As a professional over-thinker, I have spent an inordinate amount of time thinking. In a world where the top performing agents in the world say that everything is INSANE and provide lengthy instagram dissertations about why now is indeed always the best time to buy, you can imagine that thinking too much is a bit of a handicap in my chosen profession. With that touch of winter in the air this morning and my year in the process of winding down, I have had more time to think about all of the things that concern me, which are all of the things. Chief among those, aside from whatever nagging terminal disease may be causing nascent symptoms, is the state of the Lake Geneva vacation home market.
A Realtor thinking about the market isn’t unique, not that you’d think it would be. It’s the obsessing over the market that’s unique, and moreover, it’s the concern that someone who bought a house from me 13 months ago might now be in a spot where the market is turning against their position. This is an issue I have, where I tend to treat property as a tradable commodity instead of a lifestyle enhancement that will also likely appreciate over time. All of this over-thinking has led me to write this market update, which won’t be earth shattering, especially if you’ve been reading along for the past several years.
If you bought a lakefront home on Geneva Lake sometime between the beginning of time and today, you’ve done very well on your purchase. Throughout those generations of ownership, the market has always moved up and down, sometimes year to year and sometimes decade to decade. I’ve discussed this often, but did you know the entry level lakefront market on Geneva Lake was, for all practical purposes, flat between 2003 and 2018? That’s fifteen years of pricing stagnation. Inventory was never especially plentiful, but it was consistent, and consistently available inventory does nothing to make a buyer fear that they may have missed their chance to purchase a particular asset at a particular price. If I was in the market for a 1996 Porsche Turbo and every time I saw one at auction, over a period of fifteen years, the price was always mostly the same, would I have been uniquely motivated to purchase any one of those cars? Of course not. But if one car was $130k and the next one was $150k and a year later they were $200k, and then two years after that they were $275k, well, I might deduce that the next one would be $300k. And because of that concern, I’d buy. The fact that I had a chance at one for $130k just a couple of years earlier would eternally bother me, but it wouldn’t keep me from capturing my prize. This explains much of the run-up in markets around the country, notably outperformers like Austin and Boulder and other crunchy outposts.
We know the broad vacation home market at the lake has benefited over the past 40 months from a severe lack of inventory combined with steadily increasing pricing. If the last two bedroom condo sold for $675k, then the next one was $750k. If the last cottage on a regular street in Fontana sold for $750k, then the next cottage was $815k. And so on and so forth until we find ourselves where we are today. And where is that? Well, we’re at the point in the cycle where the next comp is no longer automatically higher than the last comp. Welcome to the end of 2023, it’s not like the beginning of 2023.
This adjustment in buyer behavior and pricing methods has been a slow adjustment indeed. Agents have been caught up in the higher and higher forever environment that was present from mid 2020 through early 2023, that they haven’t yet fully recognized what’s actually happening to valuations. From 38,000 feet, the market is softening. Individual properties are outperforming, but that’s always been the case. Even between 2003 and 2018 when entry level pricing was flat, a unique entry level home in perhaps a desirable location or in updated condition would still outpunt its similar segment competition. Today, if the last condo sold for $775k in the spring of 2023, it might be time to realize the next condo should be priced at $775k or a touch less. This is going to be a slow grind towards normalcy.
Why would it be so slow? The increase in pricing was rapid, as we all know. As I’ve written often, imagine if the covid market boost in luxury markets was not solely because of a desire to get out of the city (all cities), but if it was, in actuality, the perfect storm of low interest rates, increasing stock market valuations, a work from home environment, AND a desire to leave cities behind for a while. Now look where those same individual conditions exist today. Interest rates that, while not as high as you or your parents’ endured in the late 1970s and early 1980s, are high relative to where they’ve been for the past decade or two. Rates are no longer a compelling reason to purchase that vacation home that you may or may not desperately want. If you were on the fence in 2021, 3% interest rates pulled you right off of that fence. A 7.75% rate does not have that same market-boosting effect. The stock market, while broadly up on the year, feels iffy at best, with negative sentiment ruling the day. And while many people thought they’d be “working” from home in their pajamas for the rest of their lives, most employers are slowly dragging their employees back to the office, at least for three or four days per week. Whitefish, Montana, your market is toast.
With those market boosting factors entirely reversed, who thinks the market should continue to go up and to the right forever? While it’s taboo in the business of real estate to discuss declining prices, I think it’s time we had that discussion. If you don’t want to, you can always find someone willing to tell you the market is going in the direction you’d like it to. I am not interested in market praise that lacks substance, so let’s consider the market at the moment.
The lakefront market has had a fine year, and I’ve been thrilled to be part of some incredible sales. My volume this year is on track to exceed $145,000,000, which will likely beat the second place Walworth County Agent by somewhere around $100,000,000. But in spite of the market performance at specific price points, the meat and potato segment of the lakefront market is in a slump. The entry level market has been pretty well defined this year and last as being somewhere in the $2.9-$3.5M range. That’s where we can expect the floor of the lakefront to exist both now and likely into the future, and that segment still has plenty of demand and nonexistent inventory. But the inventory that has been priced in the $4-6M range this summer has been met with buyer skepticism. If I could pluck individual pieces of existing inventory today and sprinkle those at their original asking prices into the mid 2021 to mid 2022 market, I would expect nearly all of them to sell. This summer and fall we are, instead, seeing further price reductions in this segment. This is what happens when inventory increases: Someone wants to sell more than you do. The motivated owner prices her property accordingly, which impacts every property in the segment. The market does not go up and to the right uninterrupted as many market participants, and many market owners, seem to think. It turns out a deluge of Open Houses featuring free wine! doesn’t actually sell real estate here.
The good news for the health of the market is this pause is necessary. The market segment mentioned above is searching for support. Is every home in any condition on the lake worth $4.5M? No, it isn’t. It might have been in the spring of 2022, but it isn’t right now. Many of these pieces of inventory that are sitting unsold have fielded offers this year, but the sellers have been unwilling to recognize the market trend. If your house was listed at $6M and now it’s listed at $5M and you have an offer for $4.6M, you might want to realize that’s where the market is for your property. And if you think it’s going to be worth $4.99M next summer you might be right, but I’m betting you’re going to be wrong. The market adjustment that is occurring isn’t severe. It’s a modest reduction based on increased inventory in a particular market segment, and it begs the ownership to understand that a condo that was worth $600k in 2018, and was then worth $900k in 2022, might “only” be worth $825k in 2024. Is this a market in collapse? No, and we should stop pretending that a slight adjustment down is a catastrophic occurrence, or even something more than the normal market pattern that it is.
I find the markets to be stable at the moment, in spite of this ongoing search for broad market support in specific segments. If you’re a seller in a segment that’s full of inventory, you might want to either reconsider your timing or reconsider your target valuation. If you’re a buyer in a segment with inventory, be that a lakefront home or a lake access cottage, you very well might have some negotiating power this winter that you haven’t had since sometime in 2018. I made some noise by encouraging buyers to write less than attractive offers between 2010 and 2013, and it might be time to resurrect that old tactic. A positive for the market today is that while inventory has built (again, all segment specific), I do not see it continuing to build in the off season. I’d expect a few pieces of inventory to come to market over the next 60 days, but I do not have a sense that there is any meaningful inventory surge in the offing. The lakefront market in particular is incredibly resilient, and with current demand at still significant levels, we can expect the market to absorb the existing inventory over the winter. The question will be, at what price?
It’s 5:47 am now, and I’m done with my morning session of over-thinking everything. If you need any guidance in this market, I’m here to help, and I will do my absolute best to make sure you avoid a market mistake.
Above, my fantastic listing at 906 South Lakeshore, Fontana. A rare piece of inventory in perhaps the most coveted stretch of lakefront.