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| Feature |
The Private Resort Home Market: An Investment Outlook
John Ferry Additional Research by Daniel DelRe
06/01/2005
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When vacation homes are replicable
commodities, they become prone to wild swings in value. Wheaton found that a
price bubble that formed in the latter half of the 1980s caused nominal prices
to more than double from their 1977 level, and real prices to increase by 25
percent. This bubble burst in 1988, causing nominal prices to fall by 30 percent
and real prices to plummet by almost 50 percent for the remainder of the study
period.
TOP VIEW
Owners of high-end resort homes have enjoyed substantial gains in
the value of their properties. This is particularly true at the upper end of the
market, where the homes boast extraordinary settings and five-star services.
However, while most homeowners value lifestyle over investment potential,
developers and real estate experts warn that easily replicated properties fare
poorly as long-term investments. |
Wheaton’s study shows that investors who bought the high-end ski
resort properties in New England in 1975 saw their investments fail to keep pace
with inflation; those who bought during the late 1980s bubble suffered large
nominal losses, as well. A buyer who paid $90 per square foot in 1988 saw the
price erode to a $60 nadir by 1997, before it began to rebound.
While
Wheaton’s research focused solely on ski condominiums in New England, he
maintains that his conclusions are applicable to the wider resort home market
today. “To the extent that these sites are reproducible, there’s no reason for
this stuff to be a great investment,” he says. “You just go on to the next
mountain or beach or lake.”
Wheaton also argues that the increase in the
construction industry’s productivity over the last 30 years, which has lowered
the cost of building a home, compounds the problem. “It’s not clear that the
hard costs of constructing these homes ever increases faster than inflation,” he
points out. Building a home, therefore, will be an inexpensive alternative to
purchasing an existing house, and will help keep the rate of appreciation of
existing houses in check.
“I certainly think people should not expect the
appreciation to continue,” adds Christopher Mayer, economics professor at the
Paul Milstein Center for Real Estate at Columbia University. The prices of these
properties are generally more volatile than are the prices of less expensive
homes. Mayer’s research confirms this.
Those planning to hold onto their
vacation homes for many years may be willing to ride out these volatile swings
in market value. But Mayer, like Wheaton, also believes buyers who invest in
resort homes that can be easily duplicated in similar settings are vulnerable to
disappointing returns. The supply of resort homes will ultimately outstrip
demand, depressing prices, Mayer concludes. “This country is filled with places
that have great views.”
Even impartial wealth advisors, who have no land to sell and no economic
theories to advance, find it impossible to estimate the real long-term value of
these properties. “We have had several discussions over the years and
unfortunately we have arrived at no hard and fast rules,” says John Bird,
president of Salt Lake City-based Albion Financial Group. “Consider it an
illiquid capital appreciation vehicle. Yes, there are those rare markets where
well-documented appreciation has happened every month, but the caveat of all
investments is especially relevant in those cases: Past performance is no
guarantee of future returns.”
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