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There is another takeaway between your Irvine new home sales graph and CR’s. The nationwide giant peak in 2005, 75% above the early 2000’s run-rate, compares to Irvine being at the same level. There is also the dip in Irvine’s sales in 2004, while nationwide was still booming.
I’m sure you know this, but Irvine’s small lots are a feature not a bug. They allow parks & schools to be closer to each home. In my part of NC, land around the edge of our city is not scarce. But if you look at sales & construction, they are more in neighborhoods with smaller lots than slightly further out neighborhoods with much larger (1-2 acres or more) lots. Part of it is the amenities, but also if you have a large lot, and your neighbors have large lots, you don’t have many neighbors. For some that is a feature, but for others, it’s not.
I understand the land premium, and discussed this with my dad in FL. I did not and still do not understand why the premium changed so much during the bubble - this was even more pronounced in FL.
Land value is very closely tied to home price, and when home prices went up much more quickly than the cost of construction, the “left over” fall to land residual and developer profit. Land values skyrocketed during the boom and crashed very hard when house prices went down. Basically, 80% or more of the change in price of houses went directly to land value—a process that works in both directions.
As for the lot size, I think smaller lots can be made more desirable by their configuration and neighborhood amenities, but consumer behavior is nearly always going to favor larger lots. Woodbury did a good job of substituting private use spaces (yards) for public use spaces (parks). However, if done poorly, high density products can quickly degrade into near slums.
In terms of development in Irvine, during the boom, was TIC selling lots to builders/contractors? Was a good part of the run-up in new home cost builder profit or was it all in the land sale?
As a follow-up, BK said on OCReader that builders were only allowed 6% margins even back when they purchased land from TIC. I found that strange but here is what he said:
http://www.ocreader.com/forum/viewtopic.php?p=15491#p15491
Could TIC really exert that much control back when they sold the land to the builders?
I would imagine that TIC would just stop selling lots to builders if they found their margins creeping > 6%. It does somewhat make builders contractors for the developer. Builders, especially those that remembered the early 90’s crash, would probably trade the profit for security. I would also imagine that building is stronger in Irvine than in other areas of SoCal, so not getting blacklisted by TIC would be prudent.
6% also puts the contribution of the builder on equal footing as the realtor.
“Could TIC really exert that much control back when they sold the land to the builders?”
Yes, they can and they did.
The retail lease contracts are similarly structured so profits are limited by onerous profit sharing agreements with TIC’s retail division.
Perhaps if I get really ambitious for a post, I may do an analysis of how much of a typical Irvine resident’s paycheck goes either directly or indirectly to TIC. It’s an astonishingly high percentage when you consider they sell the houses, rent the apartments, and control the commercial centers.
“6% also puts the contribution of the builder on equal footing as the realtor.”
That is an interesting perspective. Makes sense, writing poorly worded property descriptions takes the same skill and effort as building a home—right?
I have to step back and say there has been amazing progress made today. It has finally been acknowledged that Irvine has always had a large premium outside of the rental premium. I say congratulations to the psychological progress and acceptance to this fact based on the hard data that has always existed.
The premium for Irvine should apply to rentals too. Think Manhattan. Prices are insane, but rents are too.
That rents & prices in Irvine are more divorced than other areas is something different than the pure land premium.
I’ll let the peanut gallery chime in on how vastly inflated rents are in Irvine, but let’s take a look at today’s irvine property with tremendous freeway access. Monthly cost of ownership is $2300, I’d bet it rent for $2500. You could drive your car directly into your yard.
hah, and any drunk on the off-ramp to the freeway can drive their car directly into your yard also!
I forgot to comment in the post on how awful the location of this property really is. The back of this house is adjacent to the peak breaking area for cars exiting the freeway. So in addition to the freeway noise and pollution from being so near the 5, the owners of this property have to deal with the loud and irregular sound of people breaking. I imagine squealing breaks are rather jarring at 2:30 AM.
This house requires both soundproofing and air quality remediation.
From the realtor comments on Redfin:
“Backs to Culver exit off of 5 freeway. You don’t see it, but you hear it clearly.”
So you said that there is a premium to own over rent, yet this property seems to have ownership costs below your estimated rent. That says that there is no premium over renting.
Premium 1 is why it is more expensive to rent in Irvine vs. somewhere else.
Premium 2 is why it might be more expensive to buy/own in Irvine vs. renting in Irvine.
“It has finally been acknowledged that Irvine has always had a large premium outside of the rental premium.”
The post never made any reference to rentals nor to rental premiums. You are making stuff up and seeing what you want to see rather than what is really there.
“I say congratulations to the psychological progress and acceptance to this fact based on the hard data that has always existed.”
Sometimes the bullshit you spout is really hilarious.
PR was stating that you acknowledged the large premium that always existed for Irvine.
He is implying you have acknowledged the rental premium in the past but have final acknowledge the other premiums that have historically existed.
Not sure what he is making up exactly.
“It has finally been acknowledged that Irvine has always had a large premium outside of the rental premium”
When did IR ever talk about “a large premium outside of the rental premium”
That is what PR is making up.
I guess you’re right. Irvine is exempt from the housing decline that’s now impacting every other community in Orange County, including NB, LB, etc.
Way to go!
@lee
didn’t know that anyone stated that…much less PR in this particular post.
All areas have declined. It is just a matter of what degree.
Don’t tell me, it was all that gov’t intervention that didn’t save Miami, Las Vegas or the inland empire but it sure saved Irvine. Phew. The central bank sure can focus its “save” button on a particular neighborhood.
“Don’t tell me, it was all that gov’t intervention that didn’t save Miami, Las Vegas or the inland empire but it sure saved Irvine.”
You talk as though you think this is over.
Here’s what I think. Some cities, like the one’s you mentioned above have already, or close to, hit bottom. Other cities, like Irvine, and most of OC, have not ... in the meantime, the long-term perpetual decline continues.
Japan has been dealing with it for more than 2 decades. I don’t know if it’s gonna last that long in America, but I do know this ponzi scheme is not done unwinding. The fire is not over ... no way.
which might all come true…
But why was Irvine and most of OC different versus those other cities you mention as having hit bottom?
Why have those markets hit bottom while OC will face a continue slow grinding decline?
Rarely are such questions asked: Are premiums being acknowledged? Is amazing progress being made? Is Irvine sophistication being respected? Are PhDs and FCBs being misunderestimated? Is our children learning? Is the passive voice being used?
Where is IHO? Shouldn’t he be telling us how many sales there were last weekend at the grand opening of Stonegate or Woodbury East, or whatever they call those tiny lots?
You rang?
Maricopa, the lone SFR project in Stonegate, had 5 sold buttons out of the 8 available in Phase 1. Starting prices for those overpriced homes were $800k+... can you believe that—for a 2400sft home with only a 2-car garage, no formal dining or living and only 4 bedrooms? It was an FCB convention!
And it gets worse… Laguna Altura has almost the same exact floorplans (with a few tweaks that should have been included in Maricopa) for almost $200k more:
http://www.irvinepacific.com/LagunaAltura/Map-and-Amenities.aspx
Check out those prices… detached condos going for almost $800k, SFRs starting at mid $900ks! Irvine land premium indeed… also gate and proximity to Laguna Beach premium.
Did we just time jump back to 2005? Bleh.
If they can get those prices, more power to them. I can’t see the bubble rally resuming like they think it is. Either sales will be weak or incentives will increase, or perhaps both.
I am hoping for a TON of both.
I think TIC central command understands how strong demand is for new product in Irvine.
Through price increases, they’re able to gauge how much the buyer can take, like $5.00 gas
If there’s push back and sales are particularly slow or weak, a few token concessions are thrown in.
Either way, they still come out ahead.
Hello All -
...any thoughts or prediction to prices and sales when QE2 ends early summer? We clearly have rates at seriously subsidized lows. If rates rise a point or 2 in the next 12 months what will happen to prices and sales?
Where do you think rates will be in 12 months? If you were a bank would you lend someone money for 30 years for less than or about 5%??
Just some interesting thoughts about where we are going…
BD
The US inflation rate at nearly 10% using the previous methodology.
http://www.cnbc.com/id/42551209
Interesting stuff. I wouldn’t be surprised if rates don’t climb 2-4 percent in the next 5 years for a 30 year fixed mortgage.
BD
BS
How loud were people talking about inflation in 2007? Besides IR & others here talking about housing inflation. Check the shadowstats. Their inflation measure was > 10% for 2005-2007 and around 10% for the whole period of 2001-2008.
So we had the same old-measure CPI during 2001-2008, AND a massive housing bubble (a serious form of inflation that produces a massive resource shift), yet most of these inflation hawks were mum. What’s changed?
Yes there is primium on Irvine land and its all Don Bren. At age 78 he has very little or no debt and and the capital to call the shots. As a minority shareholder in TIC around 1978 he raised hell with the marketing of the first phase of Woodbridge. The real estate market had a great run up from late 1975 to late 1979 and folks were camping out for a new home in Woodbridge. Well Don Bren made if kown that the price points were to low. At the time the ranch was owned by the Ford/Fisher/Taubman partnership. Al Taubman and his partners from Michigan were always happy with thier returns on the TIC investment and I’m sure Don Bren will get every thin dime he can out of ranch.
If you want a new home in Irvine I would wait for the Five Points group development on El Toro base. They have leveraged capital and have to sell homes, fast.
RE: Has anyone sold more houses than Don Breen?
William Levitt probably has him beat.
http://en.wikipedia.org/wiki/William_Levitt