Oooohhh, That Smell––Picking at Bottoms

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Q: So Paul, does everybody, including us, think they can pick the bottom of the real estate market in Mammoth? We think that with all of the information now available on the Internet, including your blog, we will be able to do that. But c’mon, what’s your best take on when the bottom will be and can we time it perfectly?

A:  In the last few months the questions and comments about “the bottom” have become more frequent and more entertaining. Many owners or wish-to-be sellers are in the
“we’re there-we’re there, or…we’re close, aren’t we?” state of mind. Or they’re convinced that the start of regular air service (Dec. 18) will be the bottom. Meanwhile, bottom feeding buyers are trying to predict the specific quarter, like “2^nd quarter 2010, 2013” or based on some other event such as, ”when Starwood sells to Vail” or “when Main St. is redeveloped” or…(well, I’ll save that for later). At least the bottom feeders aren’t talking about earthquakes, volcanoes and hantavirus. The only thing I know for sure is that we’re heading towards the bottom. I know, genius of me to have that figured out.

Everybody wants to predict the bottom of every market. But cycles are never perfectly predictable. This picking the bottom stuff (at least here in Mammoth) is more psychological than financial. In fact, I’ve had people get upset with me because I would not proclaim “the bottom” or predict its soon arrival. Read any good financial book and you’ll discover that you’re lucky if you bat .500 at anything. Your odds of getting perfect skiing are about the same, but that doesn’t stop most people, especially not fanatics.

The one thing most people don’t realize about “bottoms” (or tops for that matter) is that you don’t know you were there until months, or years, after they occurred. No algorithm or statistical modeling will help, especially in Mammoth where emotion and “life’s clock” are such huge drivers in the market. True bottoms can only be seen in the rear view mirror. And losing your youthfulness, or squandering the opportunity for precious years with your children and grandchildren, while waiting for some “bottom” no longer makes any sense for most. 

My regular readers will know there are far more important concepts to consider than nailing the absolute bottom. First, they know I watch the foreclosure market intensely because that will prove to be the best barometer of the market for a multitude of reasons (previously discussed ad nauseam). But secondly, they know that hitting the bottom isn’t as important as purchasing a quality property, and this type of market provides the buyer the patience to do that. Back in the goldilocks market I would gasp when sales would come through the MLS and people were buying dog-meat properties for high prices. The 80’s and 90’s taught us there were locations that simply didn’t resell when the market got soft. When the market got hot there wasn’t much discretion. Non-discerning agents and their buyers had little insight, and after all, real estate only goes up. In today’s market buyers should simply get screaming deals or great properties. Preferably both, but buying an outstanding property is far more important in the long run.

The third thing my readers know I watch closely is the inventory. The total inventory is really so small that it is relatively easy to watch. (I have found that many potential buyers know the inventory better than many local agents.) Right now there is a growing number of wait and hold sellers/owners. Personal knowledge and the files on my desk show this. The inventory also reflects it. Many listings expire and don’t reappear. Mammoth really has an unknown supply of sellers. Most of these people aren’t necessarily delusional, they just fall into the “don’t have to sell” category, and most likely there is great emotion tied to the property. (Adult children who rarely come to Mammoth seem to have a strong influence over their parents when it comes to selling “the Mammoth cabin”.) Others are just waiting for the “adjusted basis”. And many that didn’t sell in the past year are now happy they didn’t because they likely would have put those proceeds into mutual funds. So much for batting .500.

On the other side of the pendulum swing, some of the current listings and “short sales” are going to end up as foreclosures. And some heading to foreclosure aren’t listed, they aren’t even going to try to sell. (And pay attention, banks are getting hungry for cash.) But overall the inventory is remaining stable, there are no staggering or alarming numbers. A good percentage of that inventory would probably sell if the prices were cut by another 10-30%.

The other thing about real estate bottoms is that they aren’t “V” shaped bottoms, they are “U” shaped bottoms. And with all the wonderful economic news out there today, I would expect the U to be rather wide. That is unless some black swans come to the party. But what that really means to me is that this bottom period that we are in, or are about to enter, or is somewhere in our future, will be a period for buyers to make quality purchases in the local marketplace. And please don’t come looking for “cash flow”.

One thing I’m also observing, and should remain so, is that not all segments of the market will bottom at the same time. For instance, the values in the condo hotel segment of the market have declined substantially off of the peak(s) (the rear view mirror is a little fuzzy). I’m seeing numbers (recent sales) off as high, or greater, than 50%. There are buyers at these discounted prices, but I think there will be some additional minor declines in value, especially in the less than best locations. It all depends on how strong the winter rental income is and how many more foreclosures we will see in the next 12 months––and there are some in the pipeline. On the other hand the single-family home market between $700K and $1M remains stubborn. If the sellers cut their prices by 50% off the peak in this segment the inventory would vanish in a few days. Foreclosures aren’t impacting this segment of the market. Decent homes in the $500K range sell quickly. We may see the bottom of that segment in the next 12 months. But would could be close now. Not all segments are created equal.