Perhaps you recently read the new article about the Lake Geneva vacation home market in the pages of Crain’s Chicago Business. The article was written by long time Crain’s real estate writer, Dennis Rodkin. Dennis does a nice job with his articles, and I applaud him for continually updating his readership on the goings on around not just Chicago, but the vacation home markets that matter to Chicagoans. In this recent article, he discusses the increase in lakefront sales in southeastern Wisconsin and includes some quotes from area competitors regarding the statistics present in our market. I didn’t comment for the piece, but I often do, so I’ll file this one under something about not being able to win them all.
The issue I take with the article is not one of Dennis’s making. Rather it’s a general real estate issue that I take offense to whenever I see it, no matter the market. Specifically, the use of statistics on small volume markets. The business of real estate is built around such statistics, and the use of fancy algorithms has led to the Zillows and OpenDoors and Compass’s of the world. Never mind that those are all pretty awful businesses, they all focus on one thing: The use of statistics, or better stated, the marketing angle afforded by the use of statistics that are often meaningless. Allow me to explain.
If we were in Chicago proper and we were looking to understand how liquid the market is for condominiums priced $1-2MM in River North, this would be something we could easily figure out. We would come up with a total, then compare the total to prior years, or months, or quarters, and announce that the market is either improving or declining. We could ascertain whether or not volume is on the move, or prices are on the move. When we sample this market, we would come up with something that matters because the market is large enough to offer us a consistent sample. The same is true of houses in Arlington Heights. The same is true of houses in Dallas. Imagine living in Dallas, gross.
Still, the issue I have with real estate discussions involving statistics is when those statistics are cherry picked to support a stated theory. Moreover, I dislike the use of statistics when the market at question is an exceptionally low volume market, say, like the Lake Geneva lakefront market. I use statistics in my business to help figure out where valuations should be, but I always downplay the results. Price Per Foot? You know I hate that metric as a standalone, even though the Lake Geneva market has focused intently on that statistic since the first residential boundaries were staked. Worse than looking at statistics in a small volume market is looking at them in a specific, narrow period of time. As in, the second quarter of this year is this many percentage points improved over the second quarter of last year. Such discussions are meaningless.
This article discussed the lakefront market in those exact terms. This particular quarter against that particular quarter. By contrasting third quarter results, the outcome proved a “doubling” of volume on the lakefront. Sure, the market was hot this year, but let’s open our focus to compare YTD 2020 with YTD 2019. If we did that we’d see that 22 residential lakefront homes have sold YTD 2020 (I’ve closed 10 of those personally), and 19 YTD for 2019. That shows a slight improvement in volume, and more accurately reflects the market conditions than does focusing on one busy quarter. With the lakefront being starved of inventory at different times throughout the market cycles, as is the case today, the market volumes will fluctuate wildly. If there isn’t a home to sell, we can’t sell it. This skews the perception of the market if you’re focusing solely on volume.
For today, nothing more than a warning against being guided by market statistics as you consider a lakefront home to buy or sell. Low volume markets just don’t follow predictable patterns that can be explained solely by objective market statistics. How to best understand a market that doesn’t always make sense? Work with me.