The Prospect of Rising Interest Rates and 2019 Marin County Home Price Forecast

The Prospect of Rising Interest Rates and 2019 Marin County Home Price Forecast

Marin County: 2019 Likely More Price Gains

501 Sausalito Blvd.

Marin County Real Estate prices are -2% thru the first quarter of 2019 when compared to the first 10 months of 2018- which is nothing other than a win/win. The last half of the 2018 saw waning demand and an end to the 8 year real estate up cycle; and the first 4 months of each year are almost always the weakest especially if it’s a rainy year.  Other parts of the country haven’t been so lucky: ex. New York City Condo prices dropped almost 20% from their Summer 2016 high- which is about what happened to those same Condo prices during the Great Recession.

There’s continued concern in the marketplace about how 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 herein: 1) The FED raises interest rates during times of rising prices (inflation) and lowers interest rates when prices are stagnant or falling. 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 20 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 5% from 1998-2008 and 2.3% in the decade ending last year.

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 wonder:

  • 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 still holds. If interest rates materially rise, so should earnings and real estate prices.

Action item:

Buyers today should lock in mid-term debt. We 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- which is also a cyclical phenomenon. Home prices are a function of the local economy, and San Francisco continues to mint more millionaires than any other US city as the New York Times recently featured. Despite the feeling that home prices are exorbitant, the actual numbers show we continue to significantly lag historical appreciation when comparing the last 50 years by: 8 year real estate cycles, 7 year business cycles and by individual decades: all mathematically confirm prices have room to appreciate.  

Marin County home prices are 21% above their 2007 levels, and 70% above the 2011 low.

Please feel free to call , we are eager to earn your business. Thank you!

Dave DuPont

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