DOES INSURANCE CRISIS AUGUR THE END OF REAL ESTATE?
Q: We know the cost and availability of insurance has gone crazy and at some point will negatively impact real estate values, especially after some of the more recent disasters. How do you see this impacting Mammoth specifically? And as usual, what else are you seeing in the market right now that you find interesting?
A: Mammoth continues to be a classic example of “all real estate is local.” There are plenty of interesting dynamics continuing to happen, most of which I have been discussing. The insurance issue is the most compelling at this point. The Mammoth market has already endured many negative impacts from it and will not escape the further challenges. How it all plays out is unclear, and it will undoubtedly add to the cost of ownership. But it may end up being one chunk of the inflationary toll being wreaked on everything.
The Mammoth regional real estate market, like many markets across the country, has slower transaction volume. Significantly higher mortgage rates combined with low inventory are putting the damper on interest in property, showings and closings. But active agents in this market will tell you that there continue to be plenty of frustrated (potential) buyers. They want to buy, they can buy (many with cash), but they just aren’t seeing a property that meets their criteria, or at least most of what is on their wish list. One of the most interesting aspects of the current market—there continues to be regular, very impressive (high) closings in several segments of the market. And the newer, higher-end luxury product is in strong demand.
Undoubtedly the near stalemate market conditions will be affected by the anticipated insurance challenges in the future. The added expense, hassle, and new perceived risks will be weighed by both buyers and owners, and some of these owners may decide to become sellers because of it. The Mammoth market has already been through a phase of this market condition, and so far it has not impacted values.
Most local condominium projects have already seen major escalations in their insurance premiums, and there have been some extreme examples. These HOAs have absorbed these increases both by special assessments and increased monthly fees. Some condo hotel properties have been hit hard and yet their values and desirability in the market are at peak levels in the last six months. Other random projects have experienced significant increases. Sometimes there doesn’t seem to be any rhyme or reason for one project to be singled out, especially without knowing details of the claims history at every HOA. And some of it is actually counterintuitive—having fire sprinklers or cement fiber siding doesn’t seem to be an advantage and having a wood shake roof or siding doesn’t seem to be a detriment. At least so far.
The California FAIR plan has really come into the spotlight in the last month. It is considered the “policy of last resort.” It is currently covering about $300 billion worth of real estate in California.
The FAIR plan covers many properties in Mammoth and the region. Most of the properties in the area are classified as being in a “very high fire severity zone.” This is a common disclosure in a local real estate transaction but is a red flag for the insurance industry. Many properties in Mammoth are covered by the FAIR plan for the last 30-40% of the insured value. One of the major insurance companies typically covers the majority of the insured value.
Many are now contemplating or anticipating the insolvency of the FAIR plan and what may happen if it gets to that point. The Plan is technically covered by the major insurance carriers. But what if everybody becomes insolvent, or worse? Basically, a complicated situation becomes even more complicated. Inevitably the State and federal government are going to get dragged into this for “solutions.” There will need to be new (and better?) State legislation and regulation. And of course there will need to be some “dealmaking” between the State and federal governments. And conceivably, every insurance policy holder in the state might be on the hook for something. And of course, the courts are going to be involved as well.
How this will affect policies at the next renewal and beyond is unknown except for the fact that they will be more costly and more difficult to retain and obtain
Property owners may be forced to take risk-reducing measures, and some of these may be costly, and need to be completed with immediacy. All of this is bound to have some impact on real estate values and that impact may be very “local” too. If, or when, we see some “rush to the exits,” even at a small level, we’ll have a better idea.
But the interesting question is; Is this another real estate “yin and yang” moment? The current economic conditions have most people wanting to be in hard assets including real estate. This theme has driven some of the activity of the past year. And the most recent disasters will only drive the cost of construction and replacement even higher (inflation on top of inflation?). Increased insurance costs might not be the best reason to walk away from this hedged position. And as we have seen in the past, these insurance crises tend to smooth-out over the long haul, but this one is likely to take much longer.
Ultimately, higher insurance costs are going to be part of the larger basket of rising costs associated with owning real estate in Mammoth. Right along with snow removal costs, asphalt parking lot sealer, paint, internet/cable service, and on and on. Artificial Intelligence won’t be of much help to offset these. There is even a faction in Mammoth who may find this appealing—in their minds these higher costs will make condo short-term rental (STR) properties less lucrative and reduce some of the demand. All in the hopes that some local resident can buy or lease a property in the future instead of it being a nightly rental. But how are they going to cope with the additional costs? Unless you are in subsidized workforce housing, the affordability of Mammoth will be an increasing challenge for both owners and renters.
Beyond the insurance debacle, the hotel and condo-hotel segment of the Mammoth market is an interesting topic to reflect upon. The Limelight should be opened by the end of this year. And the Rockspring project on the historic Dempsey/Nevados corner should see significant construction this summer. The Berner St. Residence Inn property has been cleared. And there are recent, new owners for several of the remaining North Village properties. The consultants have been saying the resort is short/in need of these ”hot beds” for well over a decade.
It is interesting to think about how these additional rooms will impact the town and the local real estate industry. Could Mammoth end-up having a glut of small accommodations? When we look at other popular mountain resort communities we see a large volume of hotels, condo-hotel properties, boutique-style hotels, etc.. Many have multiples of what Mammoth has or will ever have. This is why Mammoth’s condominium base and its availability for STR is so critical. And without these thousands of available hot beds, the resort would be completely dysfunctional and Mammoth’s bed tax revenues would be a fraction of what they are.
Is this new hotel development the sign that Mammoth is finally maturing as a resort, and might even indicate it may someday fulfill the elusive “destination resort” description that has been talked about for decades? Maybe, maybe not. What makes Mammoth the “crown” of resorts, what makes it the very special enterprise that it is, is demographics. The high popularity and demand is largely a byproduct of it being a half day’s drive from a massive population base. I certainly wouldn’t shortchange the fact that it is a great ski mountain surrounded by a spectacular natural environment with endless recreational opportunities. But ultimately, it is the location and proximity to millions of people who don’t think twice about driving for hours in their vehicles to come recreate in this great playground.
Because Mammoth is this unique drive-to resort, are hotels really the best accommodations to fulfill the demand? Of course, there will be always be the crowd who will only stay in a hotel. But Mammoth’s typical condo is really more accommodative to many of our visitors. Parking the rig close to the front door of your quarters for the next two nights has many plusses. And if it is less expensive, even better. Reality is that many of Mammoth’s guests and customers are a little different from other mountain resorts. Most didn’t just get off of an airplane.
I’m sure the Aspen/Limelight folks are quite certain their hotel, social clubs and gathering spaces (all with the appropriate “vibe”) will be very popular. Will the Westin diehards be lured away? Or will they just stroll over to take it in? The Rockspring design is interesting and is sure to have its own appeal. And from there, who knows?
But with all of these new hotel options available, how will it impact the bread-and-butter condos of Mammoth? Our guests and customers aren’t likely to change all that much in the coming years. The Airbnb/STR model isn’t for everybody, but it certainly isn’t going away. It actually has a long steeped tradition in Mammoth, and for good reason. Or maybe the variety of accommodations will be a great advantage, something for everybody and for every occasion.
The future of all of this will be fascinating to watch. Happy President’s Weekend and Ski Week!
Paul Oster is the Broker/Owner of RE/MAX of Mammoth (celebrating 35 years). For other timely real estate information you can go to www.MammothRealEstateBlog.com. For legal, accounting, or construction advice, please seek out the appropriate professional.
