13 Jun Marin County Update
Welcome to the Southern Marin Real Estate Blog presented by The DuPont Group. Our group formulates highly unique and specific real estate pricing data that you can’t, literally, find anywhere else. Although our business focus is Marin County, the principles contained in our valuation paradigm can be applied to any residential real estate free market.
The price at which any home will sell is driven by four general factors: 1) Home buyer emotional response to lot/location and all the rights that transfer with title 2) emotional response to the actual house- finish/flow/curb-appeal, 3) Home Size 4) Liquidity. However, across even fairly small sample sizes the primary differentiator of home value is lot/location; homes in desirable areas are also inherently more liquid throughout the business cycle. Despite lot/location being the primary driver of home value, we are the only real estate group that compiles lot/location values for the markets which we serve.
The levels of home pricing in any area are a function of the availability of jobs and the salary levels supported by the local economy.
The cycles in real estate pricing and demand are a function of participant emotions. Buyers value homes by how much they like them (and their price). These patterns in participant emotion are highly cyclical and exacerbate the business cycle. Similar to the business cycle’s 4 general phases (expansion, peak, recession, trough), the residential real estate market has 6 general phases of participant emotion: balance, positivity, exuberance, caution, fear, and indifference. Each phase of participant emotion is affected by interest rates and the affordability of homes.
At the core of the business cycle is the fact that at towards the top of the business cycle people make investment decisions based on overly optimistic longer-term economic projections. During recessions, these overly optimistic investment decisions become “excesses” that need to be restructured; in RESI real estate jargon this is synonymous with people have to sell their homes during recessions because they can no longer afford to carry them.
In most business cycles, monetary policy changes during the four phases. During Recession, interest rates drop increasing the availability of financing to stimulate growth, hiring and availability of jobs; interest rates are usually at their lowest during the “Trough”; start to increase during the Expansion; and are the highest at the “Peak” of the business cycle.
However, in our current business cycle, interest rates are at their lowest during the current “Peak” of the business cycle. The two very general reasons for this are 1) the Expansion during this business cycle was very slow and uneven for different parts of the country; and in many areas ‘normal’ job growth associated with a ‘normal’ business cycle expansion was lackluster or non-existent, and 2) policy makers are too short-sighted to make decent longer-term policy decisions, like exhausted parents that never turn the kids TV off.
The effect of this historically “loose” monetary policy, is two fold: 1) The carry-ability of homes is at an all-time low when home prices are at all-time highs (you ‘just’ need the down payment money and to qualify for a loan); and 2) the overly optimistic investment decisions made during this business cycle Peak are proportionately greater “excesses” that will need to be restructured during the next recession.
The broad Marin County real estate market is starting to soften after 3 strong years, with a few price range/geographical exceptions.
However, after years of competitive overbidding, buyer negotiation fatigue combined with historically low interest rates is still resulting in competitive overbidding for desirable homes, but paradoxically repeated price cuts for homes in less desirable areas. Desirability still driven by 1) lot/location and pricing, 2) finish and 3) house size in that order. Buyers in Marin are busy, have little bandwidth to deal with the over-administration of the local building & planning departments, and prefer to hit the ground running instead of signing on for a protracted bureaucratic remodel process.
Cycles in home buyer preferences are at their heart demographic. Most Marin buyers with the urgency to compete for homes in this market are families needing school districts for their kids. These folks will sacrifice home size and finish all day long for community and walkability (i.e. lot/location)- which is why smaller homes in Sycamore park continue to defy gravity and expectation. Homes in the hills with privacy, solitude and views are not as desirable to this primary buying demographic and sell for lower relative prices.
Moving forward, Marin real estate pricing will likely pull back, but less than most areas in the county for the following reasons:
1) There is soon to be a glut of office space in SF as we move thru this next recession which will drive commercial pricing down and ultimately bring more homebuyers in over time. SF bay area is the best job market in the country.
2) The process of household formation for the tech workers is gaining momentum and to attract top talent, tech firms have to offer space in the city- which is bullish for Marin as historically tech workers didn’t live in Marin. If they were single they wanted a sexier urban lifestyle; and if there were families they wanted access to the broader job market down on the peninsula. Now they are coming over the bridge in increasing numbers. This benefits Marin w/ increased demand in the short-intermediate term.
3) The next positive thing for Marin is SF is morphing in a global destination for successful entrepreneurs and their families (not so much for successful single people- London and New York etc. preferred by them). This also benefits Marin in the short-intermediate term with increased demand as a portion of all SF families eventually ‘find’ Marin.
4) The last really bullish thing about Marin is we have tremendous water reserves for the size of our population- even at the worst of the drought last year our reservoirs were at ‘normal’ water levels- the water districts actually had to increase pricing on water- because of CA politics- Marin folks were using less water. Water likely to be a longer-term problem for many of the larger Southwest cities; which will ultimately drive more people North (where it actually rains) and SF & Marin to benefit from this longer term ‘migration’.
Marin real estate pricing will likely pull back at least 5% during the next 18-24 months before rebounding ever higher in the next cycle. The towns of Marin don’t historically move in tandem. The lower priced towns in past recessions feel decreased demand before the more wealthy areas and the effect is to create an historically stable long-term price chart- there were only two years 1991-1992 during the S&L crises when Marin County prices EVER dropped (down 1.25% in each of those years)- until of course 2007-2010 when prices dropped 30%; so saying Marin priced could fall 5% or more in this recession is a big deal as it only happened in two recessions since 1960 – when we started tracking pricing.
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