The Malibu Real Estate Report

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Rick Wallace

Light on the distant horizon

Malibu real estate values are dropping. Nobody knows how fast they are falling or how far they will go down. There were some indications this market was inevitable. It was also a surprise to some extent. The initial signs of recovery, from the same sources of the current doom, are now becoming evident.

Those are the feature developments of Malibu real estate from this summer. Here are some of the details.

Only about 60 homes have sold in Malibu through the first two-thirds of the year. Steep price reductions are rampant, but the lower prices are still not sufficient to draw buyers. Even during the worst of years of the last down market-from 1991 to 1996, about 150 homes sold per year. In the glory years, it was more than 300. Last year, when the slow down seemed in full swing, about 175 homes sold in Malibu. If records could be traced back to 1960, possibly this is the slowest year since then for number of units sold.

Because so few homes are selling, it is impossible to accurately gauge how far prices have dropped, or at what rate. Everyone has a guess. Fifteen percent? Twenty-five? Thirty percent down so far and heading to 50? Hardly any homes that last sold in 2006 or 2007 have resold this year, so that measure is incomplete. Making estimates more confusing, at least 13 homes have sold for more than $10 million, where the last vestiges of the market have been resilient, thereby putting the averages severely out of whack. As a rough measure over the past 20 years, when the number of homes listed for sale is equal to the annualized rate of home sales, prices tend to be stable. About 220 homes are for sale now and only about 100 will sell during the whole year. Conclusion: Rapid price declines.

Malibu once seemed resilient to the outside crisis. Additionally, some current factors mask reality. Sales of the most expensive properties, after all, have remained adequate. The inventory of homes for sale has not burst skyward as it has in outlying areas of Southern California. Currently, there are few foreclosures on the market, or REOs as they are best known (Real Estate Owned by the bank or lender, after they have taken back title from the borrower of the property).

In lieu of foreclosures, the short pay market has heated up. Essentially the same process of distressed selling, usually when there is a “notice of default” publicly posted, a short pay is a way for a lender to get a property sold and get paid for the loan even though the amount is “short” of what was owed. Many current home and condo owners are pursuing short sales, looking-in partnership with their lender-to avoid the longer and costlier foreclosure process.

What wasn’t expected, even as the national, state and regional markets tilted downward two years ago, was the lending crisis that hit last August. As a result of virtually shutting off the money supply, the entire industry has crashed, with Malibu on the top tier in terms of price. Never has there been a time, even in the 20 percent interest rate days of the early ’80s, that buying is so difficult. Because of the drastic and sudden tightening of lending standards, the industry has experienced a de facto shutdown that was unexpected.

Even had the lending crisis not occurred, however, there were indicators this current predicament was inevitable. Since Malibu real estate relies on purchasers buoyed by a booming economy (an unreliable source in 2007 or 2008) or arriving with a boatload of equity from their last home, the outlying marketplace is directly influential on local demand.

When the 100 percent-financed, adjustable-rate marketplaces in areas such as Lancaster, Victorville and Temecula collapsed, that meant $200,000 homeowners had no chance to buy up to $300,000. The $300K people had to abandon the $400K market. And so on up the line. By early 2007, the local condo market, Malibu’s only sub-million-dollar market at the time, was feeling the hit. The surrounding valleys had gone in the tank. By the end of the last year, homes under $1.5 had stopped selling. It has worked its way up the entire price ladder this year. As with an approaching hurricane, the Malibu market was certain to absorb some damage.

While this storm is now raging all around us, it is those same distant horizons that offer some hope. Our inevitable stabilization and recovery will, lacking a booming economy, rely on outlying areas first. There are signs the recovery is underway.

The California Association of Realtors reported that the number of sales this July was 43 percent higher than last year (though the median had dropped 40 percent state-wide from 12 months previous). The state unsold inventory index has been decreasing steadily all year long as homes are selling faster, particularly at lower price ranges. Locally, the affordability index for the Los Angeles region, which hit a low of 19 percent at the end of 2006, has reached 39 percent. More folks are able, if not yet ready and willing, to make purchases.

While the number of statewide foreclosures is at an all-time high, and resets on mortgage rates will kick in over the next three years causing more borrowers of all price ranges to need to sell, there are still other signs of recovery. Recent legislation benefits some homeowners who may face foreclosure. Interest rates remain historically low. The first six months of 2009 will have fewer adjustable rate resets, giving the market some breathing room, before they resume with more intensity the following 30 months. The percentage of escrows lost because of unfounded loans has been decreasing.

Rick Wallace of Coldwell Banker has been a Realtor in Malibu for 20 years. He can be reached at his Web site, www.RICKMALIBUrealestate.com.