Blog : Market Cycles

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.

Market Cycles

Market Cycles

It pains me to write about the market on this blog. During the earlier times of these writings, I could write and write and only some buyers and sellers would pay attention. Now I write and write and other agents pull my insights and commentary and adopt them as their own. My selfishness objects to this. But there’s no way to combat it, unfortunately, aside from a fatal paywall. No, this information might be my proprietary blend, formulated only after decades at this helm and distilled by the fire of many market cycles, but once I write it it’s free. Other agents who find their market insights from this blog, you’re welcome for what follows.

To understand this market, you must understand the macro functions of a generic real estate market. First and foremost to that understanding is the awareness that people, en masse, do not buy or sell based on personal circumstances, or their personal economy. They buy based on confidence and they sell based on fear. There is nothing else. In 2008 a homebuyer on Geneva Lake bought a lakefront house on the exact day the market topped. In 2011 he sold it on the exact day the market bottomed. His personal finances between those dates changed very little. The only thing that changed was his perception of the market, and that perception started with confidence and ended in fear. All other commentary related to the movement of markets is nuance.

This is why corn-field subdivisions in 2006 sold with violent fervor and then died with a silent dirge in 2012. This is why those same cornfields are selling now at a furious pace, for prices that far exceed any market top of 2007. $500k for a cornfield ranch? Sure! Why does this buyer buy for $500k now when she could have bought for $340k in 2012? Has her income increased commensurate? We know that interest rates have risen since then, so that isn’t the catalyst. We know that the job market in greater Walworth County isn’t welcoming Google or Facebook anytime soon. So why the rush now in the heat of competition when there was only silence back when value was literally everywhere? Confidence and fear.

Now that you understand this, consider the 2019 buyer. This is not a uniform buyer, by the way. There are three sorts of buyers in the market this morning, the morning of my birthday. Our first buyer is the scared buyer. This is the buyer who was afraid to buy in 2006 because the market was too hot. He was afraid to buy in 2012 because the market was too cold. And he’s afraid to buy now because he feels that it is, once again, too hot. This is what market cycles do, they go from hot to cold, repeatedly, with various stops along the way. This buyer doesn’t like 2019. He wishes it was 2014. He wished, in 2014, that it was 2012. In 2012, he was terrified. This is a buyer who fails to understand real estate and its purpose, and instead wishes to time the market with the hope of immediate and lasting gains. This is the buyer who wouldn’t buy Apple at $8 because IBM.

The other buyer is the feverish buyer. This is the frantic buyer. The buyer who is so whipped up by her own confidence and by the confidence of her cheerleading agent that she has no choice but to buy. Bad house in a bad location for a bad price? SOLD! This buyer can’t wait. Won’t wait. To suggest that better inventory might be coming next week is to suggest pause, and pause will not be tolerated. This buyer is motivated by confidence, by personal economy, by haste. I want to hate this buyer, because this generally isn’t the smart of sophisticated buyer that chooses to work with me, but in reality, I understand this buyer. This is a buyer that knows summer is coming, and that buyer wants to spend it in a better place. That buyer wants this scene so badly she’s willing to rush into it to secure it. This buyer skews markets. This buyer prints albatrosses. This buyer is what every open-house holding agent prays for. Walk this way, young lady.

And then there is the other sort of 2019 buyer. This buyer understands that the market is hot. He understands that prices are higher than they were two years ago. He understands that 2012 was a good time to buy, but he wasn’t in the market then. But this is a buyer who is neither terrified of the future, nor will he sloppily rush to secure it. This is a buyer who understands, even in this cycle of low inventory and high competition, that value still exists. It is still out there. It is present, even this morning, with limited inventory and incredible buyer activity. There are cracks and there are properties that find their way into them. Deals will be had, or maybe they won’t.

To each of these buyers I would suggest the market is indeed hot. Not as hot as the fanatic buyer would suggest and not as dangerous as the regretful buyer would insist. This market is hot. Undoubtedly hot. To buy in 2019 is to entertain some sort of premium. The cycle is getting old, but is it spent? I do not think it is. There is a market trend that is presenting routinely and blatantly, and that trend has everything to do with the state of Illinois. Not the State, mind you, but the state. The pending income tax and constant property tax increases are not a good thing for our market. To suggest that they are is insane. But is a diminished Illinois bad for Lake Geneva? Is an Illinois that has yet to see a tax increase that it isn’t willing to consider a fatal prospect for the vacation home market that lives and dies with the residents of this great state? The answer, it seems, is no.

Would I prefer Illinois to grow and expand and usher in an era of prosperity, free of the shackles of politicians who find office by fostering resentment between classes? Of course. That would be ideal. But in spite of the current tax climate, Lake Geneva is thriving. Why? Well, it’s because of that negative climate. See, times were, a junior associate might live in Lakeview with his new bride. They’d enjoy their time there, but as they matured and as their incomes grew, they’d look for the upgrade. They’d look to Winnetka, maybe, or Lincoln Park. They’d look to move from that condo and to a single family. Or they’d look to find a bigger residence on a higher floor. Something better. Then, after they made that move and their personal economies continued to grow, they’d move again. A few years later. Or maybe a decade later, still, they’d move. Upward and onward, to something better. In case you weren’t aware, in real estate, something better is generally more expensive. The cycle would continue until the time came to downsize, and retire to a winter spent in Naples.

Today, I see the cycle changing. Buyers see the illiquid suburban manse and they want nothing to do with it. They see the pending property tax burden and they do not want to embrace it. But they are still growing financially and they still long for something else. So instead of purchasing that next house, that bigger condominium, that adjacent unit, they’re taking their housing dollars out of state. They’re still earning at a fabulous clip, but they’re not wanting to reinvest into the Illinois problem. Why go long in illiquid real estate that may or may not be taxed at a rapidly accelerating rate? That’s the question, and they’re answering it by bringing those unspent housing dollars to Lake Geneva. They’re investing them in market where the return will likely be financial but will also be personal. They’re investing in their families. In themselves. They’re keeping their housing footprint reasonable in Illinois and they’re expanding it here. Want to know why our market is thriving in spite of Illinois? This is why.

I expect the trend to continue into the foreseeable future. The cycle will ultimately pause, and at that point we’ll re-ignite the cycle where fear breeds fear, and the weaker hands will be flushed. But until then, and again after that ultimate, some-day-softening what happens? Lake Geneva thrives.

PS. Do I think full time residents are going to leave Illinois for Wisconsin? No, I don’t. If you own a house in Crystal Lake and you pay $10k in property taxes on your $300k home, let’s suppose you rightfully hate that and want to move to Wisconsin. In Lake Geneva, that $300k home will have a $7k tax bill. Your kids are in soccer and you commute to Schaumburg every day for work. Will you uproot your family and your life to save $3k per year? The answer should be, and will be, no. If you said yes, then you’re not thinking clearly.