Is Aspen’s six-year real estate surge on the decline?
March 5, 2016
In a real estate market that's been historically cyclical, a seventh straight year of an up market isn't necessarily good news.
The Aspen-area real estate market has enjoyed six straight years of upward momentum, with 2016 marking the seventh year. Over the past 40 years, the longest period of any upward movement was six years, said Randy Gold, a partner in the Aspen Appraisal Group, to a group of about 200 people at Thursday's Aspen Board of Realtors Real Estate and Economic Outlook Luncheon at the St. Regis Hotel.
The message was familiar to most in the room who were present for last year's luncheon, where Gold cautioned Realtors about the six-year cycle, but on Thursday, Gold felt more certain about the market correction.
An erratic stock market, a strong U.S. dollar and low oil prices all are expected to have an effect on Aspen-area buyers, he said. And January and February numbers this year are already proving that things have slowed from 2015, which at more than $2 billion in volume was the biggest year in the Aspen area since 2005.
"The number of transactions is down significantly in January and February over last year," Gold said. "I think 2015 was the market peak and we're moving into the next phase of the down market. … Of course, anything can happen, be it positively or negatively."
The strong U.S. dollar combined with weaker currencies around the world means huge costs for international buyers looking at American properties, especially on the luxury end of the spectrum. And Lawrence Yun, chief economist and senior vice president of research for the National Association of Realtors — the guest speaker at Thursday's luncheon — said some other factors also could be at play this year.
Even though Americans are reporting higher lifetime accumulated wealth than ever before, the consumer confidence index is at a neutral point, approaching 100 points.
The index has been a good predictor of who wins a presidential election, Yun said. When it's above 100 points, the incumbent party usually wins the White House. When it's below 100, the opposition party traditionally wins. It's currently at 98 points — as if campaign season hasn't been exciting enough.
America's annual gross domestic product has been below 3 percent for 11 straight years, but there's a gap between what American people are experiencing and the hypothetical 3 percent growth, Yun said.
The gap is $1.7 trillion, or $5,000 per person. It means people have $5,000 less in their pockets at the end of each year. Yun said that could explain why the two candidates outside mainstream Washington — Donald Trump and Bernie Sanders — have momentum.
Homeownership is at a 50-year low, with first-time buyers participating at 30-year lows, he said. The people currently buying homes are mostly repeat buyers and second-home owners.
The Federal Reserve increased interest rates in December and will likely do so again in May or June, again in September or October and again in 2017. Rising interest rates don't always equate to higher mortgage rates, Yun said. Mortgage rates are determined by everything from the bond market to U.S. budget deficits, foreign capital, inflation, printing money and Federal Reserve short-term interest-rate changes.
The federal government has been printing money in order to spend, which has led to disaster in some countries, Yun said.
"Relatively speaking, America's situation is not pretty, but it's better than other countries, and that's why the dollar is strengthening," he said.
Yun presented at least a dozen other factors that could play into the strength or weakness of the American — and global — economy, noting that all of it could affect Aspen, or perhaps not.
"It's very hard to forecast the Aspen market because of its uniqueness," Yun said. "There's a lot of uncertainty relating to the Aspen market."
Gold predicts a strong year for Aspen's commercial real estate, but Yun isn't so sure. While Gold expects a lot of commercial activity this year due to healthy capitalization rates and strong buyer interest, Yun thinks yields are just too low, especially in a rising-interest-rate environment.
One purchase that Gold can agree just didn't make sense is the Boogie's building purchase by Thor High Street Advisors for $27.5 million in May.
"That's a crazy purchase to me — I don't get it," Gold said. "The retail tenants in that project will have to generate about $25 million in retail sales to be able to afford to pay their rent."
Gold said another thing to watch is the unusually high number of fractional-ownership units coming into the market. Between the Dancing Bear, The Aspen Club, the W Hotel and the Lift One Lodge, there could be more than 600 fractional interests coming on the market in the next year or two.
"That's a huge amount of inventory, particularly in what I think is a decelerated market," Gold said.