The economic maelstrom we are navigating is more than just a recession. Recessions occur regularly, and in fact are important part of the economic health of any economy: excesses are purged and growth expectations are reset to more realistic long term realities.

What our economy is going through is a shift of greater proportion & meaning. Economies go through shorter-term cycles and longer-term cycles. The greater post-war, high-growth ‘secular’ boom cycle that culminated in the Great Bull Markets in stocks and housing is over. The blame at this point is irrelevant, but ultimately rests both on policy and the spending habits of large numbers of Americans.

There are numerous consequences of this economic shift we are witnessing, that could fill many volumes of books & newspaper, but I will focus on what I believe to be the single most pertinent effect of this ‘next phase’ on home shoppers:

Moving forward, there won’t be as much (inflation adjusted) money trickling down through the system to the lower income components of our country-- nor will our economy operate and "Full Employment" as it has for so long. Crime, violence, drug use and trade, and general social unrest will increase especailly around urban centers. The greatest effect of this I believe will be clustering of successful people & families in safer neighborhoods-- the ulitmate flight to quality.

Example: If I was a home buyer looking for a safe place for my family, I would avoid locations such as Piedmont (very close to Oakland, a high crime area), and favor places like Southern Marin (far from the slums, and safer). I would also try to find a safe place that is close to a great job market where my long term employment prospects are good—especially relative to other areas; where the public schools systems are above average, and near other children of families with comparable means.

If you look back at the factors which drove real estate prices higher in Marin, and Southern Marin in particular, what you will find is that only 1 thing has changed: the availability of capital or cheap & easy financing.

All the other factors which drove prices higher are still intact, such as: The supply constraints of Marin homes, great schools, safe neighborhoods, clean air & water, thriving employment markets, a wonderful community, and great, healthy lifestyle with access to vast public parks & open space.

If you compare the prices of Marin real estate to other suburban areas around the globe with similar proximity to quality employment markets, what you find is that 1) there aren’t many areas as close to great job markets as Southern Marin, and 2) That Marin was (and still is) very reasonably priced in comparison. I actually believe that while some parts of Southern Marin were over-valued, that other parts weren’t. A savy buyer even at the peak of the market could find a fixer house on a great lot within 15 minutes of the Golden Gate for under $1mm. Of course I understand the relative significance of $1mm, but the point being that a motivated business person working in the Bay Area can expect to earn a great deal of money over time while they grow a family in Southern Marin with all that it has to offer.

Valuations:
Residential Real Estate, as opposed to other industries, relies on flawed valuation models which our stumbling banking system so painfully, and clearly, depicts. The main philosophy is that homes are only worth what someone will pay for them at any given time; and the best way to value a home is in comparison to other similar homes that have sold recently with similar characteristics, nearby.
Well, this may be true in the short term, but over time, like any other asset, there is an implied value given the characteristics of that asset and availability of substitutes-- or choices. While there may be significant differences in the way different buyers value certain characteristics (such as a great public school system when a family set on private education), the main idea here is that there is an implied value in homes in this area whether or not you can pull that value out an any one time or not; and at times (really hot, or really cold markets or “markets in turbulence”) this fair value has LESS TO DO WITH recent COMPS 6than in more normal market environments.

To this end, I have developed a valuation model (which is a work in process) that aims to create a fair value estimate for homes in our Marin. Please visit http://www.thedupontgroup.net/home-value-estimator . What we are seeing is that homes are currently trading at a significant discount to fair value-- in some case 20% or more.

There is much more to discuss, so if you have any interest in speaking with me please call Dave at 415-867-6611.