Marin County: 2021 Likely More Price Gains

2020 has been an interesting year for everyone on many levels. Most notably it resulted in the first generational rotation of families leaving and new ones arriving to Marin County since the 2002-2007 era. 2020 also brought a new high water mark to Marin County Real Estate pricing for the 9th straight year, rising app 14% year to date 2020, and an average of 8.4% annually since 1972. Home prices are now 36% above the previous peak in 2007, and 108% above the 2011 recession low. The loss of so much housing in Sonoma again this year added to demand in Marin County as did the rotation of families leaving San Francisco proper and moving to Marin.

The Federal Reserves has increased it guidance on targeted inflation rate which potentially signals rising interest rates once COVID-19 is gotten under control- until then we will be in a holding pattern with strong government stimulus, continued eviction constraints for investors, and lower interest rates.

In a higher interest rate- higher inflation rate environment there is concern in the market place what the effect might be on housing prices that rising interest rates will result in decreased affordability, and that real estate prices will subsequently fall.  Interesting, if you look at the facts historically, it’s a bit of a different story.

Assumptions: 1) The FED raises interest rates during times of rising prices (inflation) and lowers interest rates when prices are stagnant or falling, to stimulate aggregate demand. 2) Real estate prices are a function of salaries/earnings within commutable distance to the subject property. When incomes go up, so do home prices and vice versa; earnings might be clumpy, but one can’t happen without the other. 

In a recent study, we examined appreciation/depreciation of Marin real estate prices over 10 year increments (decades). The 10 highest appreciation decades on record started in 1977 (1968-1977) and ended in 1986 (1977-1986) where returns averaged between 9-16% annually in Marin for those entire decades. Those years also coincided with the highest lending rates in modern US history.  Real home price returns after inflation averaged 4-6% during these decades.

Interestingly, the 10 lowest real estate appreciation decades coincided with the last 19 years- where these 10 individual decade returns hovered between 2-5% annually for those entire decades– starting in the decade ending in ‘09 (2000-2009) and ending last year in ’18 (2009-2018). Interest rates were/are at historic lows. Real price returns after inflation averaged 6% from 1998-2008 and 2.3% in the decade ending in 2018.

We also  calculated a correlation of 69.4% for Marin RE prices and national interest rates- historically when Marin prices rise, so have local earnings and national interest rates, and when Marin prices gains slow or fall, so do earnings and interest rates (which is also how it’s supposed to work).

A savvy reader might argue:

• that interest rates, home prices, and salaries don’t always move in unison which is market participants worry to begin with;
• or that the level of interest rates is a national monetary policy issue, while Marin County real estate prices and affordability is a local phenomenon, and that it would be difficult for any home buyer to make prudent purchase decisions based on unpredictable FED policy changes, or how those changes might trickle down to them;  
• or also how it seems like FED policy is designed to raise interest rates after massive concentrations of wealth and not so much based on current or future inflation concerns.

And on all counts you would be right; but the above general study is still holds. If interest rates materially rise, so should earnings and real estate prices.

Action item:

Buyers today should lock in mid-term debt. I like the 7-10 year fixed rates as very few families live in their homes longer than that. The shorter the duration of your locked mortgage rate, the greater the risk of short-term imbalances between rising interest rates/mortgage payments and lagging earnings.

Marin Real Estate Prices Forecast:

Barring any geopolitical jolts or any other extraordinary catastrophe, Marin County prices must increase approximately 7+% to keep on par with historical appreciation. Tiburon, Ross, Kentfield and Belvedere should appreciated closer to 20% as these towns have lagged county-wide appreciation the last few years. Home prices are a function of the local economy, and San Francisco continues to mint more millionaires than any other US city.