availability of mortgages.”
• Credit Crunch/Recession Possibility: In light of the credit melt-down and a possible recession’s affect on high end real estate, the on-line magazine, Financial Planning, recently wrote, “High Net Worth individuals are vulnerable to changes in their net worth. As "qualified investors" with access to hedge funds, they may have seen their portfolios damaged more seriously in recent months than have standard-issue investors. The larger
question is whether the credit crunch will spark a full-blown recession. If it does, even
the richest Americans could find their wealth diminished, at which point it will become much clearer how well insulated top real estate markets truly are.”
• Trophy Properties: Everywhere one looks, trophy properties are being snapped up at unbelievable prices.

Regional/Local Trends:

• Fastest Growing Region: According to the Center for the Rocky Mountain West, the Rocky Mtn region (5 state: Idaho, Montana, Utah, Colorado, Wyoming) is the fastest growing area in the country amongst persons ages 40-60 – the classic baby boomers. Also, the ‘echo” generation, children of baby boomers are the next largest population segment flocking to this area, referred to as the “third coast” by demographers.
• Boomers Retire and Head West: There is a huge new retiree population migration.
These people are newly retired, aged 55-64, “young elderly, grabbing life with both
hands” as one Center for the Rocky Mountain West 2006 study put it “They are couples I n good health, with high education and income levels”.
• Second Homes Become Primary Residences: According to a recent study by the Northwest Colorado Council of Governments, increasing numbers of second home owners are making it their permanent home. Second homes are on the decline as more and more owners in Pitkin County, Eagle and Garfield Counties, are taking up residence here year round. “Baby Boomers are just coming into that age bracket -55 to 64 –
most likely to purchase second homes. And as they hit their 60’s and 70’s, a huge influx of full-time residents is anticipated”, said the consultant who wrote the study. As this happens, more and more full-timers will add to community life and a maturity of services.
• Local Population Growth Forecasts: According to a recent October 2007 Healthy Mountain Communities: State of the Valley Symposium, the population of Eagle, Garfield and Pitkin Counties combined is expected to increase 20% from 116,500 in 2005 to 138,800 in 2010. By 2025 it will ‘soar’ to 220,000 or 88% more than the current level. Nationally, the growth rate has been 1% annually; the Pitkin County growth rate is 1.4%, Garfield County is 4.5% and Eagle County is 3.2%. The big driver of the Pitkin County economy will be surging demand for second homes for reasons cited above. In the next 20 years, Pitkin County’s population is expected to increase 46%.
• Parents Purchasing College and Resort Properties for their Children: More and more parents are purchasing housing for their children in college and resort towns as a
way to defer expensive housing costs for the kids, to use the property as a 2nd home, possibly for retirement, and to take advantage of the potential appreciation.
• Public Lands as Magnet: People are flooding to areas surrounded by public lands – US
National Forests, National Parks, BLM - places where ‘open space’, green forests and wilderness appeal prevail. Dominated by recreation and tourism, these lands have become the equivalent of prime waterfront property.
• Exurbia: A huge population migration to “exurbia”, semi-rural areas where affluent Americans are moving in growing numbers, especially to smaller towns of less than 50,000.
• Controlled Growth (Strict Zoning) Fuels Real Estate Wealth: The “environment” has become the key economic asset for these communities. There is a direct economic
upside for property values in controlling growth, and this is a huge driver of local real estate values.
 In Pitkin County, over 85% of the land is publicly owned, another 6% is zoned resource or agricultural (rural and large tracts of land) and an additional 3% is deeded private land trusts or local government open space. Pitkin County has limited private land available for any kind of private development.
 The other counties of the Roaring Fork Valley - Eagle and Garfield Counties - have 79% and 63% publicly owned lands respectively.
• Lack of Speculative Activity: The high price of real estate, strict zoning and lengthy approval process and limited available land has made any kind of development hugely expensive. The economics of the project difficult are difficult to justify. But where new projects have been finally approved and developed, design guidelines have maintained the overall quality of small town living.
• Affordable Housing Shortage: The lack of affordable housing is driving Aspen’s employees further and further downvalley to Glenwood Springs, Rifle and beyond. This detracts from a local community base and ultimately diminishes a thriving and dynamic ‘small-town’ character of Aspen.
• Increasing Traffic: There has not been a City/County consensus to solve the “Entrance to Aspen” problem for thirty years. Meanwhile, traffic in town and on the west side of
town during commuting hours gets worse every year. The only through road into Aspen for employees, trucks, slow moving construction vehicles, tourists and second homeowners, Highway 82, is pushed to capacity eroding the overall quality of life. But it’s not even close to big city traffic …yet.


2008 Winter Forecast

For the past 50 years, Aspen has not only been an important place to be seen, but also it’s been an incredibly good and solid investment. Although owning Aspen real estate is primarily a quality of life decision, more and more buyers also see Aspen real estate as part of a solid portfolio diversification plan.

Yes, most real estate professionals here believe we are probably poised for a slowdown, but at present, early winter 2007, there is little sign of that.

It seems likely that it’ll take longer to market properties and that the unprecedented appreciation levels and hyper-activity of the past 4 years will slow. While the national housing downturn may have a more immediate stabilizing affect on the Aspen market, in the longer term there should be dramatically increasing demand for Aspen and Roaring Fork Valley property based on the significant demographic, socio-economic and local trends cited earlier.

Whether right now Aspen is the land the national housing slump forgot, or sunning itself before a
long dark winter, is anyone’s guess. A credit or stock market meltdown, a strengthening dollar, a terrorist strike, huge energy price spikes, a recession and other shocks to the economy certainly could inflict blows to the Aspen real estate market.

If one is concerned about market timing, especially whether it is prudent to buy into a peak, or maybe even a flattening market, please remember this fact: At any point in time, prices here have always been setting new records. So far, this market has rarely – if ever - corrected, but it has ‘paused’ for 1 – 3 years (as example, post 9/11 the market stagnated for about 30 months).

The historical pattern has been that when prices stabilize, it becomes the new base for the next
market climb.

In the bigger picture, those who have sat on the sidelines waiting for a ’great deal’ or a market correction have basically spent their lifetime regretting that indecision and procrastination. At any time in the past 50 years, this market has consistently presented ‘sticker shock’ to new buyers. And though history is no indicator of future results, once one gets over the psychological pricing hurdle and plans on at least a 3-5 year horizon, boldness in the Aspen market has almost always been consistently rewarded.

For more articles on the State of the Aspen Real Estate Market and related Aspen real estate articles, see The Estin Report, original articles by Tim Estin at www.EstinAspen.com He can be contacted at Mason and Morse Real Estate, 970-920-7387 office, or by email: testin@masonmorse.com


www.EstinAspen.com

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