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Know the West

Blowing bubbles

Around the region, real estate offers the latest incarnation of the old boom-and-bust


Note: This article is a sidebar to this issue's feature story, "Town Shopping."

"A town does not just wake up one morning and decide to become a real estate boomtown," says Spenser Havlick, a professor emeritus at the University of Colorado’s school of architecture who served for 22 years on the city council of Boulder, Colo. — a real estate boomtown even by the Rocky Mountains’ skewed standards. "It takes a combination of factors, many of them often controlled by outside entities looking for good investment opportunities."

There’s no shortage of these "outside entities" in the West these days.

"More Americans have footloose sources of income — investment income, pensions, etc. — that allow them to choose their place of residence," says University of Montana economist Thomas Power. Add to that a housing market that has outperformed the stock market in the past five years, and you’ve got a lot of people with a lot of money looking for a place to plant their capital.

Other forces are at work here, too — forces that have contributed to the much talked-about "real estate bubble," and that could someday burst that bubble.

Tax codes and public relations

Without certain pieces of our federal tax code, places like Silver City, N.M., and Jarbidge, Nev., might remain dusty backwaters forevermore.

Tax breaks encourage lots of people to buy second homes, for example (HCN, 10/25/04: Window Shopping: Part-time paradise). Federal tax code gives a bonus to those buying homes, even second ones, by allowing them to deduct mortgage interest on their tax returns.

Another set of tax policies encourages wealthy real estate investors to buy and sell additional homes. Under Section 1031 of the federal tax code, if you sell real estate for a profit, you can defer federal income tax on the profit if you reinvest it in other real estate within six months. So you could sell your California holdings and reinvest all the profits in Silver City or Jarbidge, and avoid paying any federal income taxes on the deal for a year — or for as long as you like, if you keep selling out and buying elsewhere.

And of course, the media help hype certain real estate markets. The February 2006 issue of Mountain Living magazine, in an act of seriously bad karma, listed "Top 10 Undiscovered Towns" right next to sidebars titled "Best Place to Buy Land" and "Best Fractional Ownership." (Featured in the issue, in case you’re crossing towns off your list, are Bisbee, Ariz., Saratoga, Wyo., Taos County, N.M., and Grand County, Colo.)

It’s not just print media. A National Public Radio documentary five years ago (pre-Shovel Brigade, it should be noted) put Jarbidge, Nev., on many peoples’ mental map, including mine. The Emmy Award-winning TV show Northern Exposure did the same for Roslyn, Wash., where the show was filmed. Many in northern New Mexico blame the film adaptation of John Nichols’ novel, The Milagro Beanfield War, for drawing attention to the area between Santa Fe and Taos.

This kind of attention can get a town’s economic powers that be dancing a jig, of course. Many Western burgs have employees whose main gig is attracting media attention. Basically, all publicity is good, unless it includes the word "Superfund."

Real estate is no sure thing

Even with tax breaks, investment strategies, and the most sophisticated marketers around, however, real estate is no sure economic thing, either in the long term or the short.

No corporation in the country does a better job of conceiving, marketing and selling real estate than Intrawest, the world’s largest resort company, which owns Copper Mountain, Whistler, Mont Tremblant and Snowshoe, and controls the base areas of Winter Park and Snowmass. Intrawest’s new developments are in such high demand that it frequently has to conduct real estate raffles.

Yet even Intrawest occasionally trips over its shoelaces. Several developments at the base of Keystone Ski Area, which Intrawest built in conjunction with Vail Resorts five years ago, quickly lost value. I wrote a local newspaper story about how Keystone had become the most affordable Summit County housing option — not exactly the kind of publicity Intrawest was looking for.

In Keystone’s case, the bubble burst because the prices were so hyper-inflated that, once the initial buying frenzy subsided, later buyers realized there were far better local deals. But many factors can cause the so-called real estate bubble to pop, on micro or macro levels.

Overbuilding, which rears its ugly head mainly in mega-resort communities, causes real estate prices to, if not deflate, then to not rise as much as developers and real estate salespeople would like. (There’s an interesting distinction between a "recession" — not inflating as much as god clearly intended — and a "depression" — an actual loss in value, proving there is no god.)

A national recession, a rise in interest rates, a change in the tax codes, or a combination of those things could translate into a significant slowing-down of the West’s booming real estate economy. Many economists argue that the housing bubble is based on irrational factors, and is bound to burst. Not everyone agrees that a collapse is imminent, but even analysts with the National Association of Realtors concede that a slowdown is already underway, thanks, in part, to rising interest rates and a growing inventory of homes.

Whether or not the West will follow larger trends is questionable. With an 18.2 percent increase in single family home prices — and as much as 48.9 percent in places like Phoenix — during the last year, the West bucked the national trend, outpacing all other regions.

And in resort and "quasi-resort" communities, buyers have remained enthusiastic through other national recessions, according to Gabe Preston, principal with RPI Consulting in Durango, Colo. "Whatever risk might lurk on the national scene is washed out by visions of walking their dogs or fly-fishing beneath the backdrop of ‘the Gores’ or ‘the Bells’ or ‘Bridal Veil Falls,’ " he says. "They want that lifestyle so badly, I don’t think a fear of a housing bubble is going to stop them."

Of course, if the real estate madness did slow down, a lot of cheap housing would become available for those of us who stuck it out.

Where I live, we call that "hope."