Charles Dickens once said, “It was one of those March days when the sun shines hot and the wind blows cold: when it is summer in the light, and winter in the shade”. Those words perhaps best describe the end of ski season which officially ended the last weekend of March.
The community of Wintergreen has had one of the best ski seasons in our history. In a recent conversation, Wintergreen General Manager, Hank Theiss, mentioned that the budget for this year was about $1,800,000 and the actual numbers were closer to $3,500,000. The $1.8 million vs. $3.5 million are budgeted and projected figures for EBITDA or free cash for the year. The operating budget is closer to $31 million for this fiscal year. As you know, most of the annual operating revenue comes during ski season, so these additional funds enable deferred maintenance and improvements, put off due to past financial challenges. Rather than reiterate what you will receive through Resort communiqués, I will concentrate on the real estate markets in regard to where we are, how we got there, and where I believe we are headed this year. Perhaps it is important to first fully understand how America was affected by financial and mortgage markets and how it affected values across this nation.
From a historical perspective, government policies encouraged homeownership by making mortgage interest made tax-deductible in the same 1913 legislation that created the federal income tax. Fannie Mae and Freddie Mac were created to provide mortgages with low down payments to qualified buyers and sell bundles of those mortgages as federally backed bonds. The Federal National Mortgage Association, known today as Fannie Mae, created during New Deal Administration of Roosevelt in 1938, bought mortgages from banks, who then sold the bundled loans. Its purpose was to make more credit available and thus allow more Americans to own homes. Freddie Mac followed in 1970. Fannie Mae and Freddie Mac were officially private corporations, but as entities created by Congress, the mortgages they held were implicitly guaranteed and backed by the government. Together the two agencies held about half of the residential mortgages in the United States. Under President Carter’s administration, Congress passed the Community Reinvestment Act of 1977 (CRA). The Act required banks and other financial institutions to offer home mortgages to those who would not qualify normally for such mortgages, such as low income borrowers and minorities. President Clinton strengthened the CRA in 1995. Financial institutions were pressured to increase the number and amount of home loans to moderate and low-income borrowers. The predictable result was an explosion in the number of sub-prime loans for which little or no down payment was required. The borrower was not even required to provide proof of income in many cases. On-line lenders and other sub-prime lenders did not care as long as they originated the loan and got their commissions. These sub-prime and Alt-A loans were risky; because the borrowers had no “skin in the game”. By 2006, nearly half of all new mortgages were subprime or Alt-A. The banks packaged them and sold them to Fannie Mae and Freddie Mac and then they were sold again, financed by big banks, hedge funds, and large institutions. They were repackaged by Wall Street’s financial engineers and sold to pensions, and as investments all over the world. They were attractive because in a world of low interest yields these loans offered high returns. Many institutions, when purchasing these complex collateralized securities, understood what they were buying; but were able to justify these purchases because the reward of the high returns. The risk in these mortgages spread around the world as the loans were chopped up into bonds and derivatives.
When home building declined and prices fell, the universal downward pressure on consumption in America’s households spread across the nation to other industries. Debt levels created individual household financial disasters. As the market cooled and mortgages defaulted, the banks started to fail; not only because of losses on the mortgages they retained but also because of the mortgage backed securities they held. As the capital levels of the banking institutions were depleted and their leverages increased, big national firms like Lehman Brothers, Wachovia, and Washington Mutual, AIG, etc. failed. This led to a worldwide financial crisis from which we are just now emerging.
What does all this mean to a little community like ours? Wintergreen has been fortunate because throughout all of these national upheavals, we have been responsible and grounded in regard to real estate ownership. Our owners have decent FICO scores, the necessary down payments, and good jobs and a sufficient income to make the mortgage payments. Lenders rarely hesitate to make loans to our clients and owners because they are qualified and have the necessary cash to make usually a 10% to 20% or greater down payments, real “skin in the game”; and a 2nd home is generally a discretionary purchase for those who can afford it. Until the housing boom of the early to mid 2000s, there was a moderate wave from low to high selling ranges and good liquidity in values over the past 25 years. During the first half of this decade we saw values skyrocket at Wintergreen and agents and builders came in to the market with no concept of Wintergreen’s history or its markets. This led to a boom real estate market experienced brokers and agents had never seen before. Prices shot up and inventories shrunk.
Following the financial crisis, values are resetting downward and inventory is growing. Prices must readjust because much of the current inventory is overpriced. Values are transparent at Wintergreen and properties will bring only what the market establishes. We have been fortunate in we have had only a few foreclosures in the history of the Wintergreen, even in these troubled economic times—often from those who bought at the top of the market and have decided to walk away.
In general, the real estate market at Wintergreen has fared much better than the national average. However, there is fierce competition for buyers, who are all looking for bargains in a recessive economy. There are about 90 homes on the market on the mountain currently, 30 or so in Stoney Creek, and over 125 condos. Lot sales include about 65 home sites on the mountain and approximately 60 lots in Stoney Creek.
Although our firm saw considerably more sales closed these past couple of months than we saw for the same months in the past two years, there is still a lot of property to sell to get inventory back to acceptable ratios. Once more, real estate needs to be priced to the market, if it is going to sell.
Sales in general are fair, but improving. The days are gone when a property would sell quickly because demand was fueled by national events. I am optimistic and believe we may have gone through the worst of it, provided rates do not move up too quickly and sellers are willing to be realistic.
What does the future hold? There is cash out there waiting for the perfect time to invest in real estate. We are starting to see stability in the equity markets and confidence restored. I believe we will start seeing a recovery starting in the 3rd or 4th quarter because buyers who are on hold will make the decision to buy because they see opportunity. Long term interest rates are exceptionally low now, about 5.0% or below with no points on an 80% loan. So, if buyers find the perfect home that they plan to live in for the next several years or a 2nd home condo or home they will take advantage of reduced prices and historically low interest rates. Rates may never be this low again in our lifetime due to the federal deficit spending. In addition, gaining time together with family and friends who want to enjoy good times and build wonderful memories with all the amenities and facilities at Wintergreen is important. Folks with stressful and busy lifestyles are looking for an alternative. In addition, those considering waiting to buy could lose their dream home to another buyer. Finally, this timing just after ski season, when sellers are motivated, is a tremendous opportunity to recommend a friend who is looking for a great buy and would like to be a part of this beautiful and unique environment and community called Wintergreen.
Contributed by Tim Merrick