Saturday, August 25, 2007

One Reader's Analysis and Predictions

Someone sent me the following by email. Thanks and I think you are spot-on:
According to wikipedia (, income in Marin is like so:
  • Per Capita Income: $44,962
  • Personal Per Capita Income: $67,682
  • Median Household Income: $71,306
The median price of a house in Marin County in July, 2003 was about $650,000. You have pointed out before on you excellent blog that 2003 was probably teh normal cycle peak in the housing market. But then Greenspan came along and (directly or indirectly) inflated housing by inflating credit. As a result, in 2007, as proclaimed with ill-considered glee in the IJ, the median house price was a tad over $1 million. How was a rise in prices of $350K to $400K over four short years possible? It wasn't because Marin is any more special today than it was four years ago that's for sure. It was possible only because of so-called "affordability" products aka "toxic" mortgages - 0% down, low teaser rates that reset later, interst only, neg. am., etc, etc, etc. that were given not just to subprime people with low credit ratings, but, as we are learning now, to people with good and even stellar credit. You've shown that recently about 80% of borrowers in Marin make use of these "affordability" products to some extent.

We are now finally and at long last returning to more traditional lending practices where borrowers are expected to make 20-30% down payments. If in addition to that lenders return to the traditional rule that teh amount you borrow should not be more than 3-4 times your income, then there is no way the $350,000 to $400K increase in Marin's house prices can be sustained.

Based on tradional standards, a household bringing in the median household income would only be allowed to borrow about 3.5 x $71,306 = $249,571. That implies a median house price of about $311,964 (assuming 20% down). Not $1 mill.

It seems to me there are only three likely outcomes:
  1. House prices come down to levels sustainable based on incomes,
  2. Incomes rise to justify current house prices (if the Marin median house price stagnates, that implies the Marin household median income will rise from its current $71,306 to about $230,000 per year),
  3. The market's freeze up except at the higher end.
I think #3 is pretty much where the market is now in Marin and why the county statistics show the county median house price still rising. The truth is that the majority of the Marin market is barely moving if at all and there are a few steep discounts now. I think #2 is incraedibly unlikely given the job market and outsourcing and globalization and the like which is not likely to change any time soon. #1 is the most likely and certainly the most desirable outcome in terms of long-term economic and societal health.

Keep up the good work.
And keep up sending in the insightful emails.


Blogger cajun100 said...

The comments in the item are well taken. I do think, however, that the effect of a major shift in capital by small investors from the market to real estate has been of more importance than normal affordability. The easy money that facilitated this investment frenzy only served to accelerate these capital shifts and the speculation that came from it.

Do not underestimate the impact significant upgrading of the inventory has had as well -- a lot of younger singles and families of all age groups with money -- found for the first time in years a growing assortment of "totally renovated" housing units available. Units that better suited their financial status, and in communities with high amenities. So -- instead of having to move to a large golf course project in Contra Costa, or down to Los Altos Hills, -- one could move to Marin County !!!!

It would be interesting to do a study in a community like Mill Valley of "remodeling" building permits during 2004-2006. Noting how many of these resulted in a housing unit better suited to the rich than the middle class. And how many buyers were from out of the area prior to the move-in. I believe it would be eye-opening.

Under these circumstances whether the "average buyer" in Marin can afford to live there is less important to any affordability analysis than before. The very fundamentals of the local market have been modified.

Aug 25, 2007, 4:27:00 PM  
Blogger Marinite said...


Your comments suggest that upgrading is only relevant to places like Marin or were not existant in Marin before and only recently have happened and so justify ignoring median income affordability.

I think upgrading is a constant and not something new (to Marin) like your comment suggests. I mean, I remember people doing upgrades in Marin to the tastes of the times during the 70's (ok, so I remember my parents doing that and those of my friends), then again in the 80s, then again in the 90s. The latest trendy upgrades were granite counter tops, stainless steel applicances, etc. So what? People upgrading houses is a constant and nothing new.

Aug 25, 2007, 4:44:00 PM  
Blogger Lisa said...

I can't wait for the August sales numbers to come out. I just have to believe that the credit crunch has to be having a serious impact on sales here in Marin. And who can purchase without a Jumbo loan??

But no one seems to be a deer in the headlights. Yes, voodoo financing may be gone. Jumbo loans only for stellar credit and substantial downpayments. But I think people will still be slow to accept what this means.....that a lot of the price gains during the boom are going to vanish. Local incomes do not support these prices. No way.

The "we're all so smart because we're homeowners" mantra is going away overnight, though. I look at the asking prices in the Marin IJ and just laugh.

Aug 25, 2007, 4:50:00 PM  
Blogger Matthew said...

I predict the following:

Heat index to .40 or lower?? (it's now .45 and still falling). By the way, any "median" price with the heat index below .5 is BS given the market is essentially at a standstill.

2007 final (actual same vs same) price drops of 10% in Marin. I'm sure we're 3/4 the way there already if not already there when you factor in buyer incentives.

2008 price drops 15% in Marin as money continues to dry up and major media comes to grip with the BS of the last 6 years or so and businesses like CFC continue to go under. 2008 will also be the year that consumer confidence hits 20 year low.

2008 Foreclosures peak, housing inventories across the country peak and days on the market peak.

2009 price drops 5-10% in Marin as everyone will know someone who's been foreclosed on. If recession sets in by 2009 (first year of new Presidency) then all bets are off. In that case, I'll predict another 20% price correction in 2009 (min).

2010 All real estate blogs shut down after they collectively helped slay the RE machine once and for all. Yes, in 2010 (or 2011) a home will once again be thought of as a home; a place to hang your hat, raise your kids and serve as the centerpiece of your family's roots. Neighbors will once again ask about your kid's ages and names before asking what you paid for your house.

Lets see, that 2010/2011 scenario or the BS we have today.... hmmm, which of these communities would I like to live in ?? .. decisions, decisions..

Not even the RE machine can shake the fact that loans must be repaid at somepoint, so eventually housing costs (purchase / rents) will (again) be tied to wages.

Ah yes, the final prediction.. by the end of 2008, credit and debt will be thought of as one in the same and debt will not be thought of as income.

I know this is a bold prediction given that I'm basing this prediction on the average US consumer getting it, but I predict this will happen by the end of next year. Okay, okay, it will take until 2009 for the average knucklehead in California, Florida and Nevada to get this master's level financial concept.


Aug 25, 2007, 5:40:00 PM  
Blogger Marinite said...

2010 All real estate blogs shut down after they collectively helped slay the RE machine once and for all. Yes, in 2010 (or 2011) a home will once again be thought of as a home; a place to hang your hat, raise your kids and serve as the centerpiece of your family's roots. Neighbors will once again ask about your kid's ages and names before asking what you paid for your house.

You mean I have to keep at this and protect my identity for another three years? Yikes!

Aug 25, 2007, 6:00:00 PM  
Blogger Lisa said...

I look forward to the day this blog can discuss when we feel it's safe to buy again in Marin....2009? 2010? By that time, J6P will be saying "real estate, yuk, are you crazy?"

Someone at the end of my little street in San Anselmo paid $900K for a 2 bedroom / 1 bath cottage in 2005. I'm not kidding. I cannot imagine that house will ever be worth that money any time soon.

Aug 25, 2007, 6:13:00 PM  
Blogger Holland said...

I agree with Matthew's prediction. It is like history repeats itself. Back in 1929, a big stock market crash was followed by a furious rally lasting for 5 years. During that time people thought business came back to normal and started bidding up housing prices. Then the real bear market set in with people losing jobs, houses, etc. and that period was called the great depression.

Let's fast forward to current time. We had a NASDAQ crash in 2000 and a market rally from 2002 to 2007. Right now we are facing records amounts of foreclosures and pricing adjustments. This bear market is starting and it will last 4-5 years. We should keep our fingers crossed that we could survive this unavoidable bear market. Maybe people will start learning how to live within their means and refuse to act like suicidal lemmings

Aug 25, 2007, 8:52:00 PM  
Blogger cajun100 said...


What I am trying to say (perhaps not very well) is that there is a large difference between the classic "upgrading" that people did in past history -- and the "teardown and rebuild" mentality that has resulted from the push from easy money and the increase in the population of wealthy buyers looking for "good places" (not just Marin County, certainly) to live.

I have lived as an adult in California since 1955. I remember circa 1970-73 people raising eyebrows in PACIFIC PALISADES down in LA, when lawyers and doctors spent $80,000 remodeling a home worth about $150,000 as is. The location was drawing in people who could afford to do that. Those who bought in 1945 typically could not or would not.

Now here in Marin County -- as in other desirable CA locations -- speculators urged on by easy money overpay $700,000 for that same level of housing, and plow $500,000 into it. This house, now marketed at $1.5 million or more, has raised the ante across the board in that vicinity. This could not have been predicted from any analysis of affordability based on regional or County income. My summary: the historic linkage between localized income and housing value has been broken. Unfortunately I believe it will remain so, barring a major and lasting depression.

Aug 26, 2007, 4:29:00 PM  
Blogger Unknown said...

All of these comments seem to imply that the market in Marin is one large market and not a lot of little markets. As in the past, certain segments of our market will rise, some will remain flat and some will fall. Bottom line though, the best locations and properties will continue to generate and are generating multiple offers. Proximity to SF, schools, shops and more make Mill Valley's sycamore park one of these neighborhoods. While I wouldn't pay $1000 per foot to live there, many people can and will.

Credit is tighter, but still not tight to the average purchaser. Good borrowers with good credit and good reserves can still get jumbo loans easily. Just call wells fargo, wamu, or any other top notch bank.

My prediction, prices will continue to rise through 2008, although at a low single digit pace. The fed will drop rates .25% this month, and another .25% this fall.

Places not to invest. Novato under $1.0m, San Rafael under $1.0m and over $2.0m.

Places to invest. New properties in southern marin.

Sep 5, 2007, 3:35:00 AM  

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