52 Sidney Bay Price Analysis - Makes sense to Rent, not to Own

I have completed a rent versus buy analysis on 52 Sidney Bay Drive in Crystal Cove. Listed for sale at $2,895,000, this home recently rented for $6,000 per month.

The result? Renting wins hands down, costing $5,103 per month. Buying is a real disaster - it could cost $20,478 PER MONTH.

And this is a conservative estimate because it assumes only a 4.1% drop in the home's value over the next 12 months. If this drop in home value turns out to be in my opinion a more realistic 8%, then the cost of owning in the next year becomes a whopping $30,000 PER MONTH.

Of course, one interpretation of this analysis is that this home is hopelessly overpriced. And I agree with that.

Here's the backup data:

Rent		Own
Rent Payment	-$6,000	Mortgage Payment (20% down)	-$12,433
Monthly Return on Unspent Downpayment	$897	Principle	$2,800
Total Monthly Cost	-$5,103	Mort Tax Benefit	$2,040
		Insurance	-$200
		Maintenance	-$200
		Association Dues	-$615
		Property Taxes	-$3,016
		Prop Tax Tax Bene	$1,146
		Decline in home value	-$10,000
		Total Monthly Cost	-$20,478

Plunging Home Sales Could Sink Recovery

A recent analysis by CNNMoney.com shows that a double dip in housing prices is coming. Existing home sales sank 27.2% in July, twice as much as analysts expected. This is the lowest level since 1995.

What does this mean for Newport Beach and Laguna Beach home sales? More pain - high end home values will fall faster and have more room to fall than the lower end of the market. A new owner of a high end home likely will hemorrhage money because of a decreasing home value, every month, month in and month out. Of course, you won't hear this from a real estate agent who is trying to sell you a house.

"Home sales were eye-wateringly weak in July," said economist Paul Dales of Capital Economics. "It is becoming abundantly clear that the housing market is undermining the already faltering wider economic recovery. With an increasingly inevitable double-dip in housing prices yet to come, things could get a lot worse."

It remains to be seen how the sale prospects of existing listings in such places as Crystal Cove will be impacted. Keep an eye on these listings:
5 Atlantis Cove
9 Atlantis Cove
52 Sidney Bay Drive
28 Tideline Bluff

Renting Makes Sense in the High End

I'll say it now.   The new American dream at present is renting.  And there is nothing wrong with that! 
 This is driven by the high cost of owning.  In the high end, why in the world would anyone buy when they can rent a high end home for close to half the cost of owning.  Not everyone can play this angle of course.  But the real cost of renting a home that would cost about $6,800 a month to own is roughly $4,000 per month.  This assumes of course that the value of the home is flat which is realistic for at least the next 2 years.  This also assumes that you don't spend your huge downpayment and it is earning 3% interest or dividend income and that you are in the 40% tax bracket. 

It gets really interesting if you then factor in decreasing home values in the high end.  This is reality and the homeowner really takes it in the shorts.  A $600,000 decline in the home's value in one year is $50,000 per MONTH in losses for the owner. But not the renter.  I'm so glad the owner is subsidizing my lifestyle while I live in his deluxe OC beach-close home!  I'll enjoy it while it lasts!  Then I'll buy.

Laguna Beach Sales Numbers Drop at Height of Summer Selling Season

Not a good sign for the real estate market in Laguna Beach. 
The number of home sales in Laguna Beach is down 19.4% for the 22 business days ending July 21 based on DataQuick’s freshest stats.  Normally, sales pick up in the summer.  Not this summer.  And a long winter is around the corner.
The chart in the OC Register is here.

Median Laguna Beach Single Family Home Price Bounces Back in June

The June numbers are in and the median single family home price has improved from May. According to Dataquick, the median price for a single family home in Laguna Beach in June is $1,288,000 as compared to $985,000 in May. As compared to June 2009, the median price is up about 2%, which is flat. Summer is the big home selling season so more houses naturally sell at this time.

What does this mean? Some higher end homes in Laguna Beach are selling. But only some. Most of the homes I am tracking have not sold and the price reductions continue. It remains to be seen what happens after the summer selling season. The downward trend in the high end could continue, slowing sinking the value of the homes bought in the summer. Be careful if you are buying - factor this into any offers you make.

Real estate agents are, of course, welcome to comment in a meaningful fashion.