The Malibu real estate market still has a big cushion

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No one in Malibu should be disappointed with the current value of their property. Prices just in the last few months have skyrocketed more than anyone could’ve predicted, let alone wished. The median price of a home sale in the 90265 ZIP code has surpassed the $1,800,000 mark. There is hardly a condo in Malibu worth less than $500,000 anymore. If you own a beach house, your value today is about 50 percent greater than it was during Christmas 2002.

If everyone agrees these are great times, everyone also agrees they won’t last. It is only a matter of time before rapidly escalating prices are a thing of the past. Then what? Is there a “bubble”? How soon till prices drop?

The first thing to know is that there is no such thing as a “bubble.” The term is a media creation. The concept that all the buyers in Los Angeles will stop their searches at the same time and sellers will pour onto the market creating a cataclysmic reversal of values within a short period of time is simply foolish. The market will not change in any drastic manner.

The truth is the market has been so favorable to sellers and prices, with a confluence of factors so extraordinary, that “normalcy” is still far out on the horizon. To get back to normal again, let alone for prices to fall, several factors must take hold. The Malibu marketplace has plenty of cushion before such dynamics occur.

Over the last 20 years, the supply of Malibu homes for sale has probably averaged about 250. The interest rate during that time has probably averaged about 8 percent. Currently, we have 140 homes for sale and the interest rate is 6 percent. It will take some time, likely until at least the November election, before the twin buffers of low inventory and low interest rates have dissipated. Compared to balanced periods, when the friction of buyers and sellers is equal, the current environment remains very favorable to sellers and prices.

Are we heading toward a more normal market? Yes.

It’s true that the supply was 110 homes! The interest rates were 5.5 percent! Trends toward normalcy have begun, as both the inventory and interest rates head north. The first four months of this year were possibly the most intense we will ever see. The dynamics, where seemingly everybody was qualified to buy a home and virtually none were for sale, were bewildering. Those days are over and we are simply in a great market now. Thus, I would make two predictions:

Prediction A, someday, prices will be lower than they are now.

Prediction B, someday, prices will be higher than they are now.

Likely, it will go B, A, then back to B again. Prediction B, higher prices yet to come, appears imminent because inventory and interest rates remain ridiculously low. But there is another prevailing factor. The ongoing population explosion in Southern California creates a severe squeeze on housing needs. As each price level feeds the demand, and prices adjust upward, eventually the upward movement of home ownership hits the very highest price level. Welcome to Malibu. After Malibu, there is no upward mobility available; the demand is more frenzied. Compounding the matter is the slow reaction of local and nearby governments to housing demand. Anti-development attitudes and the slow pace of construction has facilitated the dizzying jump in prices.

Had the past few years revealed less population explosion and more home construction, these price increases would have not have occurred, most obviously. Far from a “bubble” that suddenly pops, a gradual reduction of once-frenzied buyers (combined with sellers anxious to cash in) will bring a new playing field. Key word: gradual.

There is a pendulum effect in the real estate market, and clearly the pendulum has swung strong and long to the seller’s side. When it swings back, it will swing wide again. A new psychology will affect sellers and buyers. Sellers, sitting on robust equity, will be anxious to cash in and may flood the market. Buyers, knowing better days are ahead, will hold off on purchasing. And once that happens, lacking very low interest rates and/or a blazing economy to prop up the market, prices will begin to suffer. “Bubble”? No. But a correction is in order.

Meanwhile, another source of competition will halt price increases: rentals. The rental market has paused while millions of buyers lured by cheap financing made purchasing their primary goal. The sale and rental markets compete for customers. As frustrated buyers increasingly resign to renting, the rental market may experience the next frenzy. In general, rentals rates have become attractive; the counterweight to high sale costs.

Despite friendly lending requirements, at a certain point buyers stretch too far, beyond their means. That is already happening. Plenty are the cancelled escrows these days due to buyer non qualification. To further illustrate, the “affordability index” sits at barely above 20 percent in Los Angeles County. That means only about one in five households can afford a median priced home. There is no better indication that prices need to adjust. The tide won’t change cause buyers don’t want to buy. They simply can’t.

Nevertheless, at this writing, the number of homes for sale in Malibu under $1 million is down to five. The number of condos for sale under $500,000 is down to zero. The inventory of 140 homes for sale at any price is 28 percent lower than last year at this time, and lower than 94 of the last 100 months. Even under the $2.5 million benchmark, only 1 percent of Malibu’s homes are listed for sale. The dark days are not soon.

Don’t expect a 1991-1996 crash, anyway. The Southern California population of that period experienced a flight to other states that is much less likely in our next downturn. In fact, the pace of population growth may never make such a reversal again. Additionally, the slow construction of new (and speculative) housing makes for much less vulnerability than a decade ago. Besides, the economy is more balanced in our region, less dependent on any one industry.

Thus, when the inevitable “correction” occurs, it may not be bad. Whatever becomes of our local prices over the next 6, 12, or 18 months, the appeal of Malibu won’t go away. As long as 15 million citizens surround us with a desire to be closer to the water and cooler temperatures, the long-term forecast remains sunny.

Rick Wallace of the Coldwell Banker company has been a Realtor in Malibu for 17 years. He can be reached at his web site, www.RICKMALIBUrealestate.com