Marin Contractor of 35 Years Shares His Thoughts

I was contacted by a reader who mentioned that her father, a Marin resident and a contractor here for 35 years, is bearish on Marin real estate for at least the next couple of years due to the local housing bubble. Here's what she told me (reprinted with her permission):

Also, FYI, my dad, who is a contractor in Marin... told me today that he sees prices dropping 10-15% at least. He remembers the last housing bust here, and thinks it could actually happen again. He recommended that I sock my down payment away and wait it out for 2-3 more years, even with interest rates rising.

I asked if her father would be willing to share his thoughts in more detail on this blog and he agreed.

Here is the context of his response:

We were talking about the state of the market in Marin. I asked him for his comments on the current state of the market and whether it was a good time to buy or not. He answered in terms of the next 2 years.

And here is his response:

Look at the sum of the information:

• Recent significant property value/price run ups

• Increasing interest rates

• Increasing commodity prices

• Huge tax/budget deficits which must drive up interest rates and taxes even more. Higher rates will be needed to attrack buyers for our bonds which will drive the other rates. Fed is holding on to limit rate changes for political reasons.

• Bank of Japan and other overseas money supplies are tightening.

• Stock market is skittish and looking to go bear. Money moving to commodities and to overseas markets. Even good companies with good prospects will have a harder time attracting capital and maintaining stock value.

• Individuals income is increasing in only a very small segment of the scale. The top 1-2%. Most everyone elses income is stagnant.

• Recent upward shifts in number of properties listed with fewer sales and a greater number of reduced prices being considered by the sellers.

• A large percentage of real estate purchases have/are being closed with extreme conditions: i.e. no money down, short term variable rate notes to squeeze in the deal leaving ittle or no equity at closing. Leaving many owners with with little incentive to avoid default and foreclosure when rates in the note increase o refinancing is required and no appreciation has occurred.

All this squeezes cash flow available for payments and hurts peoples confidence in their ability to make these payments. Long term loans are extremely sensitive to interest rate changes. i.e if you have $3,500.00/mo for a mortgage:

• The most mortage you can carry is 600K at 5.5% or 550K at 6.5% or 500K at 7.5%

As a buyer at 7.5% your best offer will be 500K not 600K. Ability to pay a mortgate drives prices in the lower to mid range areas of the markets.

I think fewer lenders can continue to offer the variable loans given the lack of short term property appreciation expectation. The lack of expected appreciation will tighten the mortgage resale market for the notes that come out of these loans. Too much risk.

You have noticed the trends. This is systemic with little chance of a momentum shift away from this any time soon. Keep your eyes open. At some point the momentum will ease and it will be time to act.

In addition I see them in what I do. As an estimator/contract administrator for a residential construction co. working in the 1.2 m to 3.5 m range. I am noticing:

• it is much more difficult to fit a budget and tons of increasingly costly products and commodities into a deal.

• construction loan LTV's are tightening with lower appraisals requiring more capital up front for the lenders to give the OK. Clients are telling me the construction loan roll overs deals with permanent financing included are getting more difficult to complete.

• clients can get less for their money that they expected and are not moving ahead with these construction projects. Even those with cash are being more careful.

• greater client concern over property values vs. the cost of property and construction. Every recent tear down and new custom home deal I have seen costs out more than the reasonable property value at the end of construction. This has disuaded many clients and makes it very difficult to negotiate and maintain profit margins.

It's nice to occasionally have an insider's point of view or at least that of someone who makes it his profession to be knowledgeable about the Marin market.