Resort Real Estate: Does Supply Prevent Appreciation?
Abstract
This paper examines the behavior of ski resort property in a major New England market over the last 25 years. A constructed property price series reveals that nominal prices are quite volatile and only slightly higher today than in 1980. These fluctuations and trends are investigated with a time series VAR model. The findings indicate that (1) natural snowfall is crucial to business; (2) regional annual business is central to individual resort demand and hence price appreciation; and (3) resort supply responds so elastically to any movement in prices, that it effectively curtails any long-term property appreciation. Impulse responses reveal that positive demand shocks fail to generate any long-term (real) price appreciation because of excessive new development. This behavior could be typical of many other ski resorts.
Introduction
As the economy in the United States continues to grow, an increasing number of Americans are purchasing and building second homes: by the ocean, near lakes and in the mountains. According to Ski Magazine, in 1960 there were only a handful of ski areas that had any permanent housing, while by 1990 the country contained more than forty major resorts with collectively over 100,000 housing units (excluding hotel rooms). The objective of this paper is to examine the investment performance and economic behavior of such second homes in one particular market, ski resorts, and in one part of the country, New England. This appears to be the first effort to study a market for 'second' or resort homes. A number of authors have examined the cyclic movements of commercial property markets (Wheaton, 1987; King and McCue, 1987; Voith and Crone, 1988; Grenadier, 1994; and Hendershott, Lizieri and Matysiak, 1999). The hotel lodging industry has been studied (Wheaton and Rosoff, 1996; and Coopers and Lybrand, 1999), and of course the primary home and apartment markets have been well researched (Grebler and Burns, 1982; DiPasquale and Wheaton, 1992, 1994; and Blackley, 1999). There is no published work, however, on second home resort housing.
To study this market, a property price series is first constructed for one particular resort, Loon Mountain. This resort is believed to be quite typical of New England ski areas. The series reveals that nominal prices are only slightly higher today than they were in 1980, and consequently real prices have eroded-by 40%. In addition to showing little long-term nominal appreciation, the series exhibit considerable variation across time. The series is stationary, however, and so can be examined with traditional econometrics. The causes of these fluctuations are explored with a time series model of the resort, a conditional VAR, and three things are learned.
First, natural snowfall in the region is probably more important than either the region#39;s long-term economic growth or business cycle in explaining the annual volume of the region#39;s ski business (New England skier visits). Secondly, regional ski business in comparison to Loon Mountain#39;s own stock of units closely explains price appreciation. Finally, new supply at Loon Mountain responds so elastically to any movement in prices or regional business that it effectively curtails any long-term property appreciation.
To further reinforce these conclusions, VAR impulse responses to both transitory and permanent demand shocks are examined. The shocks are truly exogenous and are generated by either exceptional snowfall in one year, or by a permanent increase in annual snowfall. In both cases the initial increase in prices that results from the generated business is soon reversed from exuberant new development. In most situations, prices (in real terms) actually wind up slightly lower a number of years after the shock. This behavior could be quite typical of many ski resorts and hence can clearly limit long-term investment performance for such property markets. Buying a condominium in a ski resort might bring the owner some yield (either personal or rental), but it is unlikely to produce much capital gains.
Data and Modeling Approach
The New England ski market is composed primarily of nineteen major resorts and fourteen minor ski areas in the three northern states of Maine, New Hampshire and Vermont. Major resorts have a large number of trails as well as extensive lodging and condominium developments. Minor areas focus primarily on local day skiing. Most skiers in these markets live in the Northeast, and much of the skier traffic comes from automobile-based weekend trips, between the months of December and March. These weekend and holiday trips generate most of the demand for resort real estate. The region#39;s snowfall is not as abundant as in the western U.S., so over the last thirty years all of the resorts have installed full snowmaking capacity on virtually all of their terrain. The resorts compete extensively with each other for destination skiers that come predominantly from Boston and New York.
Loon Mountain lies in the center of the northern states, in the White Mountains of New Hampshire. Being located directly off the state#39;s largest interstate highway (I-93) it is very accessible and has grown in popularity. The first ski trails were cut in the mountain in the early 1960s, and a hotel was built at that time. Condominium developments were begun in 1975, and today more than 2,100 units sprawl along the access road that leads from 1-93 to Loon.
The condominium market at Loon divides itself into two parts. Those that were developed directly adjacent to the resort, the Village at Loon Mountain, contain a total of 555 units and are considered to be more desirable because of their direct access. Over the same time a host of smaller developments were undertaken that lie along the three miles of access road, and together contain roughly 1,600 units. The real estate market
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