Wednesday, January 25, 2006

An "Incestuous Market"

You just gotta love the way the Marin IJ continues to pump (or should that be "pimp"?) the bubble with laughing gas (their article is really a rehashing of this article):
Sales of homes in the $1-million-plus category shot through the roof in Marin in 2005, becoming almost commonplace.

In 1987, $1 million could buy an eight-bedroom house. Today, $1 million is seen as an entry-level price in many parts of the county.
It really makes me sick what the cheapening of the dollar and ultra-relaxed lending standards have done. So when every house costs a million dollars, no one is wealthy (unless they move to some place cheap...hence "the exodus" of a few posts back).

It's almost as if there are two currencies in this country -- one for houses and one for everything else. House prices have skyrocketed to absurd levels, but the cost of everything else has hardly increased (with a few exceptions of course) and income is barely up; a million dollars is not a lot of money in the housing market but it's still a lot of money in the market for everything else; a dollar is almost worthless in the housing market, but in the market for everything else a dollar is still a dollar.

Step back for a minute, forget that you are a beneficiary of this state of affairs, open your mind, and look at this situation will you? There is something wrong with this picture. No?

The IJ even hints that many of the sales in Marin were from people moving from less desirable areas of Marin (like Greenbrae) to more desirable areas (like Ross), not folks coming in from outside of the county. So you know these sorts of folks in general haven't seen the required 250% increase in their income.

As has been pointed out many months ago by many others, the majority of people who can pay these exorbitant prices seem to be people who already have a house (I am excluding "trustafarians", "trust babies", etc.); the housing market seems to have become an "incestuous market". So people who don't already own a house cannot buy anymore?! So every person who comes of age as of today will be unable to buy a "starter house" because you have to have a house to buy a house? So, has house ownership now reached or is on the threshold of reaching its maximum number of market participants? What kind of market excludes new entrants? There is no way a market can sustain such a disjointed state of affairs. Robert Shiller (and probably many other economists) discusses this exact phenomena in his book Irrational Exuberance (he calls these people "asset fanatics" if I remember correctly) and he shows that in all of recorded financial history there has never once been an instance of this state of affairs that didn't end very badly.

But then again, maybe it is different this time.

If the asset that these "asset fanatics" were bidding up was something innocuous like tulips, stocks, gold coins, beanie babies, whatever, then I wouldn't give a rat's ass about it. But houses are needed and a bit more personal than tulips, stocks, etc. and houses make up a big part of our community. So I really won't feel terribly sorry for people who knowingly bought into this insanity and ultimately get burned for it. Personally, I think a steep, sharp decline would be easier on everyone but it looks like we are in for a long, slow, excruciating decline. I'm sorry to say that people get what they deserve. But maybe the bulls are right and this will continue on indefinitely and then in three years the entry level house will be at two million dollars, then three...

"These aren't the droids you're looking for... move along..."


Blogger marine_explorer said...

"Today, $1 million is seen as an entry-level price in many parts of the county."

I have to chuckle at how the IJ tosses us these vignettes without providing some statistical basis. For now, I'll resist the urge to suspect their hasty generalization--that $1M is a normal "entry-level" price--is simply to rationalize prices here.

That said, where might $1M be an "entry-level" price? Perhaps places such as...
• Bellevue, Seattle, Victoria BC waterfront
• Carmel, Santa Barbara, coastal CA homes.
• The Marina, Pacific Heights SF
• Palo Alto, Los Gatos, etc.
Personally, I see a little disparity between these locations and "many parts of the country".

On a side note, Larkspur and Greenbrae sure take a lot of lumps against Kentfield, Ross, Tiburon, etc, when in truth these towns are as diverse in "quality of living" as many other areas. Until recently, Sen. Barbara Boxer lived in Greenbrae. Then again, everyone wants to name an underdog: namely not their own town. ;-)

Jan 25, 2006, 12:31:00 PM  
Blogger sf jack said...

What, Greenbrae is not good enough any longer for Babs?

Where did she go?

DiFeinstein lives in Presidio Heights (right?) - going to be very tough to match that.

Not sure Tibby or Belvy would top that.

Jan 25, 2006, 4:30:00 PM  
Anonymous Anonymous said...

This article is misleading on so many levels:

For one, it equates the entry-level as being the median or slightly above. When I got started in this game, I bought a Novato condo, a commodity that can still be acquired for < $500k. Most young couples breaking in to the Marin market (assuming there are any left who are even trying) will be buying Novato PoS' or condo's to get their toehold. The 900k stuff is the move-up market.

BTW, if you look at the heat index (, condo's have gone into the toilet, whereas as SFH's from $600-$800k are still pretty "hot". In fact, condo's were the hot item in 2004 and the first half of this year ( so I think it is pretty obvious the first-time home-buyers and investors crowd have disappeared.

Jan 26, 2006, 9:12:00 AM  
Blogger Marinite said...

so I think it is pretty obvious the first-time home-buyers and investors crowd have disappeared.

So the "move-up chain" is broken in Marin? The move-up chain reaction --> first time buyers buys some previous first time buyers PoS. That person moves up to a slightly better PoS. That person moves up...and so on.

Jan 26, 2006, 9:23:00 AM  
Anonymous Anonymous said...


Pretty much, that is a fair assessment. I think you will see the 600-800k SFH heat index number start to slide as the people planning a move up can't unload their PoS or condo to come up with the down payment.

Jan 27, 2006, 10:24:00 AM  

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