Bubble delusions- California Beach towns trapped in fantasyland

Please stop the insanity, the madness continues.

My first hand account on why the coastal bubble keeps going on.

As most of California was hit over the head with a 2×4 during the Housing Crisis of the past five years- Many of the higher priced coastal communites escaped (so far)without so much as a scatch.  Why is this?  I am constantly amazed how high the prices are in some of these towns – and more importantly- I am amazed about the Psychology and dynamics that keep this long running bubble still permanantly inflated.

Lets take Coronado as a example.

Here we have many retired Naval officers who purchased their homes for 30k  in 1970.  Now these same homes are averaging well over 1.2 million. Some who “stretched and splurged” and bought a 50k home close to the beach have seen their home values go in excess of 2 Million.

Why are these homes still so overinflated?

Is it the usual line- “There is only so much Beach property”?

Here is what happens in 7 easy stages:

  • Stage 1-  Current homeowers buy in the community when it was “Normal pricing” (prices in line with incomes and inflation) in the 1960-1984 timeframe
  • Stage 2-  Some very wealthy Californians,Zonies(arizona) or foreigners decide to buy 2nd homes on or close to the beach.
  • Stage 3-  As these wealthy buy , “Normal Housing”- begins appreciating much , much quicker than inflation or local incomes . This is when it gets good. The residents who bought early are first in some stage of shock as once absurd pricing levels are now the NORM!
  • Stage 4-  New residents/transferees are in a state of denail about local pricing -AT FIRST(they cant understand why its so expensive here). Then over a period of time(1-2 years of renting) -What was once shock and horror turns into complacency and normalcy. NEW BUYERS BECOME USED TO THE NEW PRICING STRUCTURE AND GIVE IN TO THE MADNESS(I guess if we have to live in paradise we have to stretch it)
  • Stage 5  -speculators and easy financing swoop on in.   Fortunes are made by people in the local building,construction,lending and real estate businesses -and they perpetuate the bubble as they pour money into the local real estate economy.
  • Stage 6- The inevitable recession hits .  A “buyers market” develops as  sellers still expecting peak pricing-have their listings languash on the market in denial.  As these over priced homes dominate the market -the distressed inventory(Bank owned and short sales) appear as “bargains” to the New buyers (who have become accustomed to fantasy pricing) and speculators/builders(who also become accustomed to insane pricing and would like to buy a home or lot to renovate or build a new home)
  • Stage 7- What started the insanity(see stage 2)- a few uber wealthy come in and buy a extremely over priced home(they are extremely wealthy and dont care too much on pricing as they just sold a big biz or cashed out 20 mill in stock options)- Though these sales are few(1-3 a month)- what happens is that other sellers now have some “justification for their insanity pricing”-and this keeps the bubble going and repeats the cycle all over again.

THE TALE OF 921 a AVE cORONADO 92118

http://www.redfin.com/CA/Coronado/921-A-Ave-92118/home/5791629

Beds: 4
Baths: 4
Sq. Ft.: 3,004
$/Sq. Ft.: $749
Lot Size: 5,662 Sq. Ft.
Date Event Price Appreciation Source
Apr 26, 2012 Sold (MLS) (Sold) $2,250,000 SANDICOR #120013294
Apr 25, 2012 Sold (Public Records) $2,250,000 -5.1%/yr Public Records
Mar 28, 2012 Pending SANDICOR #120013294
Mar 12, 2012 Listed (Active) $2,499,000 SANDICOR #120013294
Feb 02, 2011 Sold (Public Records) $2,400,000 9.6%/yr Public Records
Feb 02, 2011 Sold (MLS) (Sold) $2,400,000 SANDICOR #100019989
Dec 29, 2010 Pending SANDICOR #100019989
Nov 17, 2010 Relisted (Active) SANDICOR #100019989
Sep 21, 2010 Pending SANDICOR #100019989
Jun 30, 2010 Price
Changed
$2,399,000 SANDICOR #100019989
Jun 06, 2010 Price Changed $2,475,000 SANDICOR #100019989
May 07, 2010 Price Changed $2,599,000 SANDICOR #100019989
Apr 09, 2010 Price Changed $2,699,000 SANDICOR #100019989
Apr 02, 2010 Listed (Active) $2,749,000 SANDICOR #100019989
Feb 08, 2008 Sold (Public Records) $1,825,000 Public Records
REMARKS.”This 1989(TYPO REALLY 1909) beach home was completely renovated and expanded by Flagg Coastal Homes in 2009. As seen in Renovation Style Magazine’s Ultimate Kitchen Issue 2010, the Great Room has a gourmet kitchen, La Cornue Range from France, beautiful Brasilian cherry floors & marble counter tops. Many features include flash water heater, cat 5 wiring, marble master bathroom & copper gutters. Wonderful location near restaurants, stores, Hotel Del, and beach”
Yesso it closed for 2.25 mill – a virtual steal -from the original 2.79 mill first asking price 2 years earlier. 🙂
So a home that should be in the 800-900k range -but due to the various delusions of the coastal bubble market -its artificially inflated- and then random luck of a uber wealthy buyer walking in to a open house -and now we have a continued self -fullilling prophecy.
Now what can happen to finally pop this bubble?
As we all know from the bubble theory of gravity – all bubbles must pop eventually and deflate to and past the point from which it started.
The coastal areas are going to have to see a major economic or social event for this to change- but as history has always shown – it will.
what do you think?

One Response to “Bubble delusions- California Beach towns trapped in fantasyland”

  1. Rob Dawg says:

    What do I think?

    I think I am reading a “JBR” rant. Sure the price is high but the price is also market arms length which is the ultimate measure.

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