Dirt still a good investment
As an Aspen broker, its easy to say that Aspens real estate has always performed well and will in the future. But is that really true anymore? Are we seeing a global paradigm shift in the value of real estate that could last a generation similar to what happened nationally in the 1930s and 1940s, and in Japan from the early 1990s to today? If we are experiencing a paradigm shift, will this affect the investment value of Aspen real estate? Most recently, the federal government reported that our countrys been in a recession for over a year and it could last another year or longer, making it the longest running recession since the Great Depression. Some economists believe that the United States would be heading for the second Great Depression if it was not for the federal governments unprecedented action to boost the economy. That didnt happen in the early stages of the Great Depression. Over the past couple of years, house prices have crashed over 35 percent in some parts of the country. Millions of people are losing their homes to foreclosure, and major banks and financial institutions have failed. Economists generally say home prices wont bottom out before the second half of 2009 and some wont see a bottom until 2011 or 2012. After housing prices have bottomed, most economists expect housing prices to begin to increase over the next 10 to 20 years, but not nearly as much as weve seen over the past decade. Over the past 100 years, home prices have tended to increase on average at an inflation-adjusted rate of 2.5 percent to 3 percent a year. Despite what has happened recently in the real estate world, the American public still feels favorably inclined toward real estate as an investment. In a recent survey, about 90 percent of homeowners thought that owning a home was the best long-term investment; 52 percent felt it was a good time to buy a home; while only 31 percent felt it was a good time to buy stocks. As a result, it seems that once the economic dust settles, real estate markets across the country are likely to recover faster than the stock market. What about Aspen real estate? For the past 33 years, Aspen real estate has appreciated in value on average 14.1 percent per year. During that period, the Aspen real estate market has experienced five downward market cycles where average prices declined anywhere from one to two years.In comparison, the stock market during the same period, as measured by the S&P 500, has appreciated on average approximately 7.3 percent a year. The stock market has, however, seen numerous bear markets where prices have declined dramatically.There have been long stretches where there was virtually no appreciation in average stock prices. For example, in December of 1969, the DOW topped out at about 855. It took almost 14 years for the DOW to close permanently above 855. At the same time, U.S. Treasury Bonds with 10 year to 30 year terms are currently yielding anywhere from 2.08 percent to 3.51 percent.What does all this mean for the future of Aspen real estate as an investment? Can we assume that despite the current economic recession and a possible paradigm shift, Aspen real estate will continue to appreciate on average 14.1 percent annually for the next 33 years? The answer to this question depends on the basic economic formula of supply and demand.Due to zoning and physical restrictions, Aspen and Pitkin County have for some time been fully developed. Its highly unlikely that any new development will take place in Pitkin County in the next quarter century that could add significant new supply to the existing inventory of residential or commercial space.However, on the demand side, demographic studies indicate that as a result of recent technological advances, North America is in the early stages of a major demographic shift that we have not seen since the onset of the Industrial Revolution. The projections are that over the next 50 years, over 70 million people will migrate from major cities to small towns and rural communities around the country. The top destinations will be resort and college towns with great culture and recreational amenities. If these predictions are correct, towns like Aspen, Snowmass and the rest of the Roaring Fork Valley will continue to see strong real estate demand for the next 30 to 40 years. This trend could easily counteract any decade-long paradigm shift in the value of hard assets.This demographic trend and the American publics bias toward real estate investments over stocks and bonds could continue to push Aspen real estate prices up, or near the historic 14.1 percent average annual rate. With stock and bond yields likely to produce below average returns for the next decade, Aspen real estate may still offer the best opportunity to build real wealth. The current weakness in the Aspen real estate market could offer buyers and investors one of the best opportunities in years to buy Aspen real estate at historically attractive prices.
William Small, JD, CCIM is managing director of Frias Luxury Estates. His column is a feature of Inside Business, published Tuesdays in The Aspen Times.
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