When the conversation turns to financial bubbles, tulip bulbs always have a starting role. In the mid 1600s the price people were willing to pay for tulip bulbs went------up. A lot. And then crashed. I could give you quotes about the price of various qualities of tulip bulbs in florins but that really doesn't tell you anything. What does tell you something is near its peak it would take a skilled laborer 10 years of work to pay for 1 tulip bulb. That is a lot of labor to buy a bulb.
Can it ever be rational to participate in a bubble. I have long argued yes. If most everyone else is in on the game and you chose not to participate your ability to buy stuff (not including tulip bulbs) will be limited. If you go along for the ride---well at least you can keep up with the Jones's. To bring the point home in more current assets assume everyone in the country is making money in Dodgycoin (the new cryptocurrency I invented yesterday) and it goes up so much that pretty much everyone in the world is worth an additional $25m except for you my dear reader who decided that Dodgycoin was well....dodgy. If everyone else has an additional $25m in assets what do you think happens to the price of homes, or Tesla or airfare? Economic theory would suggest they go up. Bottom line, choosing to sit out a widespread financial bubble is risky---its a bit like shorting the stock market. When you are right you really gain against everyone else, but when you are wrong it can really hurt your purchasing power relative everyone else. And it's everyone else you are competing against to buy stuff so maybe it's time to open that coinbase account.
Ahhhh you might ask---what the hell does that have to do with the Havens? The Havens is a building development at the base of Snowmass ski area. It is comprised 10 single family homes ranging in size from 2,500 to 3,300 square feet. They sold for between $5.7M and $8.4M or about $2,600 a square foot. The project sold out in 42 days. My guess is the new owners will be able to move in 1.5-2 years. The homes will be tight to each other, not have much of a view, share an underground parking garage with an elevator that brings you up in the middle of the project at which point you have to lug your stuff to your house. Oh yea and the HOA fees run around $36k per year (estimate prior to construction so that might be a low ball on HOA fees and that doesn't include any 'special assessments'). Overpriced? You make the call---clearly 10 people didn't think so, but lets take a look at some 'comps'.
There has been a lot of development in the base village over the past 3 years. Most of those units sold for between $1k-$1.5k a square foot. Here is a link to an example--a 4 bed 4 bath new construction home that sold 9 months ago for $1.25k a square foot.
1,250k square foot snowmass base
Or if you are willing to live up Wood road and walk about 300 yards with your skis you could have bought this beautiful new construction home for $1.44k a square foot and gotten great views, an attached garage and HOA of $1,200.
$1,400 a square foot, views, and $35k less HOA
Or if you were looking around a year or two ago you could have bought into the 1A townhomes in Aspen. I think these are great comps---base of Aspen vs base of snowmass---new construction and similar type finishes. These homes have similar HOA fees ($35k ish) but of course the home is about 80% bigger so HOA per square foot in Snowmass is about 80% more on a relative basis. And you get an attached 2 car garage, and YOU ARE IN FUCKING ASPEN. Historically, Aspen has traded at a 50-100% premium to Snowmass, so paying 2% more per square foot to be in Snowmass vs Aspen seems......off market. The linked home sold less than 6 months ago.
lift 1A townhomes
What do you think? Are the Havens priced a bit high relative to their 'comps'?
Remember the skilled Dutch laborer who had to work 10 years to buy 1 tulip bulb in the peak of the mania. I decided to have some fun with numbers to try to figure out who might be able to afford these vacation homes.
I assumed 'they' started working at age 25 making $250k per year and their earnings went up $100k per year. I assumed the buyer is now 45---that their total effective tax rate was 40% (i.e. w2 income), that they saved 50% of their income each year and that their investments returned 7% a year compounded annually after tax. At age 45 this hypothetical family of 4 (maybe double income maybe single income) is worth $13.6m. If their investment returns were 9% (which would be HUGE remember its after tax and fee returns) their net worth would be $16.2m. If their returns were 7% and their W2 earnings only went up $50k per year their net worth at age 45 is $8.5m. Even at only $50k per year their W2 earnings are $1.25m a year and the original couple is earning a healthy $2.25m a year. As Adam Sandler might say "not too shabby".
The base line family that is worth $13.6m and making $2.25M per year decides to buy a 2,700 square foot home in the Havens for $7m. Assume they have a $3.6m primary home with no mortgage. They decide to put down 50% of the purchase price and take out a $3.5M mortgage. They now have investable assets of $6.5M and they have added to their expenses about $265k per year for the next 30 years ($188k a year for mortgage, 36k HOA, $18k utilities, $8k insurance, $15k taxes). Looking at that annual nut I am gonna eliminate the family whose income only went up $50k per year. If you have any financial sense at all I just don't see someone whose after tax income in $375k being able to swing $265k expense for their vacation home. Even the original hypothetical family is gonna be stretched spending 40% of their after tax wages a year on their Havens home.
How many families are there out there making that much money since they were 25? And do they all want to live in Aspen-Snowmass---answer it sure seems like a lot and yes. It seems like people are getting carried away and some folks might not be thinking about what they really can afford.
Let's see what happens to this family if it turns out they maybe stretched a bit and decide in 3 years to sell. Lets assume they sell their home for $2100 a square foot ---that would give them a sales price of $5.7m. After commission and transfer taxes etc they would net $5.3m. They also will have spent $800k on 3 years of mortgage payments etc and only been able to live in the house 1-1.5 years. Let me ask the rhetorical question that is so obvious, 'Would they have been better off renting?" And if you toss in the cost of $800k into the mix their break even is about $3100 a square foot when they sell. Possible? Sure. Likely-----hummmmm.
Bottom line observations
1. Has there been a fundamental shift from living in the city and burbs to living in vacation towns? Not according to school enrollment data.
2. Lower priced homes are starting to sell at a premium to higher priced homes. For example $10-20M homes in prime locations are selling at a lower per square foot cost than $2-8M homes in average locations. This leads me to believe the truly rich got the homes they want, while the upper middle class-low ultra high net worth is reaching and bidding up prices on homes they think they can afford. I remember during the 2008 GFC in general it wasn't the people with net worths over $500m that were finically stressed even if their net worth dropped in half---its was the partners at Goldman who were worth $50M and lost half their net worth and struggled with their second homes on Nantucket.
3. I think my hypothetical family (and the financial system) has more leverage in it than anyone is accurately measuring. The family put down 50% on their Havens home. That is not like 2008 when people put down 10% or less. But there are different assumptions built into their decision which might be less obvious. What if they went with an adjustable loan and rates rise? What if tax rates go up? What if their investments don't go up 7% a year? What if they go down? Of course maybe the value of the Havens continues to appreciate at 15% a year, but what if my assumption of $2100 a square foot is wrong? What if the price they sell at is $1500 a square foot which would be in line with the comps? (answer they get back $250k of their downpayment of $3.5m).
The price of stuff isn't that informative. Remember the tulip bulb that cost 10,000 florins? That doesn't tell you squat. A tulip bulb costing 10 years of skilled labor---that tells you something. Who can afford a Havens home? Not someone only earning the minimum threshold to be in the top 0.1% of the country (that number is $1.6m a year). It would seem to be an even more select group. A cohort who is making $2-4M a year. A cohort that is way less that 0.1% of the US population (remember the really rich are going to be buying bigger nicer, better located stuff that costs less per square foot). Or maybe its people reaching and assuming that their Dodgycoin gains will cover the cost. The trick with a bubble is knowing when to sell or .........making sure the government bails you out.
