Donald Trump just signed a $2.2 trillion bailout package in an attempt to mitigate the coming recession as COVID-19 shuts down the US economy on a scale that has not been seen since the Great Depression.  Treasury will essentially print money that will be added to our current $22 Trillion national debt, which is predicted to grow by $10T over the next decade plus whatever bailouts and/or fiscal spending is required to defend our nation’s economy.  The US debt to GNP ratio is already approaching critical levels but this spending bill is the country’s only option unless you think 400 million guns in the hands of people living on the street with little to eat is a viable alternative.  Of course, the taxpayers will be ultimately responsible for this growing liability but there just isn’t any other politically expedient solution on the table with other western world countries expected to follow suit as reported by Bloomberg News this morning.

A back of the napkin calc indicates a need of at least another $2T or possibly twice that amount depending on how long the virus runs and how much pain 52% of paycheck to paycheck Americans can endure.  The current average US household income is $60,000 so with a one-time cash payment of $2400 that buys two weeks of living expenses which is far short of what will be needed to weather this cataclysmic storm.  If a follow up package of equal size is required, households and businesses would then have a month of governmental support which is probably a ‘hope for the best’ scenario.

If the virus peaks in 4-6 weeks, and that is a big if, then $4T is the number but with another $2T likely.  At these levels US dollar devaluations could reach epic proportions which is what I expected after the Treasury printed $4T to combat the global banking crisis but without any real lasting consequences. Over the next ten years $38 Trillion of debt ($32T + $6T) should produce two unsavory outcomes; inflation and increasing interest rates.  While property markets can respond to inflation with increasing prices it’s not that simple because along with that hedge comes higher interest rates and lower valuations which I clearly remember happening during the 1980’s and is an outcome to be avoided.

During the Great Recession stock indices fell by more than 50%, and while I am not predicting losses of that magnitude Vail Valley real estate dropped 17% during Q3 2010 which was only a third of the overall capital market reset.  While real estate has since fully recovered and is now setting all-time records, nothing is immune to volatility even in ‘best of the best’ safe harbors for capital.  Q1 2008 was the start of a two and half year long period of illiquid before wealthy ‘on the bubble’ owners started selling.  Depending on duration and the effects on employment, supply chain destruction, business credit defaults and the government’s balance sheet, the damage will only increase over time.

As an economist and real estate analyst for more than 40 years I am convinced that the longest bull market run in modern history was been driven by monetary policy which should have been inflationary but with an aftermath that yielded no real lasting effects.  Perhaps another $6T can be created out of thin air but given a projected US debt load of $38T in 2030, this trajectory will start raising eyebrows around the world as we approach the 100% of GDP “critical threshold” which hypothetically results in downgraded credit and higher borrowing costs with less money available for social and infrastructure programs.  It’s going to be a much different world with all of that debt floating around even if that world can find buyers for these to be issued credit risk bonds.  Cap rate compression, leverage and low cost financing produced the longest running bull market in history.  What do you think is going to happen as we do an about face and start going in the opposite direction?

In times of crisis bold measures are needed leaving me with no other choice but to endorse the current plan, but not without reservations that this level of monetary policy will be a game changer with scant evidence supporting much in the way of upside over the forseeable future.  How America and other affected economies will come out of this is completely unknown, but one thing is certain, it’s not going to be pretty.  The S&P rallied today closing at 2541 as Wall Street applauded the government’s intervention plan.  The facts however lead me to believe that this week’s rebound is likely to be a bull market rally trap which means on Monday you might want to go to cash.

As a real estate analyst and urban economist with a minor in monetary policy from University of Southern California, I have had a lifelong fascination with the Baby Boomer generation who changed the world after WWII and continue to dominate nearly every aspect of modern day living. Humanity has benefited and endured more advances in my lifetime than in the aggregated history of mankind. Human beings are having trouble keeping up which is why 40% of Americans yearn for the simpler days of yesteryear as evidenced by their political leanings which is in essence a mass protest against rapidly changing lives and technological dislocations.

We are Darwinian creatures which makes us self-interest driven yet empathetic during times of crisis when survival of the tribe is at stake, making for confusing and impossible to predict outcomes. Animals stampede and so do humans when threatened with frightening unknowns or issues they don’t understand; it’s in our DNA. As an avid follower of the economic community, one of whom happens to be our neighbor and without a doubt is one of the smartest humans I have ever met; not nerdy IQ smart but rather a real world economic forecasting savant. We had dinner Thursday night and as I left asked whether it would be better to overdose on OxyContin or razor blade my wrists given that his predictions were beyond scary as to what is going to happen as the Coronavirus spreads. This is a summary of what Julian Brigand had to say as a proven futurist.

You haven’t seen anything yet with panic accelerating on a massive scale over the next 2-3 months. More social isolation will be necessary if the health care system is not to be overwhelmed. With roughly 330 million US citizens at a 20% infection rate, 65 million people will need to see a doctor. If 5%-10% require hospitalization that means 3-6 million potential patients and should 20% of those cases require ICU admittance, then 600,000-1,200,000 people will need advanced care in a system that has about 50,000 beds. The CDC is trying to elongate the outbreak so as to prevent a systemic breakdown because if it does physicians will be forced to make triage decisions as to who lives and who dies which is going to make the public very unhappy.

The bad news here is the goal of longevity. As noted in in a prior email this is not a structural economic correction but rather a health epidemic that could burn out by year end. 2020 will be an economic disaster as global supply chain disruptions continue, employees furloughed, and business shuttered as evidenced by Vail Resorts closing all 37 ski resorts for a week while they reassess. The market opened Monday morning with another staggering sell off. The S&P is down 18% over the last 17 days and 30% from its 3300 index record high.

The only good news is that there will be opportunities to buy underpriced assets that will bounce back after the virus gets under control and it will. With the FED taking massive action it just announced a 100 bhps interest rate reduction while committing to increasing QE by $500m which includes mortgage backed securities that could ultimately drive rates to 2%. The question for places like Vail is that the rich typically don’t sell in downturns and if this a one or two year event that duration might not be long enough for real discounting to appear. During the GR it took two and half years for distress to set in because the wealthy don’t run out of money in months but rather years and are prone to riding out recessions rather than taking losses on long term hold assets they don’t have to sell.

While no one can predict magnitude and timing train wrecks can sometimes be seen coming if you are paying attention. The most reasonable plan is to wait for more information, try to predict a bottom, then buy distressed assets that are overly discounted. My hope is to come out of this mess whole, which is going to go down as nothing short of a historic black swan outlier event. The global economy would do well if it recovers by year end but depending on the carnage it might be 2021 before some semblance of normalcy returns.

While many of you are bound to disagree with these prognostications it only makes sense to wait until more information becomes available which is what I recommended during the summer of 2007. The hurricane is here, we’re all starting to hunker down, but waiting for the storm to pass as the hard part.

When owners decide to sell, their thought process typically follows this emotional pattern. Buyers tend to be in the mid-fifties and sell in the 70’s. After the initial purchase the family uses the property 2-4 weeks a year for about 10 years. Years 11-15 is when conflicts begin to arise with use declining due to changing family dynamics, career entanglements, ageing children the arrival of grandchildren, physical fitness and other emerging conflicts. Years 15-20 most families rarely use the property where what once started as a dual benefit stream purchase transforms itself into just another portfolio asset. Elderly parents know it is time to sell but are reluctant to do so with given nostalgia and fond memories of younger years and time with family and friends who are now too busy to visit. With the owners now in their 70’s altitude, fear of getting hurt, retirement and with few visitors, they decide to sell which doesn’t come easily and not without the urge to test the market with a high price because they are not in a hurry and feel that a buyer will have to pay if they want their very special place; like children theirs is special the best looking kid in class.

On average it is not unusual for homes to stay on the market 1-2 years which mostly sell between June and September. While 30% of the inventory goes under contract during ski season these tend to be ski proximate or walk to lift condominiums. Sellers oftentimes miss the summer selling season due to unrealistic pricing and/or dated condition forcing them wait until that following summer window reopens which is the reason for the high number of days on market. It takes 9-15 months for sellers to test the market, accept the fact that one of their prized possessions will soon be gone, while settling on the right price which is why new listings are problematic for our buyer clients.

During the Great Recession the market went illiquid starting Q1 2008 and did not really begin to percolate until mid-summer 2010. Rich families don’t run out of money in months but rather years with prices dropping by about 17% during the Great Recession. Most owners were not willing to sell nor did they need to at highly discounted valuations with the market suffering 30-60 months of gridlock until the recovery set in. Ski proximate real estate has regained all of the Great Recession discounting and are in fact setting record 20%-25% premium highs. If you have the holding power very few owners have ever lost money in Vail or Beaver Creek and have in fact made a surprising amount of money on these homes which was not their original intention.

If you want to know how a world class resort market is going to do over the long run, study the traffic generator which in our case is the ski company. If Vail Resorts increases demand for their products, goods and service (VR has 38 separate operating entities) and the industry has fixed supply (ski property may be some of the rarest real estate in the world because there are thousands of miles of beaches, thousands of golf courses, but only 3 world class ski resorts in the US) then everyone wins including vacation home owners, small business owners, locals, restaurants and real estate in general. If the ski company hurts demand as American Ski did when it laid off 25% of their Steamboat workforce resulting is a 13% drop in property values, we all lose. VR is a Fortune 1000 company with deep pockets, dominant market share, experienced personnel, superior management and the largest market share in North America including 40% of the CO market alone. We expect their success formula will continue with continuing dominance of the industry worldwide.

This is just a smattering of the issues that drive our vacation home investment advisory and consulting service platform and welcome your questions of which there are sure to be many.

Vacation home inquiries always touch on the question of smaller resorts such as Steamboat or Crested Butte as compared to Vail and Beaver Creek which are urbanized megacomplex destination ski areas and not always in keeping with the desired quaint small town Rocky Mountain experience. Our commentary is always driven by quality of the ski mountain, base village amenities, variety of available activities, easy airport access, financial performance, and short term rental income offsets. Crested Butte is one of our favorites places in Colorado based upon physical beauty, a by-gone era vibe, lack of crowds and low density visitation. The obstacles for smaller ski areas is the lack in diversity of activities and access since most people measure their time in days and are driven by convenience to the thing they are coming for which is typically the ski mountain. There is no real track record for appreciation for most smaller resorts nor much in the way of liquidity and short term rental income which greatly affects affordability and financial performance. Affluent families with more money than time look for best of the best experiences which for some is just being in the mountains, but for most it is a cornucopia of activities which includes fine dining, music, the arts, shopping, spas and other upscale diverse options. While most vacationers can be entertained with novelty of place for a week, but when you are investing two of your most precious resources which are time and money what the town has to offer as a package becomes increasingly important.

If these drawbacks are unimportant to your goals and objectives then there are places much less expensive than the Vail Valley but with far less liquidity and little to no return on invested capital. Telluride, Jackson Hole and other remote places favor those enthusiasts with private aircraft or extended time away from the office. These specialty markets have a dedicated fan base but do admit that they are just too small to support multiple week visitation. Breckenridge for example is exploding due to Front Range CO demand which is predicted to be one of the four fastest growing SMSA’s in the US over the next 30 years. This demand, upgrades to the resort, and increased sophistication of the town is now driving appreciation supporting our basic premise that affluent world class resorts in combination with fixed supply appreciate, the rest would do well with a breakeven outcome.

Clients hire us to help them with the lifestyle decision but are not oblivious to the financial expense. Breck has had an incredible surge in demand over the past three years with prices running $600-$700 psf which we expect will continue going because it is located less than two hours away from the Denver metroplex. If a more authentic less urban lifestyle were to be the only criteria and you have private aviation or the luxury of an all-day travel then Telluride, Jackson Hole or Crested Butte become viable options. But if multiple nearby ski mountains, ease of transportation, a highly diversified amenity base, and future growth dynamics is the criteria then Vail, Beaver Creek or Breckenridge reign supreme.

After living in the Rockies for more than 25 years our singular objective is to help clients with proper targeting because “a misguided strategy, perfectly executed, still produces a misguided result”. In reality there are only three ski areas in the US that qualify for world class status. Aspen & Snowmass (the land of billionaires), Vail/Beaver Creek (despite what the critics say is the #1 destination ski resort in the country), and the Park City/Deer Valley/Canyons area which is easy to get to but suffers from no fixed supply constraints, this is pretty much the list for having fun and making money which is what our company is all about. The specialty markets of Telluride and Jackson Hole have their enthusiasts but are equally expensive, very hard to get to, have incredibly difficult terrain, and are not nearly as sophisticated as the Top Three with Breckenridge rapidly becoming the fourth which is why or why not they could be the right place for you..

This narrative is just part of to our overall advice and counsel services Vail Property Brokerage provides its buyer only client roster and we welcome the opportunity to discuss these matters in greater detail. While I encourage interested parties to talk with us on the phone you need to understand that it is impossible to encapsulate any idiosyncratic specialty niche marketplace in a 15 minute narrative. If you really want to understand the where to buy question, which is 75% of the conversation, and what to buy which is 25% of the decision, plan on spending time learning the nuance differences which took us decades to understand and simplify into a less than one hour narrative.

Thanks again for contacting Vail Summit Property Brokerage; questions are always welcome.