“Properties like this and in many special neighborhoods, the traditional math of cashflow valuation breaks down. Next week I am going to explore the reasons for this.”

Unfortunately, I suspect that there are many in Irvine that believe that they live in “special neighborhoods” on par with Malibu.  These same people would likewise argue that cashflow valuation principles do not apply to their homes and neighborhoods.

Yes, they certainly will—and they should, if they believe it. Some of them might be right.

This bubble was so huge, and so widespread that every neighborhood was effected, but moving forward some of these neighborhoods will fare better than others. There will be something special about those neighborhoods that fall the least. It will be interesting to identify what those special features are.

That property is approaching rental parity (cash flow) if you beleive that it can rent for $50,000 per month—only 30% more to go.  BTW where the prior sale and tax info on redfin?

It’s refreshing to read an RE agent that is not giving the best time to buy line or every one agrees that the Irvine market will not go down more than 2%.  BTW that Irvine TR agent’s showing was a FC with prior $800K+ balance, now asking $675K and half month later still for sale. 

Irvine (TR) being special and immune, where’s Nancy?

When was this house built?  Can one even build a new house in Malibu any more?  Does the Coastal Commission more or less ban new construction, especially near/on the beach?

This post and (I think) yesterdays comments about ‘this time its different’ led me to looking at how OC has changed and if there’s a reason for it being different this time.

(lets see if this comes out ok. all numbers from census.gov)
................2000….....2007….....diff
population…...2,846,289…3,010,759…5.78%
housing units…969,484…..1,029,603…6.20%
med income…...58,820…...$73,107…..24.29%
med home price..$270,000

Did the population change more than the # of houses from 2000 to 2007? no.
Did the income change a lot more? apparently.
If you adjust for inflation from $270k in 2000 to 2007, then add ~25%, you get the low $400s - which is what DQ says it is.

Now, I understand that incomes may be coming down, but by how much? I kinda doubt 25% as many bears believe the OC median should be in the low $300s.

One problem in evaluating Irvine is its changed so much in the last decade let alone in the last 20yrs (accounting for the last boom/bust cycle).

You can still build there from what I understand.  There are more hoops to jump through of course.

Take a look-see at this spec build.

http://www.redfin.com/CA/Malibu/21804-Pacific-Coast-Hwy-90265/home/6852798

Looks like Marta Kauffman/Michael Skloff have lowered the asking price on their house from $20,000,000 to $7,250,000.

Here’s the writeup at $20M

http://realestalker.blogspot.com/2007/04/another-friends-house_28.html

Here’s the current listing at $7.25M

http://www.redfin.com/CA/Malibu/33744-Pacific-Coast-Hwy-90265/home/6859001

Interesting that it shows that they purchased the home for $546,000 in 1999…and I’m pretty sure that they were stinking rich then too from all the “Friends” money.

“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.”

This intrigues be because some of that growth from 2 X to 6-10 X is legitimate… and due to the growth in wealth disparity in this country and globally…. I am curious to see if Irvine has a similar trend, perhaps not as large, we will know by 2012….

Malibu topped out at over 30x price to earnings.  The median home price at the peak was over 30x the median household income.

You can still build in Malibu.  I came rather close to doing that.  Whew!  Glad I didn’t.  Now I can just buy someone else’s house without dealing with the Coastal Commission.

For those of you not in Malibu, there is the City (a thin sliver along the Coast, like Chile), and there is the rest of Malibu (the 90265 zip).  A few parts of 90265 are not regulated by the Coastal Commission.  They tend to have huge, over the top homes, with vineyards, and other water-intensive landscaping.  Inside the Coastal Commission areas, honest people often ignore the regulations because they are so strict, and sometimes so bizarre.  Want to replace your roof because it’s leaking?  The Coastal Commission thinks it can tell you what to do.  Want to put in a dog run?  Same thing.  Want to paint your house white?  Same thing.

Being someone who lived in Malibu for a long time, Rick Wallace is a good realtor.  He tells you what he actually thinks.  When he thinks prices are too high, he says so.

He has gotten progressively more flack from readers of his Malibu Times columns as he has pointed out that prices need to drop.  Like IrvineRenter, there are a number of people who get really, really upset about such things.

Rick, and Bill Rhodes from Malibu, are examples of realtors who actually have good memories and dig into the data.  Bruce Kent is an interesting example of someone who looks at the data, does some real analysis, and then hypes like a realtor anyway.

Why yes, properties in Malibu DO sometimes rent for $50k a month.  I have seen rentals as high as $200k per month.

Crazy.  Just plain crazy.

MalibuRenter,  I heard long time ago (~1996) that a new comer to Malibu was looking for a house because of a relocation.  Anyway after a year of looking and interviewing, he came back to a house that was still for sale a year ago.  The owner was there moving and said make me an offer any offer. The guy told him that he did want to insult him with what he could afford.  He got the house at the price he could afford, which was much less than replacement cost.

what is your prediction again for Malibu?

It looks like the two lots were for 20 million with 2.7A.  From the taxes record, a new building or extensive remodeling?  Most the of value is in the land.  An 1.7A walk out unto the beach carries a large premium.

That might have been the house I was renting at the time.  Ocean view, 3 br, 2 ba, close to town.  The landlord wanted out.  Sold for under $400k, totally caved on the price.  I would have bought it for what he finally accepted.  Same house would have gone for $2.5-$3 million at the peak.  Price quickly rolling down now.

2010=1996

That’s 70% off peak.  So far, it’s 30-40% off, but quickly gaining speed.

I have been contemplating the disparity between home prices and incomes in areas like Malibu to see if there really is something that makes certain neighborhoods or certain properties conform to a different set of rules.

It seems to me that areas like Malibu where there are many cash buyers, prices in areas like this are determined more by the wealth of a few than the income of the many. Any times you get truly unique properties of very high quality, and the people competing to own them are not wage earners, they are people of great wealth who see something they want. They are bidding on percentages of their net worth rather than percentages of wage income.

When the disparity of wealth sees a shift toward wealth concentration (our recent governmental policies have favored wealth concentration), special properties in a place like Malibu get bid up to very high prices. The prices go so high because the people bidding have very large fortunes. For some of these people, a $20,000,000 house is a small fraction of their holdings.

The implication is that real estate in places like Malibu will be subject to fluctuations in the general pool of wealth in society. Since deflation has ravaged people’s investments, real estate will likely fall in equal measure.

That’s an ambitious prediction for 2010, can I infer that you are saying all of SoCal will be at 1996 pricing next year? or just Malibu, and are you talking actual selling prices 2010 vs. 1996 or just the mix.

I agree that Malibu will get crushed for the reasons that IR states.  1996 Pricing in 2010, ouch you should take odds on that if you are right it would pay big.

That’s actual selling prices for LA County at 70% off peak, which puts it at 1996 prices.  For about a year, I have been saying 2009=2002 and 2010=1996.

LA/OC Case Shiller numbers for April are:
54.2% off for the low end homes = Feb 2003 pricing.
41.3% off mid tier = July 2003 pricing
30.2% off the high end = Dec 2003 pricing.

Despite Malibu being high end, its price appreciation behaved like mid tier.  Thus, I expect a similar drop in Malibu to LA in general.  For Malibu, it might take slightly longer.  Maybe there 2011 or 2012 = 1996, but it will get there.

Malibu suffers from a condition which doesn’t occur much in Irvine.  Many of these homes are second, third, or fourth homes, especially at the high end.  A surprising number of the very high end homes are actually rehab facilities, places for rent for movies/tv, or have some other commercial venture going on.

Regarding rental parity, homes like this that lease for $50k a month typically aren’t leased for a year at a time.  It’s a summer rental, film shoot, or rich person visiting for a few months.  You should put a fairly high vacancy rate into calculations.

i’d be shocked if the 3/2 ocean view, near town, that sold for $400k in 1996 went for $400k in 2012…..i’m not saying it won’t continue to crash but given the last 10 years of wealth creation i’d say that is wishful thinking. 

Irvine Renter’s commentary above about the wealthy feeling the deflationary death spiral is correct.  The part he is missing is that there are always new wealthy people who profited off the down turn to take the place of those who lost their shirts in the down turn.  I’m not saying prices won’t crash, I’m saying that a desirable area will continue to attract cash, if there was opportunity to accumulate cash…. there has been ample opportunity over the past 3 years, just ask anyone who works for Goldman.

You can also try something on Redfin.  Include both for sale and recently sold homes in the search.  Sort by $/square foot.  All of the homes with the lowest cost per square foot will be actual sales.  All of the highest numbers will be still for sale.

Malibu does have several things which are actually unique.  The Coastal Commission’s development process (and to a lesser extent LA County’s) are antidevelopment, and intended to annoy, delay, harass, discourage, and inflate the cost of new development.  The Coastal Commission tried to “just say no” to development.  The US Supreme Court gave them an education on property rights and seizure without compensation.  See

“Nollan v. California Coastal Commission
Highlights  
                   
The California Coastal Commission conditioned a building permit on a requirement that the owners to provide physical access to beaches.

The United States Supreme Court invalidated the California Coastal Commission’s land dedication requirements because there was no legitimate state government interest involved.

Description   In Nollan v. California Coastal Commission, 483 U.S. 825 (1987) (USSC+), the United States Supreme Count held that a community cannot require a property owner to dedicate land for public purposes unless the requirements advances state interests and does not deny the owner “economically viable use of his land.” In the decision the Court described the circumstances of the case. James and Marilyn Nollan requested permission to rebuild their house on beachfront land in Ventura County, California. The California Coastal Commission gave the Nollans permission to build but conditioned the permit on a requirement that they provide an easement for beach access through their property. The Nollans sued the Commission, contending that the easement was an unconstitutional taking of their property. The California Court of Appeal found that if the project contributed to the need for access, then the exaction would be constitutional. In 1987 the United States Supreme Court agreed that certain regulation of land is constitutional. For example, the Court said that limiting the height of structures or restricting fencing around a property would be justified to support the public purpose of providing public access to the ocean. The Court held, however, that the requirement for visual access to the ocean did not justify the Commission’s requirement that the Nollans provide a permanent easement across their property.”  http://www.huduser.org/rbc/search/rbcdetails.asp?DocId=605

Believe it or not, a new generation of people at the Coastal Commission are at it again with the concept of “viewshed”.  This is in addition to declaring chaparral “environmentally sensitive habitat area” and trying to prevent people from clearing underbrush to the Fire Department’s required distance.  The courts told the Commission that the Fire Department rules take precedence.  They spend a lot of time in court.  Their processes ran up the price of land in Malibu.  By preventing most subdividing of large parcels into smaller ones, they also gave strong incentives to build big impressive homes on big lots, often 20+ acres.  More than elsewhere, Malibu’s new homes have been far larger than the existing ones.  That’s one of the causes of the rising home prices.

However, when prices are dropping, none of the regulatory bodies actions help.  There are many pieces of land in various stages of entitlement or construction.  If they haven’t started construction, they will probably try to sell or let the entitlements lapse.

In 1929 the most desired and expensive real estate way located in Greenwhich, CT. During the depression it lost over 90% of its value.

Could this happen in Malibu or Aspen?

I just realized how tired I was yesterday making this post. you shouldnt inflation adjust then add % for housing.
If you add 25% to $270k, the median home price should be ~$337k.

Nevermind, OC indeed has a long way to fall.

The answer is yes, of course it could happen.

But the real question is will it happen?  The bubble mentality of american capitalism has clearly created haves and have nots…. people have grown accustomed to boom and bust and have profited.  Keep in mind that the housing bubble is not even the only bubble over the past 5 years, let alone the first bubble over the past 10 years.  This bubbles have the greatest impact on areas like Malibu and Riverside, for different reasons of course…..

Here is an interesting Sunday read:

http://www.rollingstone.com/politics/story/29127316/the_great_american_bubble_machine

Do you think the 2007 med income includes MEW in its calculation?

“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.”“

That’s damn good advice coming from anybody.  But coming from a realtor is incredibly good advice.

Cher’s house still not selling.  Originally listed in 2008 for $45 million, back on the market for only $41 million, over $3000 per square foot. 

http://www.redfin.com/CA/Malibu/25142-Pacific-Coast-Hwy-90265/home/6854743

Question for Malibu Renter: I read somewhere that drug and alcohol rehab facilities treating a maximum number of people (something like 6 I think) can be established in a residential area including a home in California. I’m wondering if any of the expensive homes in Malibu are used for such a purpose catering to wealthy clients. Any idea?

There are at least 10 rehab facilities around Malibu.  Most of them look like mansions, or previously were actual mansions.

I think a maximum of 6 patients at once keeps them from being prohibited by local zoning laws.

There are an assortment of these outside of Malibu in the Santa Monica Mountains and Topanga.  Some residents have been irritated at operations which buy several homes close to each other and end up with 15 or 20 patients in one neighborhood.

Maliburenter: $41M seems like a lot to pay located that close to PCH. Do you have any idea whether road noise is audible when sitting on the terrace of a house like Cher’s and others in stretches of Malibu close to the highway?
(I ask because I lived in San Clemente on a hillside about a half mile inland of the San Diego fwy and road noise was audible 24/7. Double pane sliders solve the problem - unless you like breezes thru the house…)

I’m a bear but some of you guys a uberbears. 1996 pricing on the coast?  I’ll take 3, thank you. Despite the massive destruction of wealth, there is still a TON of money sitting on the sidelines and foreigners who would buy all day long at those prices.

I think, in inflation adjusted terms, we may hit those #s but not in nominal terms. 2000 is aggressively low but possible with 2001/2002 levels being more realistic as a bottom.

In Newport Coast, as a 40% down payment buyer on 2mil homes (formerly, 3mil homes), I’m still getting outbid and often, by cash buyers. :(

Condos and out of the way primary residents are the first to fall.  High wealth primary residents are the last to fall, but they do fall hard when the area has lots of servants living in the other houses (who needs a fifth estate to support).