Twice a day the father of two middle schoolers, checks his favorite MLS site to see if anything new has come on the market. He’s looking for the perfect place to call their next home. It has to be on a good lot, preferably with a view and a great location. It needs the right number of bathrooms and bedrooms and the kitchen has to be really upgraded since his wife loves to cook. A pool would be nice but it has to have a three car garage and of course it has to be in the right school district. They’re a busy family so remodeling is out of the question. In fact, their current home was an older home when they bought it 15 years ago and they did all the work to fix it up, but that was life BC (Before Children) and they certainly aren’t going to do that again at this point in their lives. This is pretty much the description of the move up buyer in our Idyllic community of the Conejo Valley.
Across town another couple, slightly younger, is searching for their first home. They’re in their late 30’s, both working professionals and they have two small children approaching elementary age. Since they aren’t selling a home with equity to roll into a new place, all the money has come through hard work, saving, a few stock options from his company and a couple of lucky investments. They’ve saved 20% for a down payment and have finally paid off their student loans. As professionals they work long hours, come home to spend a little family time and put the kids to bed. Lucky for them, her mom is able to help with the kids. They need a house large enough to accommodate everyone but they have no extra money to remodel after the 20% down nor do they have the time or acumen to do it themselves. This is our typical first time buyer. The traditional late 20’s/early 30’s first time buyer couple doesn’t buy in the Conejo Valley anymore. It’s too expensive and their first job out of college simply doesn’t pay enough for them to qualify under the tight lending standards today, plus they have some pretty big student loans they need to pay off first.
Meanwhile, the homes in the Conejo Valley aren’t getting any younger. In fact, there hasn’t been a sizable new home subdivision in more than a decade and there won’t be any either, the community is built out. There’s simply no land left to build new homes. Over the past several years, buyers looking for a new home had to settle for something totally remodeled or something “newish.” The need for the desired “turnkey” home has been largely satisfied with an abundance of investor “flips.” These were homes purchased at steep discounts at the foreclosure auction during the down turn of the economy. These investors would take a blighted property, fix it up, putting in all the newest niceties and turn a handsome profit. There were no shortage of flips from 2009-2013 but those days are over what with distressed properties (foreclosures and short sales) declining as percentage of the market every month. So given this reality, what are our first time and move up buyers to do? Simple, they fight with others just like them, over the scant number of updated, upgraded homes. So while inventory is rising and sales are declining, buyers complain that there isn’t anything on the market and if it’s nice, they end up in a bidding war with someone equally qualified as they. And this brings me to the Los Angeles Clippers potential sale to Microsoft Billionaire Steve Ballmer.
Prior to putting the club up for sale, Forbes had valued the LA team somewhere well under a $1 billion. After all, the lowly Milwaukee Bucks just sold for the highest price ever for an NBA team at $558 million and in the Clippers, we are talking about a playoff team located in the 2nd largest media market in the country. Not only have the Clippers been a playoff team for 3 years in a row, they have the core of their roster signed for the next 4-5 years and have a fantastic coach. They play in a great arena, have a new state of the art practice facility and oh by the way, the new television contract is coming up for negotiation in 2015 and that is going to be a windfall for ownership with the NBA being the fastest rising sport in America. So what has this all to do with our two couples and their struggle to find a home?
Imagine that after many months of home hunting, the dream house comes on the market for our move up couple with middle school aged kids. It’s got most everything they are looking for; the schools, the square footage; the Viking kitchen; the cul de sac, pool, yard and oh yeah, an amazing view. Along with their evidence of down payment and prequalification letter, our family of four write a full price offer even though the home is priced significantly higher than the comparable sales in the area suggest it is worth. Since our couple have been looking and looking, they are not going to miss out on this place, it’s nearly perfect! Then the unimaginable happens: 4 more offers come in, with some even over asking price. What?? How can this be? The ensuing bidding war is crushing for four of the five bidders since only one will win. And that winning price? Significantly over ask and eons from the last neighborhood sale.
You see like the LA Clippers, this home had location, desirable amenities and was up for sale in a market where there isn’t another comparable property available and it is unknown when the next might come on the market. To this end, the home went to the person most willing to step up and pay way over what common thinking would suggest it is worth. And like Steve Ballmer, the couple that won the bid, knew they were probably over paying for the home, but they didn’t care because value is in the eye of the beholder and they recognized that another opportunity like this was unlikely to come along any time soon. They wanted it, had the where with all to pull it off and darn it, they weren’t going to miss this chance over a little bit of money.
Now what do you suppose the owners of a losing team like the Orlando Magic or even a big market club like the Philadelphia 76er’s are thinking? They are figuring that if the Clippers are worth $2B, even though their arena isn’t as nice as the Staples Center and even though their roster isn’t stacked with young allstars under contract, rather it’s filled with maybe-one-day rookies and a bunch of bloated contracts of hasbeen players and even though they aren’t in LA, they are thinking their ball club is worth similar money. Not as much of course, but maybe 10% less, say $1.8B. And if one of those clubs comes were to come on the market, what do you think would happen? How about nothing? In fact maybe they don’t even get an offer since they are so overpriced no billionaire Wall Street hedge fund manager is going to touch them and the club just sits on the market for sale. This is exactly what is happening in our housing market. Homes that are not fixed up are coming on the market in droves so our inventory is swelling, but they are not what the buyers want nor are they priced to reflect the improvements required and thus they are not selling. “I’m not going to give my home away,” they say. Or “Look at the home up the street. It sold for ’X’ and my home just isn’t as updated so it should be worth ‘X’ minus the upgrades.” Of course they completely under value the upgrades and under estimate the cost to put them in having never done them themselves. Coupled with the fact that no buyer is going to pay a price for a home that after the home has been upgraded by them, is only worth acquisition cost plus upgrade cost. No. They are going to want to pay below that because why would they do all the work and not have some sweat equity upside? They won’t and rather will just wait for the upgraded one to come on and buy that instead. So what is going to happen? Sellers of non-updated homes will have to lower their price until it gets to a point where a buyer has enough upside potential to purchase and fix it themselves. Until then, our inventory is going to continue to grow and prices of remodeled homes, continue to rise.
So did Steve Ballmer over pay for the Clippers at $2B, I think he would say no. Did our move up couple over pay for the dream home? They too would say no, because market value is after all defined as “What a willing buyer and a willing seller agree to without the presence of duress.”