The frothy whip of the real estate market has improved the lives and wellbeing of many, and in that list of many I include my own life and the lives of my family. If you’re been an owner or a beneficiary of the transactional churn, you know that the times are quite good. But beyond personal enrichment through the gain of equity (remember only realized equity is an actual gain), we have all benefited by the improvement of the homes that would have never been improved absent this incredible valuation increase. If a turn key house with lake access costs $500k, then a dumpy little house on the highway will never be worth $500k. But if a lake access cottage is now worth $900k, then the $500k highway house has a shot. This is what has happened.
Beyond these improvements and these obvious benefits to society’s aesthetic, something dangerous has grown from this hot market soup. The condition is as old as time, but it is remarkably contagious during times of market froth. It’s the Whataboutism of real estate pricing, and it’s as strong today as it’s ever been. If you’re uncertain with the concept, allow me to provide your primer.
Accurate market valuations are found by properly comparing like things. If a 1992 Dodge truck with four wheel drive is worth $5500, then it stands to reason that a 1993 Dodge truck with four wheel drive is worth something similar, assuming the condition and miles are the same. The 2005 Dodge truck with four wheel drive would be worth more, and the 1988 Dodge truck, unless it’s very special for some reason, is worth less. This is how we achieve an understanding of value. If something is worth this much, then something better is worth more. In real estate, the concept of market valuation is typically quite simple.
The first thing I have to do is compare like things. A ranch house on the lake is not similar to a ranch house in Elkhorn. A vacant lot with a view of the water and lake access is not like a vacant lot in a neighborhood subdivision where the only view is of endless vinyl ranch homes. In real estate, we identify and narrow, and then we narrow further until we find similar products. A 3500 square foot ranch on a 100′ lakefront lot in Williams Bay is worth roughly the same as a 3500 square foot ranch on a 100′ lakefront lot in Lake Geneva. And if the lot in Williams Bay just sold for $4M, then we can assume the lot in Lake Geneva is worth some variable of the same number, with adjustments made to account for nuance.
How I loved this method of real estate valuation. It has served me well over my lifetime of doing this job, and yet, this tried and true method of determining value is under assault from the frothy Whataboutists. The Whataboutists are the evangelists of Whataboutism, and they’re everywhere. Their theology suggests that the ranch house in Williams Bay for $4M has a direct and undeniable impact of the valuation of a vinyl ranch in Lakewood Trails. They insist that a house in the South Shore Club that sold for $5M last year means their duplex in the city of Lake Geneva is worth $1M. Their conviction runs deep, and why shouldn’t it? If you own the vinyl ranch or the duplex you’re going to find this brand of religion extremely compelling.
These folks exist during all markets, but their foment is only noticed during these periods of exceptional market performance. The key to engaging these folks is to slowly and politely insist that they are insane. If that doesn’t work, just tell them to chill. They love that. And if that doesn’t work, which it won’t, then firmly and condescendingly tell them why a lakefront house has nothing to do with the value of their farm in Elkhorn. That should calm them right down.