Inflation

I have a friend who is remarkably smart. It bothers me that he’s so smart. Have a thought? It’s wrong. How could he know it’s wrong? Because he’s smart. While no one likes a know-it-all, that’s usually disdain reserved for the know-it-alls who don’t actually know it all. A know it all who does know it all? That’s someone that you should learn from, and so I commiserate with this friend often and I learn. One of the common themes this year is the concept of inflation. My friend argues that some inflation is good, and if not good then acceptable, and that with the Fed’s focus on justice of all sorts, they’ve let this inflation run longer that they might have otherwise, because only in a late stage of inflation does the economic prosperity permeate throughout every segment of our economy. The concept is that if expensive bread and overpriced used cars mean we get to a higher level of employment and wage growth, then so be it. It’s a smart take, and one that I’m increasingly both fond and supportive of. Bring on the $9 bread, I suppose. (UPDATE 5/19/22: INFLATION IS BAD)

But what about the other realities of inflation, and how those expanded prices impact a housing market? Like most things, I’m not thinking about deep economic policy and impact, I’m thinking about how macro concepts impact our local market. In the case of this current inflationary cycle, I can see the same things happening that I saw happen in 2005-2008. I’m not suggesting this is the same sort of cycle, as lending practices have remained stringent throughout this cycle, while that was most obviously not the case during the prior cycle. Instead, I’m talking about the behavior of buyers in our market and how they react to prices and inventory.

If you were a buyer in 2007, you would have been faced with a time when the lowest priced home on Geneva was priced over $2M. I remember thinking what a phenomenon that was back then. As I adhere to concepts that suggest market pricing should make some relative sense, I saw this $2M threshold as an absolutely wild premium. Little did I know that those $2M homes in 2007 would be worth $1.2M in 2011 and are now worth $3.5M in 2021. It appears as though patience is a virtue, but only if you’re on the ownership end. When lakefront prices increased in the prior cycle, off-market homes increased in value commensurate, and a buyer seeking to find a piece of vacation home bliss with a $300k budget was left out of the lake access market. That buyer didn’t slink away, instead that buyer bought homes that lacked lake access and they improved the homes in our primary market that might have otherwise been left unimproved.

I chided those buyers back then, and ever since, as those are the sorts of buying examples I dislike. When I discussed the concept of paying a premium for a blue-chip house earlier this week, this is the opposite of that practice. Yet in 2007 it was all the rage, and who could blame those buyers? They wanted to be here, but they couldn’t swing the lake access properties, so they did the next best thing. The issue was they attached their valuations to the primary home market. With shakier finances than our true vacation home participants, those buyers were more likely to have been flushed out in the coming bloodbath that was 2009-2012.

Today, if you’re a buyer seeking a piece of this scene but you’re operating on a limited budget, you’re likely doing the same thing that the 2007 buyers did. You’re looking for a one-off. As it relates to the inflationary conversation, I’m going to creep out on this limb and say that I’m glad you’re doing that. Just like it requires a full economic expansion (with inflation) to touch all income levels of our society, it requires ample housing inflation to push buyers to the properties that would otherwise be overlooked. What does this look like? It looks like buyers buying junky homes on otherwise junky streets and fixing them up. It means homes on highways get facelifts. It means the horrible cottage next to the gas station gets renovated. It means buyers seek out opportunities in less than ideal locations, and slowly, or quickly, gentrification catches on. Only in a low inventory market can this sort of expansion exist.

At this stage in the cycle, we’re the beneficiaries of this action. We get to drive around and see the upgrades of the neglected. I enjoy this sort of improvement, and I understand every last bit of it. The warning, I suppose, is that these fringe homes will be the first homes to be punished when the market slows, but in the mean time, I’ll enjoy your new hydrangeas. They look great.