Illusions Die Hard

This Summer 2009 Market Update is a bit lengthy but filled with lots of helpful information so perhaps print and read it again later.

First, a quick national snapshot. The latest national existing home sales and new home sales numbers last week failed to meet forecasts. The National Association of Realtors reported 2.4% growth in existing homes sales last week, to an annual rate of 4.7 million. The stock market – no longer satisfied with meager housing growth – wanted a rate of 4.9 million and suffered a small sell-off. Even though sales nationally managed to increase in back-to-back months for the first time since 2005, existing home prices are still falling, distressed sales are more the norm and the national market remains saturated with a 10-month supply of homes.

In the Telluride region, sales volume and number of transactions are at their lowest point in many years. Dollar volume in May 2009 is off 79% compared to May 2007, the last May timeframe of normal historical numbers (May 2008 was nearly as dismal as this past month). Number of transactions is no different with May 2009 numbers down 75% from May 2007. To further illustrate the state of Telluride’s real estate market, just 10 transactions (excluding in-family transactions) occurred in May including:

· the sale of a $1.6 million home at Little Cone Ranch;
· three fractional sales totaling $145,000;
· two homes in Mountain Village – one of which was a short sale of a brand new ski-in/ski-out spec home selling for $783/foot and the other a brand new trailside home selling for $788/foot;
· a small, older single-family home near the high school in town for $800,000;
· two sets of mining claims totaling nearly $1 million that sold to a national land trust for open space preservation;
· and a 0.75 acre parcel Down Valley purchased for $235,000 by a local family.

The Telluride real estate market is nearly at a standstill. Since the start of the year, the ratio of how much properties are asking versus what they are selling for in San Miguel County averaged 83.9%. In years past, that ratio hovered in the mid 90%range. The number of listings in San Miguel County for sale in the Telluride Multiple Listing Service is 1,053. June is about to finish with at least seven sales and, most importantly, there are 38 properties under contract in the region including five condos and two single family homes in Mountain Village; 22 condos and four single family homes in town (17 condos at Element 52) and a couple properties Down Valley.

The average number of sales per month since January is 14, equating to 75 months of inventory to sell. Clearly something has to give and I expect it to be additional price reductions of existing inventory along with carefully considered asking prices of new properties coming to market. Anomalies exist and masterpiece properties with all the right criteria continue to command above market prices. Buyers with specific sets of criteria aren’t usually chasing the foreclosure/short sale/best deal properties. The sale of the home at 304 Benchmark in Mountain Village is a great example of that; it was a non-distress purchase selling for current market ($788/ft). A couple years ago it would have sold for close to $1,000/ft.

For some sellers though, the reality of Telluride’s market is seemingly unimportant or of limited interest. For others, they are stuck in a sea of similar properties competing to garner offers from a thin universe of buyers while trying to hold out from reducing asking prices in order to be the first to sell. However, even price reductions don’t always result in offers these days. Throw in a relatively small but significant list of foreclosure and short sale properties in the marketplace (43 of them) and it becomes clear that Telluride is in the midst of a correction too, like much of the country.

The difference, though, is Telluride’s income and property values are much higher than almost the rest of the country while significantly fewer residents are below the poverty line and lower income strata. We’re not going to have the Phoenix, Miami or Las Vegas experience where upwards of 75% of recent monthly sales are foreclosure and short sale properties. We're a "want" based real estate market versus a "need" based market.

What’s selling in Telluride since the start of the year? Condos in Mountain Village closing between $350,000 - $500,000; 2- and 3-bedroom fractionals with an average sales price of $96,000; homes in Mountain Village either in the $2.4 - $2.8 million range or in the $4 - $5 million range; and homes in town below $1.4 million.

Which sellers are reducing their prices?



While this current correction seems to be destroying the illusions of the previous bubble period, it’s still a mixed bag. Americans seem to have straightened up pretty fast. After the crash, we saved all the cash we can, at least according to news and anecdotal reports. Savings rates, which had been near zero, are now bouncing up towards 5%. Americans are supposedly planting backyard gardens, cutting our own grass, driving less, cooking meals at home, and so forth. Yet the feds are waving the bottle under our noses encouraging us to spend. But on the whole, consumers seem to be breaking free of a few investing illusions including that ‘houses always go up in price’. People know it doesn’t work like that. Many speculators and homeowners alike have lost big. They’ll remember it.

In Telluride we will see continued and noticeable growth with families relocating to the area. Buyers will continue to make smart lifestyle purchases of real estate here along with realistic long-term land investing. With rare and risky exception, gone are the days of flipping properties. It now is much more about having a home in the mountains for the extended family to enjoy while usually renting it out to cover some expenses, or relocating for a few years or longer because of the excellent quality of life (community, schools, nature, history, skiing etc).

Yes, the Telluride housing market is slow. But it works like other markets. It reacts, then it over-reacts. It shoots, then it over-shoots. For the past 6-12 months it has been a rough ride for many sellers and brokers here but there is a silver lining for both Telluride and my business. Fortunately my business continues to pace along with a recent closing a couple weeks ago, another one about to close and a third under contract in addition to receiving two offers in the past week for seller clients.

Telluride has a few silver linings too. The ski company just announced a major snowboard World Cup event (boarder-cross and dual giant slalom) December 17-20, which is the only Olympic qualifier competition in North America. Mountain Village’s newest hotel, Capella, opened four months ago and is garnering lots of international attention and strong praise from guests. If you want to try out Capella contact me directly for an outstanding “Discovery Package” involving 3 nights lodging, dinner, activities and spa session for as low as $995. The Peaks Hotel finally is getting its bearings with an impressive remodel and the hiring of a highly experienced sales and marketing director. Other good news is that there were no foreclosures for the month of May.

Barring any extreme situations, I believe Telluride has touched bottom in terms of sales. We may bounce around down there for the rest of the summer through fall and into winter, but as sellers continue to relent and others acquiesce to a new market reality, transactions will continue. Offers are definitely being made and properties are contracting yet buyers for now have the benefit of choice and price on their side.

Downturn Slams Mountain Village Owners Association, Forcing Board to Eye Cuts and New Assessments

by Seth Cagin
06.26.09 - 12:41 pm
Board Discusses ‘Prioritization’ of Resources

The tough economy is not sparing the Telluride Mountain Village Owners Association, which is absorbing a sharp drop in revenues, particularly from real estate transfer assessments. There was ample evidence to be drawn not just from the content but also from the sober tone of a board discussion on Thursday that the crisis is, if not imminent, clearly in sight.

“The purpose of this discussion is that we want to make sure everyone is aware of where we are,” said TMVOA President Nelson Sharp. “I’d like to get a lot of membership input on this. We are going to be forced to prioritize, even if things partially come back.”

As of May 31, TMVOA, which is the master owners association in Mountain Village, saw revenues $952,000 behind budget. RETA, which has been the association’s largest revenue stream, is 66 percent below 2008 to date and 69 percent below the average of the previous nine years.

After accounting for expenses, TMVOA has lost $853,500 through May 31, compared to a budget that foresaw earnings of close to $100,000, for a net variance of $953,500. As a result, TMVOA reduced its reserves from $13.32 million to $12.47 million, versus a budgetary expectation that reserves would grow slightly.

The risk of foreclosures poses yet another threat to the TMVOA budget, if membership dues are affected, although that specter has not yet manifested and owner assessments through May 31 are actually slightly ahead of budget. Owner assessments, budgeted at just over $1 million this year, represent the second largest revenue stream to TMVOA, after RETA, which was budgeted to generate $4 million this year, but will likely fall far short of that.

Looking ahead, according to a memo prepared by TMVOA CEO Erin Neer, if nothing changes through the end of 2010, “the organization will be drawing down reserves significantly, leaving very little excess reserves to cushion further detrimental performance or significant outlays that are currently not planned.”

As one way to avoid that outcome, Neer identified several potential new revenue sources for TMVOA, notably a civic assessment, which is tantamount to a municipal sales tax and which could generate $1.5 million a year, and a resort fee assessed on lift tickets, which could generate $700,000. Finally, if existing revenue continues to flow below expectations and no new revenues are found, debt obligations and TMVOA’s legal obligation to fund gondola operations could require TMVOA to impose a special assessment on all the members, which consists of all property owners in Mountain Village.

In light of the daunting series of budgetary challenges, one Mountain Village resident, Don Orr, challenged the board by asking whether there is any firm evidence that money spent for event sponsorship, at just over $845,000 this year, and which includes the summer sunset concert series, is economically beneficial.

TMVOA president Nelson Sharp agreed that measuring an economic return on that investment is high on his agenda.

Several board members responded that events produce clear benefits, including a higher quality of life for residents and visitors alike, the creation of “vitality,” and making Mountain Village a desirable place for new buyers of real estate, which in turn generates real estate transfer assessments.

Penelope Gleason of Bootdoctors argued that while the sunset concerts, for example, don’t directly benefit her business because her store is closed when they take place, she absolutely supports them because they benefit the economy as a whole, and the success of restaurants and bars, who do benefit directly from the concerts, is essential to her own economic success.

As has often been the case in the Telluride region, some fundamental questions were posed in the course of Thursday’s discussion, namely, “what are we?” and “where are we going?”

“Are we the economic development arm of Mountain Village?” Sharp asked. “Are we the entertainment arm?”

In funding worthy causes, referring as an example to support for the Telluride Montrose Regional Air Organization, board member Jonathan Sweet said, “we should do our share, but not more than our share.”

Telluride Ski and Golf Co. CEO Dave Riley, who sits on the TMVOA board, said that it is necessary to put discretionary spending in one bucket and essential spending in another, “and see what that looks like.”

“I think we’ve gotten ourselves in this pickle here because for twenty years we’ve been riding a real estate development boom” and there’s a need to ask “what is our economic model for the long run here … that is not dependent on real estate development.”

“We can’t event ourselves out of this problem,” he concluded.

This story will be published in the July 2, 2009, print edition of The Telluride Watch.
© watchnewspapers.com 2009

A Plug For An Outstanding Illustrator & Photographer

I had the fortune to stumble upon Joanie Schwarz's outstanding works when she was on a working ski vacation to Telluride a couple years ago. Since then, Joanie has photographed and illustrated two portraits of our family -- one of our daughter Ava and the other of our border collie, Mesa. Joanie has been recognized in the publishing world for over 25 years for the dreamlike quality in her painted and photographic imagery including works in Time Magazine, US News and World Report, Playboy Magazine, and hundreds of book covers for Simon and Schuster and Scholastic books. She shoots newborns, bellies, family and kids, dogs, painted works and nudes. Joanie is frequently in Telluride and lives in New Jersey.

You can see her work at www.joanieschwarzphotography.com. Her illustrations were perfect surprise gifts for my wife as well as our relatives.

Vacation Homes Still Work For Some

An interesting article from CNBC

Vacation Home Still Works For Some
By: Shelley K. Schwartz, Special to CNBC.com | 23 Mar 2009 | 01:15 PM ET

Interest rates are at rock bottom. Housing affordability is at a record high and the glut of available properties on the market has left buyers holding all the cards.

If your long-term financial plan includes the purchase of a second home, or vacation property, now may be the time to make your move.

“There are an abundance of properties available right now with sellers making concessions that they generally aren’t going to make in a rising market,” says James Boykin, author of “Investing in a Vacation Home for Pleasure and Profit” and a retired professor of real estate analysis at Virginia Commonwealth University.

Despite the incentives to buy, however, the mortgage crisis that crippled the market over the last three years has made it harder to qualify for loans—particularly true if you’re purchasing a second home.

And with property values continuing to fall, homeowners who once relied on the equity in their primary residence to finance the purchase of a cabin or beachfront retreat are no longer able to tap those funds.

As such, if you’re looking to expand your real estate portfolio in today’s market, be prepared to bring more cash to the closing table and perform greater due diligence to ensure the property you do select meets your personal and long-term investment needs.

“Real estate is a very good alternative to stocks and perhaps other investments at this time, but it needs to be right for you personally as well as right for your portfolio,” says Boykin.

Here’s a look at how the second home market stacks up, what to look for when selecting a property and what it takes to land a loan.

Future Demand

According to Walter Molony, spokesman for the National Association of Realtors, the second home market is “fundamentally healthy,” despite short-term ups and downs.

Indeed, the number of vacation homes sold fell 30 percent to 740,000 in 2007, from a record 1.07 million in 2006, according to NAR. The median price was $195,000 in 2007, down 2.5 percent over the prior year.

While the results have yet to be tallied for 2008, Molony notes demographics bode well for that segment over the next decade.

“The long-term underlying demand is favorable for vacation homes because of the large number of middle-age, middle income Americans [who are the primary buyers of such properties],” says Molony. “In recent years, this market has been driven by the baby boomers, but there are two even larger population groups coming up right behind them. Those younger segments will continue to fuel this market for the next 10 years.”

At the same time, NAR reports the housing affordability index rose 13.6 percent in January to 166.8, the highest since tracking began in 1970.

The January index, the most recent month for which data are available, indicates a median-income family, earning $59,800 could afford a home costing $283,400 in January with a 20 percent down payment, assuming 25 percent of gross income is devoted to mortgage principal and interest. A year ago, the same family could afford a home costing $263,300.

“If you have the resources and are confident about your economic future, you’re not going to find a better market than we’ve got today in terms of affordability and raw buying power,” says Molony. “It doesn’t get much better than this.”

Who’s Buying?
Those who buy vacation homes overwhelmingly do so for personal enjoyment, rather than investment potential.

A 2009 NAR study finds 84 percent of vacation homebuyers were most interested in owning a family retreat, while 25 percent bought with the intent to rent to others and 26 percent are looking to help diversify their investment portfolio.

A smaller percentage – 30 percent – expect to use their vacation home as their principal residence in the future.

Regardless of your intent for a vacation property, however, Boykin notes it’s important to buy with resale value in mind.

Look for views, proximity to amenities and established resort communities, he says, especially if you hope to rent it out part-time.

It’s also best to stay within driving distance of your primary home, enabling you to enjoy your vacation retreat more often and pop in to address problems as they arise.

First-hand knowledge of the market will also help you avoid buying into a community that’s on the outs.

My Top Clients' Perspective On the National Economy

In the past week I spoke with my top clients about their intimate and very knowledgable perspectives of the national economy. These are people who are titans in business and politics and have some very informative opinions.

1. Extended period of massive deleveraging by financial institutions (4-5 years).

2. Further GDP contraction

3. Reduced consumer spending

4. Higher (10%+) unemployment through 2010

5. Periodic bear market rallies rolling over to new lows

6. National property market looks ugly. Only really motivated sellers will transact unless place is unique (beauty is in the eye of the beholder/buyer).

7. Every market is different but real estate market will hit bottom in late 2009 (the most optimistic assessment of the people I spoke with)

8. 16 million homes upside down in America. Government stimulus should help 4 million of them.

9. One client just lectured students at MIT and told them that of the various real estate markets he analyzed around the country, the median sales price declined 42% to get the markets going again.

10. The velocity of money, income and spending must increase before the markets hit bottom. All three are still decreasing.

11. Another $1 - $2 trillion in government stimulus needs to be injected then ultimately drained out of the markets.

12. There will be no bounce of a recovery. Instead of a "V" shaped recovery it will be a "U shaped recovery.

13. The stock market is going nowhere for a while. Earnings will be trashed for a year+.

14. Hard assets will not generate a high rate of return. Risk capital will demand very high rates of return. The Obama administration is going to have to deal with risk capital...it is on the sidelines and will eventually have to be dealt with.

15. Smart money is paying down debt and hording cash. There will be an enormous number of buying opportunities for investors, especially in securities and real estate, not equities. Non-performing loans will be bought for 20 cents on the dollar and resold for 60 cents on the dollar.

16. Household income will be flat for the foreseeable future and therefore inflation will not be a problem.

17. Prime will remain at current level into mid/late 2009.

18. US Dollar should show strength based on global problem with money flowing to US Treasury for protection. 5yr curve remains stable and the 30yr may show some increase, but small.

19. Energy is a wild card but since the US has seen $3+ pump prices it won’t shell shock consumers.

20. Current housing inventory is on a rapid decline due to builders not over starting new homes. Fed has jumped in to mortgage back securities and the $8,000 direct tax deduction on 1st time home buyer will give birth to entry level home sales trickling up into the more expensive home priced market.

21. All in all consumers are beginning to realize the sky IS NOT falling in and beginning to take advantage of the purchase opportunities.

22. $1.75 trillion debt for 2008 is a low estimate and it’s sad to see these mammoth corporations continue financial bailout and abuse. The Fed needs to take a hard stance and stop the bailouts.

Anyone readers care to share your opinion?

If You Own Property In Mountain Village, This Affects You

TMVOA Members Circulate Petition to Force Special Election
by Seth Cagin, The Telluride Watch, Mar 02, 2009

A petition is being circulated among members of the Telluride Mountain Village Owners Association to force an election before the end of the ski season to amend the organization’s articles of incorporation.

If successful, an election very similar to what was scheduled by the TMVOA board on Feb. 16 by a vote of 4-3, with only the three Telski members of the board in the minority, and then rescinded on Feb. 25 by a vote of 3-4, after the lodging member of the board, John Volponi, changed his position, will take place.

The ballot questions will ask the TMVOA membership to add residential representation on the board and thereby reduce the influence exercised by the Telluride Ski and Golf Co., and also to remove the provision in the articles of incorporation that allow Telski to veto any such changes to the articles of incorporation or to specified bylaws.

Since Telski does have that veto provision, the company, which enjoys its influence as the original developer of Mountain Village, could veto both ballot measures. Telski CEO Dave Riley stated unequivocally that Telski will do just that when it was a majority of the board, albeit at the request of residents, that was working to call the special election.

The question that will be considered by members if the special election is held is slightly different from what was previously discussed. Last month, the proposal was to add two members to the board to represent the residential class of members. That would have given the residential class four of nine members, and by leaving Telski’s representation at three members would have reduced the ski company’s leverage. The current proposal is to give the residential class one additional member, and add an at-large member to be voted upon by the residential, lodging and commercial classes. In addition to the residential class, the other three classes are the lodging and commercial classes, which each elect one member to the board, and the special class, consisting of the ski company.

As of Monday morning, Mountain Village resident Richard Child, said he has received “many signed petitions” via fax, many of them from “people I don’t know.”

Consistent with what other Mountain Village residents have said, Child added that there is no leader or organized group working to change the way that TMVOA is governed, although he has been a point person in circulating and collecting petitions.

“There are a lot of people involved in this,” Child said on Monday morning. “That’s what makes this special, that it’s not just one set of people. It’s a true grassroots effort.”

Child also emphasized, as other Mountain Village residents involved in the effort have emphasized, that there is “no antagonism” toward Telski, but rather a simple desire to see equity on the TMVOA board.

In the email that accompanied the petition and was signed by Child, the effort is described as a bid to end “taxation without representation.” While residents have 58 percent of the votes and pay 79 percent of the assessments that help fund TMVOA, they have only 29 percent of the votes on the board, according to a chart in the email.

Telski, as the sole “Class D” member, casts no votes and pays no assessments, but controls 41 percent of the board seats – although it does cast votes and pay assessments by virtue of its ownership of residential and commercial property.

The issue of this disproportionate representation has come to a head, the email suggests, in part due to concern about a collapse in revenues to TMVOA from real estate transfer assessments. Were TMVOA, which is the master property owners association for Mountain Village, to run into budget shortfalls, a special assessment might be necessary to meet TMVOA’s legal obligation to fund gondola operations. The gondola costs around $3 million a year to operate and has also required expensive periodic maintenance. Last year, for example, TMVOA spend approximately $3 million in gondola upgrades.

If a special assessment were necessary, Child writes in his email, “Class D (Telski) would not bear any portion of the special assessment.”

Assessment rates for the various classes of TMVOA members are established in the TMVOA articles of incorporation, which is precisely the document that can be amended only with Telski’s assent.

Residents are becoming increasingly educated as to how TMVOA operates and is funded as this process moves along, said Davis Fansler, a former Mountain Village mayor.

The fact that Telski pays no assessment is clearly part of that education.

“If you assume that any future financial risk currently resides with the residents,” Fansler said on Monday, “it is fair to ask what the residents might do to redistribute that risk.”

Buyers Love Telluride, But At What Price?

In past downturns, Telluride held fast to the ability to be among the last enclaves to be effected and one of the first ones out of the fracas. Seems like we are among the last to currently decline given the nearly 2-year housing ailments in various segments of major markets like Phoenix, Los Angeles and Miami. While Telluride's market strength is holding up better than most, the national consumer psychology is so damaged that my sense is a large percentage of prospective buyers are expecting Telluride to substantially fall off the numbers. Telluride is in a declining market, yet a large number of sellers are still living under the aura pervading this town since the 1970s -- that Telluride will continue to consistently go up in value. Owners use the fog of generalities in placing an unrealistic value on their properties. It’s tough to fault them too, given the last few years of heady returns.

In general, there are some positive elements that will keep Telluride from falling off a cliff including very limited supply; incredible beauty; unique recreation; a historically intact town; deep wealth; families providing struggling relatives (who own here) with private promissory notes and, thus, preventing foreclosures; and limited foreclosures in San Miguel County compared to the rest of the nation. The opportunities are beginning to surface here with the increase in the quantity and depth of price reductions and appropriately priced listings. Yet, with some exceptions, the nation is taking a breather with real estate.

Some of Telluride's top visitor markets are the markets with the largest number of foreclosure ratios. As long as foreclosures happen in any neighborhood, whether in Telluride or where you live, values remain in jeopardy. Amid this storm, anomaly sales will become more revealing. Families will be buying for more practical reasons like lifestyle changes, family gatherings or for relocation and less for speculative investment. Cash buyers will have a field day cherry picking some great value plays. I also think the new luxury development Capella in Mountain Village will be part of the anomaly amid this crisis. The truly rich are very glad that fewer households are in their echelon. Luxury is a word/concept/lifestyle that's been ridden hard and left wet by the masses over the past two decades. The cache of "luxury" will revert back to the domain of the truly rich in the next few years and parts of Telluride, like Capella or a special ranch or a well-located, positively unique home, will ultimately benefit.