There are things that I dislike about this business. You know this. I dislike the lack of respect that plagues this career, even while I understand it. I dislike the compensation model, as surprising as that might seem since that model continually supplies softened butter for my warmed bread. But mostly I dislike the markets themselves. I dislike the cycles, the ups and downs, the product that ebbs and flows, and the traps that it all creates. The problem with these traps is that they always exist, in the good times and in bad. They exist here, there, and in every market in the world. I dislike these traps, and while I understand them I find extreme frustration in my inability to warn everyone against them. Perhaps when I do quit this job I’ll just write a blog wherein I identify market traps, because that would be fun. It would be like a devastating Zestimate, but instead of pushing a secret algorithm I’d actually explain the market and why that particular house, or condominium, or piece of dirt is nothing but a market trap.
Alas, I can’t do that now but I can do some further explaining of how to avoid these traps. I’ve written about this before, but after a couple of million words, at some point everything will be redundant. This morning I perused the new MLS listings and didn’t think much of them. A new ranch here, another condo there. But in the middle of it all, sticking out like a painfully sore thumb, there it was. The trap. Do I possess some otherworldly knowledge of the real estate market? Of course I do, but that knowledge isn’t important when determining the location and description of these traps.
These traps exist on the lake, just as they exist in the country, but they are difficult to identify in those markets. Why? Because those are nuanced markets that fluctuate based on the whim of the wealthy. This is why you can see a lakefront house listed for a price that doesn’t make any sense, then a few months later you can watch it close. Then, while still in your befuddled state, you can see that house meet the wrecking ball. Lakefront markets often won’t make sense, just as high end off-water vacation home markets won’t. In the same way, is a house in West Palm Beach worth $135,000,000? Is a spec house in Beverly Hills worth $200,000,000? The answer is not really, until someone buys it.
That’s why we’re ignoring the vacation home or otherwise wealth influenced markets and we’re focusing on neighborhoods where primary homeowners live. These neighborhoods can be in Williams Bay or Wheaton, Elkhorn or Elk Grove Village. For that matter they can be in Toledo or Topeka. A primary home market that operates without the influence of extreme wealth typically follows the same rules, no matter the geography. The housing traps exist in hot and stagnant markets alike, but they’re far more likely in hot markets. There’s a simple reason for this.
Developers, be they professional or hobbyists, are increasingly challenged to find adequate inventory inside an accelerating market. Knowing this, they look to fringe locations, fringe neighborhoods, areas that aren’t quite there, but certainly might be next. In larger cities, this sort of thing does exist, it’s called gentrification. But in primary markets that are existing without the promise of Google or Amazon moving in down the road, these fringe areas are likely to remain fringe areas for lengthy periods of time. Developers know this, but they’re counting on low inventory to trick you into not knowing it.
There’s a neighborhood you like. There’s even a house you like. But after you looked at the house and before you could get your offer in, that house sold. You made the decision to move, to upgrade. Your loan approval was in place, and you started the mental exercise of moving, but then your house was no longer available. No worries, you’ll look around a bit more and find something else. After some time, there isn’t anything else. Nothing in that neighborhood, nothing nearby. But Zillow showed you a new idea, this one of a similar home in a different neighborhood. Sure, that neighborhood typically sells for $250k and this house is $450k, but in the good neighborhood that house would be $500k. You like the “discount”, and you pursue the new home. Congratulations, you’ve just fallen into a trap that is going to bury you when the markets calm, or worse, reverse.
Today in Walworth County, with limited inventory and a still-vibrant primary housing market, these traps exist in every single municipality. Want to walk into a huge mistake in Williams Bay? That’s possible. Want to bury yourself in a terrible and lasting mistake in Linn Township? Welcome Home! I’m guessing the situation is the same in your town, no matter where it might be. What to do to avoid these mistakes? First off, work with an agent that wants you to find the right house more than he/she wants to make a sale. Once that’s done, question everything. Why should I pay $300k for this vinyl ranch when the three vinyl ranches down the road are $225k? Most importantly, if you’re in the market for a primary home and you’ve been noticing a tempting home that appears to be overpriced for the neighborhood, just settle down and watch it. If it sells, congratulate the sucker who bought it. If it doesn’t sell, congratulate yourself for avoiding the trap.