Realty in Malibu Ignors Reality

Many thousands of people would love to own a Malibu home. Hundreds inquire about the possibility every month. The sideline is packed full of wishful buyers. Malibu is the dream of multitudes who crave beauty, recreation and a small-town feeling for their lives, as well as the ultimate reward for accomplishment. Yet, in 2008, only about two homes per week sold here.

Despite the deep romantic chemistry between the public and our town, the transitive property of equality (if A = B, and B = C, then A = C) is ignored by many Malibu homeowners.

"A" is a real estate market that statewide and in the Los Angeles region has seen values drop more than 40 percent. "B" is the historically proven notion that realty trends in the region similarly occur in Malibu. "C" follows that Malibu is experiencing a 40 percent drop in real estate values, or more. Our town, however, has been in a long period of denial. The assumption of insulation from the market has been dominant. Many listings still come on the market at higher prices than were recently paid for the same house, as if a profit is still expected in this economy. Other listings sit for months with no offers.

The result: almost no marketplace at all; very few sales; a Malibu real estate industry with barely a pulse.

It is true that the lending and home value collapse had a delayed effect on Malibu, as well as on other high-end areas of Los Angeles. Now, however, every price range, including the revered upper-end, is suffering from a harsh lack of willing and able buyers. The discrepancy between the number of active buyers and sellers is large. Many in the industry and the town seem unwilling to face it.

I believe Malibu risks a much greater value decline than necessary unless price stabilization occurs sooner than later. Just as the individual who starts with an aggressively high asking price is often the most motivated seller later on, settling for a much lower than anticipated price, our market as a whole risks a greater decline in the long run because reality is disregarded in the short run.

Only 100 homes sold last year? This is more challenging than any market of the 1990s when we had a prolonged housing slump. Last year was probably the worst year for sales in Malibu history, with only about 2.5 percent of existing homes transacting. Yet many listings are currently priced as though year 2004 appreciation is still in effect when, really, a 2004 sales price now might be fortunate.

The marketplace requires that either a buyer have a good amount of cash, is taking a profit out of their recent home sale, or can get a large loan. All three sources are limited. Investment portfolios are diminishing, home equities have narrowed or been eliminated, and lending market requirements are anything but relaxed.

While banks are operating with the right hand making it thorny for anyone to get a loan, the left hand takes back more properties lost by sellers because buyers cannot get a loan. Only when prices are so low that lenders feel little risk left from the market will they go back to taking chances with borrowers.

That means that competitive pricing is vital. Before a real estate recovery can occur, let alone rising prices, some equilibrium needs to be established. Sales and value data need to be in place. Buyers and sellers (and Realtors) need to be working from some knowledge base. Our community lacks that simple guide at this time.

Individuals can never be expected to put their needs behind those of the community, but this is a time the stars are aligned. All of Malibu will benefit from smart sellers. The best advice now, I believe, is the same as during the past 18 months: "Mr. and Mrs. Homeowner, with values heading downward, you are better off selling sooner than later. And if you don't need to sell, you are not getting any offers and you decide not to lower your price, it is probably not the right time to be competing in the already saturated market. Unless you're willing to price your home with the growing number of short sale and foreclosure sale prices (the prices most buyers are watching), just sit back a few years and enjoy your lovely Malibu home."

Prices are easily forecast for the next six to 12 months, if supply and demand trends are clear. In Malibu, when the annualized sales projection is equal to the current inventory of homes for sale, prices likely remain flat. In good times, yearly sales totals were in the 300s and the inventory was only about 150 homes for sale; prices were going skyward. But now, with a pace of 100 projected homes selling annually and 200 to 250 on the market, prices are guaranteed to keep going down. With the current discrepancy, it may be a steep drop.

Sellers have a choice of burying their heads in the 2006 sands, taking a 2002-2004 number now or looking at a lower, year-2000 price down the road. I hope Malibu's retreat on the calendar is as brief as possible. Clarity of the market environment may help.

Conversely, Malibu in good cycles has grown in value exponentially better than the rest of the state. To illustrate, in 1972 the median value of a home in Malibu was twice that of the state. By 1990, it was three times greater. By 1997, it had gone up to four times the state median; recent years, five to six times. While prospects for the long term are fabulous for Malibu investors, at the moment the median asking price in Malibu is 14 times the state median sale price. I feel it is out of sync with reality.

Malibu real estate will always be the best that can be found, but this is a time to be cutting losses, not attempting gains. Malibu is not immune from the rest of the world; pricing needs to adapt to conditions. Those who realize this soonest will be rewarded, as will all of Malibu.

www.RickMalibuRealEstate.com

Buyers Market 101

Sometimes it is worthwhile to go back to basics. In these days of uncertain and haunted real estate markets, a Malibu continuing education class on the subject might employ the following syllabus.

Week 1, Buyers Market- More members of society will next purchase real estate rather than sell it. There are more potential buyers out there than sellers. Those concerned with selling often unload many accumulated properties at one time, while a much wider spectrum of folks are looking to buy for their first time, or buy again before they next sell something. Thus, the behavior of the buying public is key to the fortunes of any real estate market.

Week 2, Price-- What is a price? What does it mean? Contrary to popular opinion that price represents some subjective greed of an owner, it is an objective measure that matches the number of willing sellers with the number of ready, willing and able buyers. If more buyers are in the market for a property (such as a Malibu beach house) than those willing to sell, the price goes up. It adjusts until the number of buyers most ready, willing and able matches with the number of properties available. If few buyers exist (note year 2008, Malibu as a whole), the price fluctuates downward where the most motivated seller competes for the next buyer.

Week 3, Deal or No Deal?- What many sellers and buyers never realize, is that a decision to not do something is a decision to act all the same. Deciding not to sell is a gamble that a later, preferred time will bring a higher price. Deciding not to buy, which is a common theme in all markets but especially at a time like now, is a bet that a later time will offer better capability, selection and/or a better price dynamic. Gambling terms apply because all decisions-and non-decisions-employ some potential risk and reward.

Week 4, Economics or Art?-There is a component to Malibu real estate that is scarcely comprehended. It is, to some extent, like a collectible or art. While 15 million people within two hours drive live, work and compete to make better lives, there is constant movement up and down the socioeconomic ladder. When one achieves the ability to buy at the highest levels, it can get crowded at the top. Malibu is perceived as among the most desirable places to live for many reasons (see Week 12). So Malibu real estate becomes like art, a possession that is difficult to value because it is sometimes measured not by any objective or comparable method, but by what one feels willing to pay. The actual use of Malibu real estate can be of less importance that the mere ownership of it.

Week 5, Interest Rates-Buyers make buying decisions based on three primary components: their ability to buy, price and the interest rates bridging the two. Interest rates are at extremely low levels historically. Real estate, the cost thereof, is up to 20 percent reduced when interest rates are lower. As an example, a buyer getting a $1 million loan at 6.5 percent pays $65,000 per year in interest. But if the rate is only 5.5 percent, that same buyer can make the same interest payment on a loan that is nearly $1.2 million. Interest rates that are 20 percent to 30 percent lower than before mean that 20 percent to 30 percent higher price can be paid, subject to the down payment required. The cost of money can be as important to the purchase as the price itself.

Week 6, What to Watch For-Since supply and demand are the keys to prices, it is helpful to know what those factors are doing. That is, how many buyers and sellers are participating in the marketplace at any one time. That can be known by monitoring both the number of new sales and escrows being reported and the number of houses on the market.

Week 7, Join the Crowd-Real estate investing strongly involves herd mentality. If nobody is buying and prices are going down, buyers wait till they go down more. In fact, there is little satisfaction in buying unless you know you can't squeeze any lower price. Then, at any sign that prices go up, sellers become reluctant to sell, waiting for prices to go higher. Perception is a major component driving the market.

Week 8, Own or Rent-Everyone has to live someplace. And they either must own or rent. As a result, sales and rentals compete for business. When sales are hot, citizens buy and don't bother to rent, and then the opposite is true when sales are slow. Rentals will go up in value in a time that sales values are dropping, because the many people refusing to buy flood the rental market and create more demand. Often at the same time, more owners prefer to sell than rent and they deplete the rental supply, causing prices to move upwards. Overall, if more people enter the arena faster than housing units can be built, home values or rentals will be going up (generally the case in Southern California for the past 100 years). The cost of housing, whether the rental or purchase market, historically requires a 5 percent to 10 percent cumulative annual increase between rent and sale values. For example, if sale prices are going down 10 percent, rental rates are likely going up 15 percent to 20 percent.

Week 9, Malibu Disasters-Natural disasters, such as the fires of 2007, have an insignificant effect on local prices. First of all, since they reduce the supply of existing or listed homes available, there is some added pressure on buyers to pay more for a more limited inventory. Contrarily, that factor may be offset by the added fear that prospective buyers feel when considering Malibu and some may want to avoid Malibu and its disasters. Then again, that factor is offset by the enormous attention and free PR that Malibu gets in times of disaster. Simply that it is a place that gets so much media attention, often in great contrast to other ravaged areas, is a statement in itself. Prices at any one time in Malibu have already been adjusted for long-accepted risk of loss to disaster. That they actually happen is already assumed, and values are not altered.

Week 10, The Dollar-There are rare times, such as the present, when the weakness of the U.S dollar draws more foreign investors. As a general rule, 40 percent of Malibu buyers are already in Malibu and making a move within the community. Another 45 percent to 50 percent are within an hour's drive. This is a unique time that outside investors, sensing bargain U.S. prices on a weak dollar, come looking for collectibles (see Week 4) at a time they consider our product at a 30 percent to 50 percent off retail price.

Week 11, Break for some sort of holiday.

Week 12, Product Malibu-Ultimately, the value of Malibu real estate is tied to an evaluation of many factors. Weather, natural beauty, cleanliness and condition of the city, recreational opportunity, access to technology, culture and sports, the esthetic quality of the homes, landscaping and commercial developments, the perceived quality of the people, comfort, safety, schooling and infrastructure are among the dozens of evaluated factors. Generally, Malibu is improving or already highly rated in many of the above.

Week 13, Why Invest?-Malibu is a poor place to invest for income. As a general rule, a Malibu home returns only about 4 percent to 6 percent of its value in gross rent. Rarely, with 20 percent down, does any property "pencil" to a positive. Purchase values, however, include land, view, and other factors that are hard to quantify for rent. For long-term appreciation, however, Malibu has a great track record. There have been more years that Malibu median values have increased by more than 20 percent in one year, than years the Malibu median went down at all.

Week 14, Foundation Lost-Malibu real estate relies on buyers moving up from lower-price tiers. The current time, unbeknownst or otherwise denied by many potential Malibu sellers, is one of a collapsed foundation. The lower the price level in Malibu, the more it is felt, currently. With markets below Malibu's level in crisis, foreclosures rampant, and rapid price declines everywhere, it is inevitable that Malibu will adjust to the foundation below. (Factors from Weeks 1-13 included).

www.RickMalibuRealEstate.com