Bad News for the Luxury Second Home Market
December 19th, 2009Posted in Skiing in Luxo-land
On Thursday Bloomberg (via Buisiness Week) reported homeowners with $1 million plus mortgages are defaulting at about double the rate of other U.S. homeowners. In September payments on about 12% of mortgages over $1 million were 90 dyas or more late.
Over the past year we’ve seen many luxury ski resort developments based on a real estate business model go bankrupt, or cancel development plans, now we’re seeing signs that the people who bought into these are in trouble too. How sweet was the dream to own a luxurious home in the mountains, enjoy the good life for a few years and sell at a nice profit!
This past year I’ve seen luxury homes at the Teton Springs Resort (near Jackson, WY) sell for less than the cost to build them. Bloomberg reports a Seattle broker seeing that happening in his market. According to the article short sales soared to 40,000 in the first 6 months of 2009. A broker in Scottsdale, AZ is quoted as saying we’re just seeing the tip of the iceberg in luxury short sales. Across ski country the last few years certainly saw a huge inventory increase in luxury homes. With their high maintenance and operating costs, luxury homes at ski resorts will be prime targets for cost cutting by the shrinking ranks of millionaires and the shrinking checkbooks of the still wealthy.
The Wall Street Journal’s Robert Frank reported some interesting data on the struggling rich in September. Chapter 11 filings by individuals or families with at least $1,010,650 in secured debt and $336,900 unsecured soared 73% in the period (2nd qtr. 09), according to the National Bankruptcy Research Center. The main reasons: collapsing real-estate values and falling incomes. It turns out rich families had little margin for error, with multiple homes, multiple car payments and children in private schools. With a glut of high-price homes on the market, they can’t sell.
With many over-extended “rich’ folks fighting for their financial lives, I think shorting an extra or a speculative ski home will be an easy choice for many.
I have been a staunch critic of the whole ski-resort-as-an-amenity-to-a-real-estate-development business model for years. I was glad to see Powder Magazine had the nerve in its December issue to run a headline special report arguing that the ski resort industry should ditch the real estate model and get back to being ski resorts.
It is too late to remove the McMansions huddling around many ski resorts, but I hope resort owners and managers not only delay, but outright cancel plans for future luxury home developments. The size of the homes is frequently insane, the resources consumed to build them and then heat them often verges on the immoral, and then they sit empty 90% or more of the time. Does this make any sense?
It will be interesting to watch over the next few years how this all plays out. Will there be a new paradigm with resorts focusing on new ways to stay profitable, or will they revert back to hoping for the good old days when over-priced lots and and over-leveraged financing made for fat profits?
What do you think? Is there too much emphasis on the luxury market in skiing and in luxury real estate in particular?
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