Pass the Aspirin

What’s clear to see in today’s Marin real estate market is the overhang of reality. Perhaps the term “hangover” is more appropriate, given the wreckage left from yesterday’s easy money theme party. Sure, while the economy was humming and interest-only adjustable rate mortgages (ARMs) were flowing, it was the real estate party of the century. But the intoxication of low payments and rising equity values has given way to the bright light of today’s reality of rising payments, falling values and hard-to-find financing. 

By definition, bubbles burst and they should, because at the end of the day, they do more harm than good for the markets they affect. Is Marin real estate different or isolated from the boom-and-bust dynamic? No, this is just a great place to live that comes with a cost. As long as buyers are willing to pay a price for the Marin lifestyle, our market will be exposed to ups and downs of real estate. 

So what will real estate do in 2010? My prediction is, not much. The reality is that the key drivers in our market, the job market and personal income growth, are still on life support. And while housing is arguably more affordable today due to the decline in values, inventory levels are still high and lenders are not swinging for the fences again anytime soon. Just take a look at the number of price reductions on current listings and you’ll quickly get the sense that a qualified buyer is difficult to come by. And let’s not lose sight of the other two important elements that are having a profound effect on today’s real estate sales: foreclosures and adjustable-rate mortgage rate resets.

Websites like, and list properties in the “foreclosure process.” That could mean a recent default on a mortgage payment or a bank-owned property that is up for sale. Either way, the relatively high number of properties listed under foreclosure in posh towns such as Tiburon, Mill Valley and Kentfield doesn’t help the true seller who is forced to reduce a listing price to meet the market. In fact, the number of mortgages in default between 30 and 90 days as of today has never been higher. Tiburon currently has 42 properties in foreclosure and Mill Valley has 65.

Unfortunately, the $1.5 million listing in Paradise Cay has to compete with the bank-owned listing two doors down for $1.1 million. Jeff Moseley of Anchor Realty, who specializes in Paradise Cay real estate, says “there has never been a better time to buy in terms of value, but the foreclosed bank owned listings represent the true market price.” He adds that the “realignment of value won’t last for long once the credit markets loosen up.” However, if you’re an owner who purchased a home in Paradise Cay in 2003, it’s almost like the last seven years never happened in terms of appreciation.

While many pundits point to the foreclosures that have worked their way through the system as a sign of recovery, they are focusing on the obvious and early casualties of the recent financial crisis. The next wave of “well-heeled” defaults and foreclosures is coming in 2010. The interest rate resets on the large number of ARMs that helped drive the hyper-growth in values during 2003-2007 will keep inventory levels high and values under pressure. The homeowner with a $750,000 ARM at 4.25 percent that is about to reset to 5.25 percent is looking at a 25 percent increase in mortgage payment. That’s an extra $650 a month that could put a large number of households under financial pressure.

The takeaway is a hangover that will take some time to wear off. Home buyers with cash and credit are definitely in a position of strength, but the market doesn’t appear ready to run away in 2010. While this gives buyers reason to take their time, sellers must face the prospect of selling at 2003-2004 prices or holding on until the music starts again. Hangovers are painful but in time we all come back for more. In the meantime, pass the aspirin.