Petit: Interest rates are important for the Aspen-Snowmass market | Company
It is widely accepted in the Aspen-Snowmass real estate community that the local market can be immune to changes in interest rates and mortgage rates. This belief stems from the high percentage of residential real estate transactions that are reported as “all cash” at the time of closing. Title companies that track this information report that approximately 70% of all residential real estate transactions in Pitkin County close without using traditional mortgage financing.
Among Colorado’s major ski resorts, Aspen ranks first when it comes to cash transactions. Telluride, Vail, and Steamboat rank second, with all-cash transactions between 50% and 60%. Summit County resorts such as Breckenridge have the lowest number of cash transactions, at 37%.
Over the past year, interest rates on a 30-year fixed rate mortgage have doubled from an all-time low of 2.75% to around 5.41% today. This dramatic increase in interest rates was prompted by the Federal Reserve’s efforts to contain the largest increase in inflation since the early 1980s. Despite the fact that we have a high number of residential transactions that all close cash transactions in the Aspen-Snowmass area, the directional trend in interest rates is likely having a significant impact on the local real estate market.
This is because interest rates reflect the cost of capital and as interest rates rise, the value of investments made with that capital becomes less attractive. This is especially the case for investments that rely primarily on appreciation, such as residential real estate, non-dividend paying stocks, collectibles, gold, and digital assets like Bitcoin. These investments are often referred to as “risk assets”.
Even though 70% of residential closings in the Aspen-Snowmass area do not involve financing from traditional mortgage lenders, the funds used to purchase these properties must come from somewhere – such as the sale of stock, the operation of stock portfolios or cash on deposit that generates little or no returns. The funds used to buy homes in the Aspen-Snowmass area over the past two years likely came from sources that generated little or no real return. The “real” return is the net rate of return after deducting the inflation rate from the interest rate on an investment. For example, if the interest rate on a bond is 5% and the inflation rate is 3%, the real return on that bond is 2% (5%-3% = 2%). Real yields crashed below zero after the March 2020 coronavirus-induced crash, sparking an unprecedented bull run in risky assets like tech stocks, Bitcoin and resort real estate. The lack of real returns on other investments and the pandemic migration of people out of urban areas have likely combined to create unprecedented demand for residential properties in resorts like Aspen-Snowmass over the past two years.
As we begin to return to an inflation-driven higher interest rate environment, it is likely that investment capital will begin to shift away from risky assets that produce little or no current cash yield. , to assets that pay interest and dividends. Buyers who purchased residential properties to rent out as an investment or to keep for appreciation made their decisions based on an anticipated return on investment in the future. For this reason, rising interest rates could have a deeper impact on resort markets like Aspen-Snowmass which have a high percentage of second and third home owners and investment properties compared to a market typical residential real estate like Denver which has a high number of primary owners.
As we enter the second half of 2022, we may see the first signs of the impact of rising interest rates on the Aspen-Snowmass real estate market. Over the past couple of months, we’ve seen a significant number of new listings hit the market, especially in the higher priced category. In June and July, 184 new listings hit the market, the highest number of new listings since the summer 2020 pandemic. Active listings doubled in Aspen and Snowmass. Of the 184 new listings, 28 have been properties priced over $20 million, of which only three properties over $20 million have been contracted or sold in the entire Aspen-Snowmass market.
Despite the high percentage of all-cash transactions, we are likely seeing the impact of rising interest rates on the local real estate market. Owners will seek to capitalize on their appreciated properties and shift their investment capital from assets that produce returns based on appreciation, such as resort residential real estate, to assets that depend on cash flow from interest and dividends.
Lori and William Small, CCIM are recognized experts in luxury and commercial real estate at Coldwell Banker Mason Morse in Aspen. They can be found via their website theSmallsaspen.com or by email at [email protected]