The epicenters of the Truckee real estate boom are now the frontlines of the bust — brand new streets bearing signs that reach back into history: China Camp Road, Coburn Street, Henness Road. These were the strips of asphalt carved into the forest to make way for the Truckee of Tomorrow — golf courses, resort living, the luxury mountain life. But instead, the housing crash has left us with the Truckee of Today — streets leading to empty lots hawked at fire-sale prices. Derelict, half-built custom homes abandoned by spec builders who found themselves hopelessly underwater. A wounded middle class.
And deep questions about the future of the real estate market and the future of the region’s economy without a booming building industry.
Truckee’s current position in the depths of an economic bust is nothing new for the town. In fact, the town’s cyclical, seasonal, boom-and-bust economy dates back to the times of the namesakes of Gray’s Crossing — 1800s settlers Joseph Gray, S.S. Coburn, Patrick Henness. Over the years, the early industries founded on the railroad, ice, and lumber have given way to today’s modern counterparts — ski resorts, retail, and finally, real estate.
As the new real estate reality sets in, and Truckee looks toward an economic future where housing seems an unlikely engine for recovery, Truckee and North Tahoe face another major economic shift in the region’s history. Meanwhile, residents are watching the volatile housing market and wondering when the recovery will take hold, and whether the housing collapse is finally the catalyst for widespread change in our local economy.
From boom to bust
Carol Fromson has been a realtor in Truckee for 22 years. But it was where she lived before Truckee that gives her a unique perspective on the current housing collapse. In the early 1980s, Fromson moved to Eagle River north of Anchorage, Alaska, in the middle of the high times of an oil boom. The construction of the Alaskan Pipeline had infused cash into the economy, and as oil began flowing through the pipeline, the boom was on. Fromson remembers women in fur coats walking the street and banks throwing high-end, crab-and-champagne parties for realtors. The oil boom became a building boom, and Anchorage was one of the fastest growing cities in the nation. Then Middle East oil production ramped up, supply glutted the market, and oil prices crashed. The oil and building boom went bust overnight.
Today, Fromson sees similarities in Truckee. Just like Anchorage, Truckee has other industries. But just like Anchorage, the domino effect of one dominant industry’s fall pulled down the economy as a whole.
Fromson has seen friends and associates — the middle class of Truckee — pack up and leave. As she tracked home sales she realized that more than a third of all property sold in the area is either short sales or foreclosures. The fall, much like the rise of the real estate, has been sharp.
The area’s real estate trajectory was unsustainable, said Fromson, and the silver lining in the dreary housing news is that locals can once again purchase homes and prices have returned to sensible levels. But the pain of a market in decline will not go away anytime soon, she said. She sees home prices declining further before stabilizing, and estimates that it will be three to five years before prices begin to climb again.
Breaking the cycle
Steve Frisch has a long history of tracking Sierra Nevada economies in intricate detail for the Sierra Business Council, of which he is president. The council has put out some of the most comprehensive and in-depth looks at local economies for more than a decade in a series of meticulously compiled reports: ‘The State of the Sierra,’ ‘The Wealth Index,’ ‘Needs Assessment,’ ‘Investing for Prosperity,’ and more.
For years, the council has been advocating that Sierra Nevada economies wean themselves off of cyclical and low-wage industries and build sustainable futures.
The housing boom, Frisch said, made all of this a lot harder. The easy money available in real estate masked the overall decline of the middle class, and all the council’s efforts at promoting sustainable economic development were easily drowned out by a booming housing industry that offered plentiful, high-paying jobs.
Today, Frisch sees Truckee at a crossroads. Truckee’s economy has been based on a succession of ‘king industries’ — railroad, ice, lumber, skiing, tourism, housing. When one fell apart, Truckee’s economy languished until the town latched onto the next ‘king industry.’
That cycle should now be a part of Truckee’s past, said Frisch.
‘We have a tendency to want what worked before to work again,’ he said.
But this time around, the resurgence of a single industry should not be looked on as our economic savoir. The economic recovery needs to come from a diverse array of businesses, each making up a sliver of the town’s new economy.
‘A sector getting big is not the sign of a healthy economy; it is a sign of an economy getting in trouble,’ said Frisch. ‘We shouldn’t be looking for the next big thing. We need a bunch of stuff to work.’
As disastrous as the housing slump has been for Truckee, Frisch is optimistic about the town’s economic future. The town is a very desirable place to live, has high-speed communication networks, and is reasonably close to major urban centers. A new economy pieced together from a number of diverse and resilient small business sectors would break Truckee’s cycles of booms and busts, said Frisch.
‘Middle class jobs are going to be rebuilt on innovation and intellectual capital and not construction and tourism,’ said Frisch.
The Sierra Business Council is working on several fronts to make this a reality. The council is leveraging private and public partnership to develop green energy jobs through biomass plants across the Sierra. The organization is also retraining contractors to work in the energy efficiency field, retrofitting homes to conserve energy more effectively. And the council has been working with existing industries like tourism to make them more sustainable and move them toward a middle class future, rather than their cyclical, low-wage present. The council’s geotourism project highlights unique, authentic businesses and travel destinations in the Sierra — a restaurant that offers seasonal, locally sourced food or a historic lodge off the beaten path from the chain hotels.
Recessions are often periods of reinvention, reassessment, and innovation, said Frisch. The giant upside to the housing collapse is that Truckee has the chance to emerge with a resilient, middle-class-sustaining, diversified economy, after coping in a truncated version of the seven steps of economic grief.
‘The cycle is denial, acceptance and once you get through acceptance you begin to innovate,’ said Frisch.
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Three Reasons to Be Optimistic about Real Estate
• New Home Construction Has Evaporated — Take the basic law of supply and demand, apply it to the future of housing, and the complete lack of new home building may be one of the most instructive indicators of the future of the market. Supply has stopped; demand, however stunted, continues. The regions that will benefit most from this bounce are the places that are not overbuilt or flooded with years’ worth of inventory. Tahoe/Truckee, with its resort appeal and buyer base that extends across Northern California and beyond, should benefit somewhat from this trend.
• The Price is Right — Home prices that the area has not seen since 2003 are now commonplace in the local real estate market. Full-time residents who escaped the housing meltdown with their employment intact and with any kind of savings can find a mortgage that will cost less than rent. The slumping prices have opened the door to an entire class of homebuyer that was priced out of the market for nearly a decade — local workers.
• Second Homes as Saviors? — Truckee real estate is fairly evenly split between full-time residents and second-home owners, and the two markets are expected to behave differently in the years to come. Ron Hemig, owner and broker at Hemig and Erle, says that while foreclosures are bringing down prices and flooding the market with inventory on the low end of the market, second-home havens like Tahoe Donner are actually seeing very little excess inventory and few foreclosures. As prices begin to level out and interest rates stay low, Hemig said that the bargain prices that are on the second-home market should spur sales. Hemig sees the second-home market stabilizing and sales increasing much before Truckee’s predominantly full-time neighborhoods recover.
Four Reasons to Be Pessimistic about Real Estate
• Foreclosures — The foreclosure market may be one of the most mysterious elements of the real estate market. Foreclosed homes drive down home prices in a neighborhood, are used as comparisons to base appraisal prices on, and are something of the wild card in how home prices will fare in the future. Delinquent properties that have not made it to the market and the looming threat of future foreclosures are weighing heavily on housing experts’ minds. Everyone knows there are more foreclosures to come, but no one knows precisely how large this ‘shadow inventory’ is, how long it will trickle out into the market, and when the stream of foreclosures will end.
• The Cratering of the Spec-Home Market — If you look back on what went wrong in the real estate market and why, the spec-home market was one of the core drivers behind the local real estate run-up and the ensuing collapse. From Gray’s Crossing to Old Greenwood, to Lahontan and beyond, contractors and realtors, cash-rich off of the booming housing market, reinvested their money into newly created lots in resort properties around town. Easy financing allowed homebuilders to borrow enough money to build custom homes on their lots, planning to turn around and sell the new homes at a handsome profit. The entire spec-home market was predicated on an ever-increasing resort housing market. When the market flattened and then cratered, the spec market fell apart rapidly and the repercussions reverberated through the entire community. Discount lots undercut other lot sales in the area. Custom homes sat half-built or foreclosed. Banks refused to finance spec-home building. Housing experts say the spec-home market will never revive, meaning a once sizable portion of housing demand will never return to the market.
• Financing — Financing was an integral component of the housing boom. From the loose lending of ‘stated income’ loans, to the equity-fueled second-home market, homebuyers were prodded on by easy financing and loosely controlled leveraging. Rising Bay Area housing prices and leveraging was directly tied to increased second-home sales in the Truckee/Tahoe area. Those days are over. Lenders want 20-percent-down payments, income verifications, and often reject loans over small details. While many view this as an improvement over the days of fast and loose financing, there is no question the lengthy and newly stringent lending policies are slowing home sales.
• How Many Homes Will Be Dumped on the Market? — The real estate collapse has soured many people on home ownership. The jubilation that homeowners reveled in as their homes doubled in value during the boom was equaled by the devastation felt by homeowners who bought near the top of the market and then watched their homes’ value disintegrate. The question is, what will homeowners who are underwater on their mortgages but who have not foreclosed on their homes do when the market begins to rebound? Will they list their property for sale as soon as the market reaches a level that they feel they can recover the cost of their home? Will they hang onto their home? If homeowners soured on the real estate collapse begin to unload their homes as soon as the market rises, that may have a dampening effect on any recovery as rising real estate spurs rising inventory and the market flattens back out again.
