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).

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