Roger Marolt: Global warming affecting Aspen even before the snow stops falling
There are many reasons why the value of a particular house can drop in value, but when an entire market falls, there is generally one overriding cause. So, why is Aspen’s real estate market suddenly weak?
A letter in the paper got me onto this topic. It was written by my friend, Phil Verleger. I pay attention when he chimes in because he is a really smart guy. I don’t say that about a lot of people, but I generally do about economics Ph.D.s from MIT.
The letter addressed an article in the Financial Times proclaiming a downdraft in Aspen’s real estate market. Sales data indicate an overall drop of about 12% in value over the past year. Dr. Verleger speculated the decline might be due to potential buyers’ concerns about global warming, basically asking the question: who wants to invest huge dollars in property for which value is so dependent on consistent weather patterns? Yes, we had a terrific winter last year, but a disaster the season before. It certainly appears that change is in the air.
I think Dr. Verleger may be right. I also think there might be a key financial indicator being highlighted by the apparent increase in the effects of global warming on the vacation home psyche. In short, a real estate investment in Aspen has not been as great of an investment as fabled and now this is relevant.
Don’t get me wrong. Aspen real estate has been a good investment. It just may not be as great as local legend has it and emerging weird weather patterns may have potential investors looking more closely at the investment rate of return factor.
We have all heard of the miner’s shack locally available for $300 back in 1952 that recently sold for $15 million. That’s great appreciation! The problem is that most of that appreciation came from the lumber yard. What once was a laborer’s lean-to constructed of scrap wood is now a modern, engineered monument to exotic wood, stone and architectural design. It’s not the same house.
To attempt extracting true appreciation of Aspen real estate, I had a look at a few local houses that haven’t changed much in physical appearance since they were built decades ago; basically classics with mostly original equipment. For example: a hypothetical house that was built almost 50 years ago for about $400,000 that is worth about $11 million today, that has been well-maintained, but without any major improvements added.
It is a small sample of houses like this and original cost is recalled from hazy memories, so the results are far from statistically significant, but the average annual appreciation for these unimproved properties examined is approximately 7% per year. Like I said, good, but not astounding.
But, that’s not the whole story. Houses are not cheap to own. We need to reduce the gross rate of return for ownership costs like property taxes, utilities, repairs, and eventual replacements of things like roofs. I figure all this averages about 3% of the value per year. Subtracting this from annual appreciation, the real return on an Aspen home is probably more like 4% per year.
By comparison, the average annual appreciation of S&P 500 stocks over the past 50 years has been about 3%. But, these stocks also have averaged annual dividend payouts of about 4%. This gives stockholders an average annual return of around 7%, or approaching double the return on Aspen real estate.
Why hasn’t anyone mentioned this before? Perhaps it didn’t matter.
The difference between the return on stocks and local real estate can be easily overlooked, as long as there are a couple of powder days every month of the ski season and summers are lush, green, and cool in the shade. It doesn’t hurt when the fishing is good and there isn’t too much dust on the mountain bike trails, either. These things have been the guaranteed intangible return on owning an Aspen home.
But, the investment qualities of Aspen real estate start to matter more to people when it is 60 degrees, sunny and dry on Christmas Day, and with only a couple of runs of man-made snow open for skiing. Second-home owners are even less thrilled about an annual threat of forest fires, especially when that is something nobody had to think much about 25 years ago.
It is argued that we won’t get serious about combatting global warming until it affects our own pocketbooks. If true, it could be why we now take notice when a guy like Dr. Verleger writes in to point out global warming’s potential impact on the Aspen real estate market. It might be why investment rates of return are suddenly relevant in what has been an historically emotional purchase of an Aspen vacation home. Maybe most interestingly, if the Aspen real estate market is sensitive to even the mere threat of climate change and we react by expanding our own carbon footprint to bolster real estate values, do we, ironically and without words, begin to mimic other industries’ cries denouncing this existential threat’s potency and immediacy? Time will tell.
Roger Marolt doesn’t think global warming is polite enough to wait to until after he is finished here to take effect. Email at email@example.com.
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