When it comes to Vail Valley property values and their unrelenting rates of appreciation, we constantly hear comments as to the "bulletproof" nature of the local marketplace and have ever since moving to Vail in 1993. Over the years, we have personally experienced two significant bear markets (1982-84 and 1989-93) and were a bit skeptical as to Vail's immunity from national downturns and recessionary business cycle trends. If ever there was a test as to Eagle County's ability to withstand adverse market events it would certainly have been in 2002. The central Rockies had just come off a four year drought where average snowfall was 80% of normal. The tech crash of 2000 produced massive losses in the stock market as evidenced by the NASDAQ exchange losing 50% of its value and the S&P dropping by as much as 30%. And the dark days of 9/11 produced a climate of fear and uncertainty, as did the declaration of war against Iraq. Individually, any one of these four events would have been catastrophic in their own right. However, four at one time could be construed as "a perfect storm" with dire consequences for the travel and leisure industry at large. As buyer agents we were hoping for a silver lining to this scenario in the form of more property coming available at better prices and began preparing clients for a possible "buyers market." Despite the decline in consumer confidence property in the upper Vail Valley appreciated 4% in 2001, 8% in 2002 and 3% in 2003, making us believers in the resiliency and blue chip character of the marketplace. We were nevertheless confused as to why owners were not converting low utilization assets to cash in such dangerous and financially uncertain times. To better comprehend this conundrum, we asked more than 100 Vail owners why there weren't selling and were surprised by the following categorized responses.

	POSTPONED RETIREMENT.   Stock market losses had delayed early retirement. As a result these vacation homes offered the promise of a respite from financial reality and the fact that many owners were going to have to work an additional 5-10 years before retiring.
	REALLOCATION OF ASSETS.   Real estate had preformed remarkably well over the previous years with Vail Valley owners enjoying considerable increases in equity. With limited reinvestment alternatives and lurking capital gain taxes, there was little motivation to sell.
	INTEREST RATES.   Mortgages continued to be affordable and were very near 40-year market lows. Refinancing lowered payments or extracted tax free cash meaning few owners were interested or didn't need to sell.
	QUALITY OF LIFE.   Based on a survey by American Demographic Magazine, 78 million baby boomers in their early 40's to late 50's citied a vacation home as their #1 luxury "wish list" item. This trend was expected to accelerate as boomers near retirement and/or had more recreation time available.
	TAXATION.   Most properties had a very low basis in relationship to fair market value resulting in considerable capital gain tax implications. Vail Valley owners tend to be rather affluent, with many homes held in family trusts. This tax avoidance structure allows heirs to receive property tax-free with a step-up in basis; another selling inhibitor.

As a result of these and other factors the number of "for sale" Vail Valley residences has decreased by approximately 50% since 2004. Yet despite this reduction of inventory huge imbalances between demand and available supply continues unabated. Economic theory states that rational markets cannot remain in disequilibrium forever. There are two ways a market can regain its balance: either more supply comes available – which is unlikely due to the aforementioned factors – or demand must be contained. Pricing is the only viable driver that can effectively produce meaningful buyer attrition. Yet in spite of dramatically increasing property prices, vacation home buyers continue to want what our area has to offer. How can this be? Our best guess is that baby boomer buyers are entering the marketplace at a rate equal to or greater than those buyers being driven out by pricing. Until such time as demand is quelled, this imbalance is likely to persist driving the cost of vacation home ownership ever higher in fixed-supply and unique world-class resort markets.
From 2004 through 2006, the annual rate of appreciation averaged 14.6% which is clearly an unsustainable growth rate. During that same time Average Days on Market (ADOM) fell from its historical 15-year average of 270 to 160 days on market. This of course was not a Vail, Colorado phenomenon but turned out to be, on a national level, the biggest real estate bull market run in post World War II history. An ever-increasing number of consumers seeking lifestyle enhancement, portfolio diversification and investment returns ravaged the diminishing supply of quality for-sale properties and produced buyer to seller ratios of 3:1 or greater in the Upper Valley and other ski-proximate neighborhoods throughout the county. In much the same way as snow turns into spring runoff it is normal and necessary to expect new inventory to come available in the 2nd quarter of each and every year, as has been the historical trend. However, since 2004 this replenishment cycle has not occurred, leading to an eventual 50% reduction in overall available inventory. Frustrated by the lack of reinvestment alternatives – in combination with Vail's rapidly increasing prices – owners took a speculative stance towards Vail's "New Dawn' renaissance and Beaver Creek's improving customer base, resulting in a postponement of most selling decisions. Increased talk about a cooling marketplace and possible real estate bubble began surfacing in the second half of 2006, which in retrospect turned out to be a legitimate investor concern. Pricing declines, increased marketing time and the mortgage liquidity crisis nationwide are all bound to worsening conditions in the months ahead and suggest caution in light of present circumstances. To date, Eagle County has been relatively unaffected. However, we are seeing signs that the red-hot seller's market has come to an end. Average Days on Market since January 2007 has increased to 290 days (which is not far from our 15-year average) but does reflect an 80% increase from the lowest 160 ADOM number. Buyers seem to be standing on the sidelines, particularly in the $1M - $3M price range, apparently worried about whether the national news will adversely affect the Vail Valley playing field. BACK TO TOP
The short answer is an unqualified "yes." From our perspective, Buyer attrition must occur if the market is to regain equilibrium. But with demand vs. supply ratios having been 4:1 it is likely that there will be ready, willing and able buyers for what the Vail Valley has to offer – even if half the buyer base falls away. Despite the temporary national slowdown, vacation home ownership in unique high-end "supply constrained' resorts such as Vail will continue to be attractive as lifestyle enhancement and investment vehicles: based upon population demographics and high net worth profile families. BACK TO TOP
A fixed supply market, fewer sellers, accelerating demand for travel and leisure and historically affordable interest rates will continue to drive prices higher in the years ahead. In order to avoid mistakes, buyers must be patient, educated, focused and ready to act. The second half of 2008 through the end of 2009 is likely to be the downturn trough. Although prices in Vail may not come down, we are hoping for an increased availability of property in the months ahead. The rewards of vacation home ownership are many, including portfolio diversification, investment returns and the creation of family legacy assets. So stay sharp and don't let the media hype affect your long term goals and objectives in this matter. It's an asset risk worthy of serious consideration. BACK TO TOP