Market Top

Market Top

Market Top

There you have it, someone said it. Someone in the real estate industry dared say it. More than likely, this will be it for me. This will be the last straw. The quiet choppers of the industry overlords will come to my house in the quiet dim of a starless night and dispatch me. No word yet whether it will be Zillow, OpenDoor, the NAR, but if you’re near my house tonight please take note of the logo on the tail.

After all, I shouldn’t say such a thing. I shouldn’t mention those words. Market. Top. Agents are trained to live in fear of those words. In fear of what they might mean for their wallets. But they only fear something they don’t understand. Consumers fear it, too. They fear what it means for their wallets and their futures. My dad lives in fear of growing grass and rain. If it’s sunny, no matter, it’s going to rain. There are real estate consumers who behave like this as well. They’re recognizable as being the people who are afraid to buy real estate when the market is down because it’s going lower. They’re also afraid to buy real estate when the market is up because, well, it’s going lower.

I’m not afraid to tell you that the market is frothy. It’s obvious. The lakefront? Frothy in pockets (new construction mostly). The off-water homes? Frothy, in pockets. The primary home market in Walworth County? Frothy, entirely and utterly. But what does that mean? Does it mean we should put our lives on hold and wait for the froth to fizzle? Should we, if our kids are young and our wallets full-ish, decide against buying a home because that home may, in theory, be worth less at some point in near or distant future? It means none of these things, but there is a way to avoid being a casualty of the froth: Buy Blue Chip Real Estate.

Word this week of a recent primary home market sale. This home is near neighborhoods that are filled with $300-500k homes. This home just printed around $1.5MM. This home does not appeal to a typical vacation home buyer. It does not appeal to a typical primary home buyer. This home is an albatross, and it sold at a market premium. This home is the sort of home that will see its value crushed by any meaningful market downturn. It’ll be a disaster. The same goes for some of the off-water homes that I’ve seen close this year and last. You might want to pay $2MM for that off-water home because it has a small view of the lake or a tennis court, but just know that when the market softens your home, the one you couldn’t live without, is going to get hammered. This is also true of the corn-field subdivisions that once made their livings with $300k new construction. That price point was fine, and still is. But now these homes are selling in the $500k range and the question is how strong are the hands that are purchasing these homes? (Spoiler answer: Lots of FHA loans here with very small down payments). These home sales are creating boom times for builders and developers, but what happens when the music stops, or at least skips? What happens when your brand new $500k home is no longer brand new, and the neighborhood builders are now targeting $390k home buyers with their new construction? What happens when your $500k home with the $482k mortgage is now barely liquid at $425k because corn fields are one thing that Walworth County is not running out of and builders can undercut you at pretty much any time? Bad things, that’s what.

These are the examples of risky home purchases. They are top end products in a middle end setting. They are lofty sales prices for new construction surrounded by dirt that previously would never, ever consider supporting the new valuations. These are the one-offs, the OTC offerings of our housing market, and these are the homes that you shouldn’t be buying if you’re concerned about how well you’re going to weather some variety of real estate slow down that may or may not occur in the next 18-36 months.

Instead, you should be focusing on value. Contrary to public opinion, and contrary to some prices on the lakefront, value still exists. It exists in homes that need work. In homes that might need some new countertops or a bathroom update. It exists in high quality neighborhoods where a particular product might be, for one reason or many, inferior. There are blue chip offerings today, if only you’ll stop being so dazzled by the countertops. Buy on streets that have a history of supporting value. Buy sections of the lake that the market finds more desirable than others.

The other lesson we should learn from this current market cycle is that patience smooths out times of incredible difficulty. If you bought a lakefront home in 2008, you paid a ton of money. Congratulations. And, if you sold that home in 2011, you lost a ton of money. Good work. But, if you bought that home in 2008 and used it like crazy through 2011 and into 2015, by then your valuation may have recovered. If you still own that Lake Geneva home now, 11 years later, you’re likely back in the black and recognizing some appreciation on your property. Further, if your kids were young when you bought in 2008, they’re nearly or entirely grown by now, and you’ve created a lifetime of memories at your lake house that would have otherwise been impossible to create. Would you trade those memories and those moments for a little bit more money? Don’t be ridiculous.

If you’re a market watcher, terrific, so am I. If you are afraid of the market, that means you’re not looking at it through the right lens, and if you are using the right lens, then your aim is wrong. Want to buy a house in the fall of 2019? Good. Be smart about it. Don’t buy the one-offs. Don’t buy the fringe betting that it’ll get better. Buy the blue chips.

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