At the beginning of this year, I spent considerable amounts of time telling people that my sale of the Driehaus Estate for $36,000,000 had little to no bearing on the value of their entry level lakefront home in Knollwood. There were many who believed that the sale would mean a tailwind for all lakefront homes, even though it was apparent that the sale of a legacy estate by one billionaire to another shouldn’t really matter to the value of a 49.5′ lot in The Highlands. The other thing I spent my time on in January was worrying.
Worrying about what this year was going to look like. Worrying if some of the $130,000,000+ in sales I had during 2021 were going to see valuation declines. I worry about that sort of stuff more than you’d think. It’s actually one of my professional handicaps. As one client dutifully pointed out, my primary professional handicap is that I’m in a people business and I generally dislike people. This is a rub, but I can overcome that by providing incredible value to my clients in spite of my periodically sharp elbows. I worry about sales and about prices and I worry if I’m doing the best job representing a seller or a buyer and how it’s all going to look in a year, five, or ten. In January, I wasn’t sure what the year was going to look like but I knew it was going to have additional headwinds that weren’t present in 2021.
While I was awash in this worry, I was also selling homes. Lots of them. Big ones and little ones, though my little ones also tend to be big ones. I was doing my diligence as I always do, talking with my finance clients and my manufacturing clients and working through my own variety of consumer confidence survey. One of the things I very much dislike about the commentary spouted by residential real estate participants is that it’s always intensely focused on the present. Rates are rising? You must buy today to avoid a worse fate tomorrow. Rates are falling? Well this house is going to be worth more tomorrow, so you must buy today. Inventory is stacked and stacked and you have too many houses to choose from? One of those is perfect for you and if you don’t buy it today you’ll burst into flames. Your equity accounts are dropping? Time to sell and put that into stable real estate. This is the sort of here and now presentation in the world of residential real estate, and it drives me to the brink of insanity. I spend my days looking at the months and I spend my months looking at the years. I want to get a sense of not only where things are, but where they were and where they might go. This is my third career handicap, behind the people person deficiency and behind the worrying part. I want to know not just where we are today, but how today fits into a greater context. Without that market curiosity, how can you properly represent a client?
Because of this it would have been premature to comment on what 2023 might look like before now. The 2022 market had several periods where sellers were giving buyers a chance to push back. Some sellers sold for high prices off market, and for those sellers (many of whom I’ve helped), they offered no consideration for what might be. They only say this is how things are, and if you want it, you can buy it. I’m not talking about those sellers, I’m talking about open market sellers, the sort that throw up their flag and hope for a passerby to capture it. Sellers listed and buyers watched, and many times this year the market was teetering on changing its general mood. But then it didn’t, and buyers who couldn’t hold their breath anymore surfaced and captured their high priced prize. The market never had a chance to soften because a meaningful percentage of buyers decided that tomorrow be damned, today was their day.
As I write this morning, there is only one lakefront home available on the open market. There are others pending sale, and at least two more off-market lakefronts pending. The IRS seizure that hung over our market for the last several years has closed, and a new owner is busy improving that dusty blemish on our otherwise impeccable complexion. There are headwinds in the market still, but with 2022 nearly complete it’s clear that the only story that matters is The Inventory Story. Predictably, it’s a boring story, but it continues to prove its importance. Interest rates, equity returns, crypto scandals, election swings, all of these things matter, but what matters the most is Inventory. This is the lesson of 2022.
The issue today is what that inventory drought will look like in 2023. I contend next year is going to look remarkably similar to this year, perhaps minus the two outsized prints on Snake Road. What will be the catalyst to add inventory next year? We just saw massive interest rate hikes, serious declines in equity portfolios, a slaughter in private market portfolios, the undoing of crypto, all combined with incredibly high lakefront valuations. If a seller was inclined to top-tick this market they would have already done so. If an owner was worried about his or her financial future, they would have already sold. If an owner was concerned about a re-setting of their ARM (this isn’t the mountain west, so this doesn’t really apply here), they would have already listed. This hasn’t happened, so what can 2023 bring that will somehow compel a content ownership group to sell?
The answer, I believe, is only true catastrophe. Show me SPY $280 and I’ll show you some sellers. Show me nuclear war and I’ll show you a seller or two. Show me something life altering and I’ll be able to show you some houses. Until then, expect more of the same. And as long as inventory remains constricted, prices cannot fall. This is great news if you’re an owner, and terrible news is you’re a buyer. But as I often warn, just because inventory is limited doesn’t mean you have to buy anything and everything. There are still mistakes being made today, they just won’t be visible until the market pauses, which might not be until 2024 or beyond. Sellers need to be aware that just because the market is tight this doesn’t mean pricing can be completely unhinged. For every example of a terrible print of a terrible house at a high price this year there is another example of a seller who missed the market and was forced to concede to more accurate pricing. If our lives are battles between chaos and order, then so is this market. That’s why I’m here, to help you make sense of it all.