There is a long standing theory that would seek to convince us that in times of economic uncertainty and dwindling stock market returns (or accelerating losses) investors turn their focus towards real estate. Thousands of blogs and columns and glossy magazine articles told us about this supposed “flight to safety”. The concept that a jaded investor seeking to enjoy their wealth instead of trade with it, pulls some money out and positions it in a real estate asset. The Lake Geneva area is a purported beneficiary of this move, as among real estate markets, we are indeed one of the more stable and can boast of a century of sustained and increasing valuations. It makes sense that some would see a panic in the market as a means by which some investors would bail from the dynamics of the exchanges and place a portion of their money in something that can be used and enjoyed along the way to creating a legacy at the lake. But that isn’t what happens.
When indexes plunge and gyrate as they have of late, rarely does this trigger a deep desire in invested individuals to go purchase expensive real estate. The theoretical flight to safety becomes a race to the fetal position, and those with disposable incomes tend to lay on their side, curl their left arm around their knees and tuck them close to their chest, place their right thumb in their mouth, all the while gently, carefully, rocking as in a sideways nursery chair. While some pundits, and mostly Realtors, would have you believe that some sort of flight to safety involves reacting to crisis by buying vacation homes, the reality of what happens is exactly the opposite. When the stock market sneezes, Lake Geneva catches the bubonic plague.
Smarter people than me will tell you otherwise. They’ll write that this move away from stocks will place value on more tangible assets: gold, art, collectibles, real estate. They’ll tell you these things, but they’ll do so from a pulpit where they do not immediately see whether or not what they’re saying translates to reality on the street. I am on the street, even if it is a nicely paved street with many oak trees lining it and a large lake lake adjacent to it, and can tell you the opposite happens. When stock indexes plunge, a high end vacation home market like Lake Geneva tends to suffer, at least in the short term. This becomes easy to understand when you grasp the theory that vacation home purchases are, at times, fueled by a perception of increased or stable net worth, the sort of feeling that comes from solid investment returns, not necessarily an increase in liquid worth that stems from increased income.
Those who have made their fortunes and are content with their compilation of wealth are an exclusion to this general reactionary rule. If I have untold fortunes that I can only whisper about when in public, I might view periods like this as a buying opportunity. After all, sellers will get a little more sweaty during moments of strife, and some may be willing to be taken advantage of in ways that they would have rejected at DOW 12,500. Some buyers will indeed act on this downward turn in the indexes, but many more will withdraw and wait to see how this shakes out. Buyers who have secured value in the form of purchase contracts will close and use this downturn to further cement their position of strength with their chosen seller.
The depth of this downturn is not yet known, as a 20% plunge in the market that lasts for six months or more is far different psychologically than a plunge that lasts mere weeks. That’s not to say I have any faith that we’ll recover what has been lost in 10 days in the same, but that is to say that if tides turn and the same traders who declared everything a muck become traders who see value in the now beaten stocks and as a result drive the markets back up some percentage points and hold it there for a while most of this panic will be dismissed by the Lake Geneva vacation home buyer. If the downturn lasts for months, or at least until November of 2012, then there very well could be a stemming of the momentum that Geneva has been building over the past 18 months. On the other hand, if the markets rebound with vigor in coming weeks or months, buyers could view this as a signal that the markets are more resilient than a day like Monday would have us believe and fuel an increase in confidence that would translate well towards activity here.
The cautionary tale this morning is that one should ignore those who will spin a downturn into a supposed flight to safety in high end real estate. This flight only takes place when markets are stagnant and calm, not when markets have been gutted to this severe degree. If those among us who harbor wealth are going to spend some of it on a much needed vacation home, the odds are not favorable that they will do so immediately following a decimation of some of that invested wealth unless they have supreme confidence in the depth of their wallet. Once markets normalize and trade based on corporate outlooks and balance sheets, the real estate markets like Lake Geneva will again be a beneficiary. This takes place over mere weeks, not years, and a return to calm in the markets this week or the next will almost immediately ease the would-be Lake Geneva vacation home buyer. Until then, take your eyes off your stock chart and focus instead on that picture up there and imagine yourself at the helm. If you need me, I’ll be fishing.