Rocky Mountain ski resort residential real estate : mile high profits or downhill returns?

Abstract

Is investing in residential properties located in Rocky Mountain ski resorts a prudent financial decision? That is the central question this paper will address. The author examined sales data from almost 3,000 residential transactions in Whitefish, Montana occurring between 1983 and 2000. Whitefish was chosen partially because this town exhibits many characteristics typical of Rocky Mountain ski resort towns as well as many of the non-ski characteristics that affect second home purchases in the Rockies. The author also gathered tax record information to determine the new number of units constructed during that period. Other external data, ranging from annual visitors in Glacier National Park to national economic data, was also collected. This data was examined in conjunction with the appropriate sales data to determine what factors influence the pricing of residential real estate. Through the use of a hedonic model, many home-specific variables that commonly influence pricing were removed, allowing for an "apples-to-apples" comparison within the data set. Utilizing regression analysis, this data evolved into a representative price index that tracked real property pricing as a function of time. For the 18 years of data collected, the real price index trended cyclically but steadily upwards, confirming the existence of a robust property market. Using the real price index, a system of equations was developed as the foundation for the econometric model. The New Home Construction Equation (a measure of Supply) and projections for relevant economic and Demand variables were input into the Real Price Equation (a measure of inflation-adjusted housing Price) to predict future housing prices. This model worked very well, with one significant exception. In the detailed analysis comparing price to housing stock, new supply apparently had a positive affect home prices. This apparent violation of Supply/Demand principles can be explained by the housing stock itself: Existing stock is limited and generally outdated, meaning that new stock has little affect on pricing and that overbuilding risk, at least historically, has not been a factor. There is also the possibility that the only supply for which significant demand existed was new supply. This will almost certainly change as the market matures. Six plausible scenarios of future conditions for the years 2001-2010 were tested using the model. Three simplistic scenarios were run utilizing linear projections for realistic, pessimistic and optimistic scenarios to establish the basic understanding of pricing behavior. Three slightly more complicated scenarios projecting cyclical behavior (more typical of real world conditions) were then run for realistic, pessimistic and optimistic scenarios to predict a more realistic pricing pattern. The linear pessimistic case predicted a steady downward trend, while the cyclical pessimistic case exhibited a flat trend line through its cyclical pricing behavior. All other cases showed steadily to aggressively upward trends. This analysis concludes that until new supply begins to lead to a more significant overbuilding risk, prices in Whitefish will likely continue to escalate in all but a significant, prolonged downturn in the economy. Another conclusion drawn from the analysis gathered is that the existing housing stock is outdated and/or in limited supply, leading to an unusual situation where new supply causes an increase in housing prices. When compared to resorts in the east, these results proved quite different. Over the same time period, real pricing for ski condos in New England fell. The author concludes that a combination of western population growth, greater "four-seasonality" in Rocky Mountain Resorts and a more disciplined supply market created the conditions permitting real estate appreciation in the Western US. These results were explained to individuals throughout the Rockies to assess their relevance. While the pricing behavior varied somewhat across the region, all individuals surveyed indicated a significant positive trend in pricing over time. Furthermore, the explanations regarding the differences between the east and the west were generally agreed upon. Overall, the consensus was the conclusions taken from this study were generally true across the region.