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Roger Marolt: Roger This

Roger Marolt
The Aspen Times
Aspen CO, Colorado

Boo! It’s scary around here, all tricks and no treats lately. Related WestPac announced last week that its plans for constructing phase III of the new one-million-square-foot Snowmass Base Village have been scuttled for now. The skeleton crew on Michael Lipkin’s development in El Jebel that was to house a new Whole Foods store has been laid to rest. A residential spa project across the highway is eerily quiet. The Boomerang project on West Hopkins has been a gaping open grave for the past year. John Sarpa’s proposed hotel at the base of Lift 1A is haunted by rumors of troubled financing. Ghoulish gossip persists that a local bank now owns at least one abandoned timeshare.

Had enough? There’s more. Adjusted for inflation, Pitkin County residential real estate sales are down more than 60 percent from last year, which was down 5 percent from the year before that. And these numbers came in before In-The-Red October!

Some say that Aspen is insulated from national economic downturns. I say they are insulated from reality. While that age-old axiomatic sentiment of our fiscal invincibility may have been based on solid historical evidence, Aspen’s economy has changed, dramatically!

We are no longer primarily a tourist-based economy. In the old days, no matter how bad the national economy got, there was always some sector, Dallas, Hollywood, New York, etc., that was flush enough with cash that upscale tourists found their ways to our town for vacations. During the deep, dark recession of the early 1980s, gas was expensive, inflation and unemployment were high, and interest rates stood at double-digits. Yet, Aspen was relatively unscathed.

In that recession, as now, people stopped investing until the carnage was complete. But, a vacation is not an investment. The only return Aspen tourists hoped to get out of their visits were perhaps a few face shots on a powder day and a suntan to show off when they got back home. Aspen can deliver those types of things even in the worst of economic times.

Fast forward. If we currently relied on tourists to butter our bread, we might still be fiscally resilient, even considering the magnitude of this economic crisis that former Federal Reserve chairman Allan Greenspan has dubbed, “a once-in-a-century credit tsunami.” But, we have converted our commercial core into an amenity for people who own real estate. Brokerage offices, art galleries, and home furnishing stores dominate the retail mix. The frightening facts are that we transformed our semi-immune micro-economy into a non-diversified real estate-based single-industry town, and this national recession is driven by a real estate meltdown.

Far from being insulated from the effects of this national crisis, so enmeshed in the business of selling, developing, and managing real estate, Aspen might feel the pains of this severe downturn more acutely than most other parts of the country.

Don’t for a minute believe that our affluent potential clientele will spend money on new properties so freely as to prevent a freefall in prices. The world now knows that real estate values can drop quickly and sharply, anywhere! We have found out that when prices begin to fall real estate investments cannot easily be converted to cash. Buyers have become very patient over such large, discretionary expenditures in this unprecedented time. Rich people don’t like to appear foolish, even if they can afford to be.

Don’t forget either that wealthy people are not nearly as wealthy as they were as recently as last ski season. Since then, nearly $8 trillion have vaporized from domestic equity markets and much more than that worldwide. For perspective, the amount of money lost in the U.S. stock markets this year could have purchased 1.33 million Red Mountain estates priced at $6 million each! Many people worth, say, $20 million last year have lost upwards of a third of their wealth and are no longer even viable prospective buyers in our market. The U.S. dollar is gaining strength making our properties even more expensive to foreigners. Disposable income? It’s been disposed!

But, the crushing blow for our local real estate market might be that people are finally recognizing that the risks of being in real estate are even greater than being in equities, and always have been. People are evaluating investment fundamentals and beginning to search for good investments based on empirical data. Investors are embracing rhyme and reason for the first time in a long time. The large emotional element of premium real estate pricing is being heavily discounted under current sobering circumstances.

Nobody, I repeat, nobody right now has a solid feeling for what the true value of real estate is. The closest that anybody can come to guessing a home’s real value by employing investment fundamentals is to estimate its annual rent and divide that by about 7 percent. That is the true economic measure of a house’s utility and is the math that economists used to estimate that the national housing bubble was poised to deflate by upwards of 30 percent from its peak in June of 2006. A national decline in home prices of 21 percent and counting appears to validate the methodology.

Applied to Roaring Fork Valley homes, this analysis yields terrifying results in most cases and indicates we are even further from recovery than the rest of the country. It is going to be painful.

We made mistakes that led us to this haunted point: We rezoned downtown. We granted variances on hillsides. We turned pastures into country clubs. We converted condominiums into timeshares. We tore down quaint base areas and replaced them with gargantuan Base Villages. We constructed penthouses on top of retail spaces to pay for redevelopment. Our government became enamored with the Real Estate Transfer Tax to fund its huge appetite for spending. Virtually everything we changed in our town over the past decade we changed in order to sell more real estate at ever higher prices.


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