As the busted 2007 summer selling (listing?) season has transitioned to a paralyzed fall market with persistently high new and resale inventory, the fact that Orange County real estate can decline in price is no longer deniable. The precipitous drop in sales creates a serious conundrum for most homebuilders: they have to balance the need for cash flow with the desire to maximize profits (or at least minimize losses) on their investments in land purchases and in-process construction. The homebuilders working with TIC have the significant added wrinkle of not fully controlling their own pricing.
Since the fear of being ‘priced out forever‘ has convincingly departed prospective homebuyers, many have accepted the proposition that remaining in a current home or renting might not be such a bad thing after all, at least until some more of the price excess is eliminated. The term “wait and see” is showing up in more and more mainstream media (MSM) real estate stories referring to the position of buyers in this standoff. Interestingly, I’ve heard with increasing frequency anecdotal suggestions that since transaction numbers are so low, perhaps so many buyers are now on the sidelines that once prices show any sign of stabilizing, everyone at once will come rushing in to purchase and it will be off to the races with happy days and increasing medians all over again. This is the “pent up demand” theory. Although it shouldn’t be a big surprise to hear realtors make this comment, some relatively rational colleagues and friends of mine have also wondered this out loud.
Well, my analysis of news in and around Irvine developments shows that this is almost certainly not going to happen. I would argue that any pent up demand is being countered with similar, or probably more, pent up supply. Many of these have been discussed on the forums, but here is my working summary of projects that are imminent and/or postponed. All will contribute to pent up supply in the months and years ahead:
Woodbury East– John Laing’s Celadon bravely opened on schedule this summer, but the originally-scheduled (late summer 2008) debut of California Pacific’s Sienna came and went, and William Lyon’s Ivy models look complete but are standing by, currently promised as January 2008.
Above- William Lyon’s Ivy: “bold” attached product. Are the salespeople keeping themselves occupied watching satellite TV?
Above- California Pacific’s Sienna detached condos, models still under construction…laid out like Decada and its predecessors. Is it my imagination, or did they manage to place these even closer together?
In Woodbury, CalPac’s Andalucia single family homes appear delayed (“early 2008” the letter says), but I’m not sure of what their original opening date might have been.
Orchard Hills- This entire development, originally slated to begin sales in late 2007, is officially postponed more than a year to 2009. Don’t be surprised if the opening is not early 2009 or the delay goes even longer. The Orchard Hills Apartments opened this summer, and do not appear to have incentives, so they may be leasing better than I predicted. The retail shops also opened on schedule, but how long will they be willing to pay TIC lease rates without progress building the community that was (presumably) supposed to be their primary market?
You can see more discussion on Orchard Hills here in the forum or here in a previous blog posting.
The Great Park (former El Toro MCAS)- Lennar has become rather quiet regarding progress and planning at the Great Park; apparently enough so to cause questions on behalf of the City of Irvine as to whether they are still committed to the original proposals. Keep in mind that Lennar won the bid for this property at the apparent peak of the market, in mid-2005.
“In Irvine, Lennar’s plans to build thousands of homes around the planned Orange County Great Park have been pushed back, and the city has not received an updated timeline from the developer since 2005.City officials said Lennar had projected that it would have 781 homes for sale by next year, though the developer said it vowed only to have that number of home sites ready for construction.A plan unveiled by Lennar last summer to nearly triple the number of homes from 3,625 to 9,500, while cutting back on commercial space and adding 400 acres to the park, hasn’t even been discussed with city officials.”
The Orange County Business Journal(registration required) quoted company officials as saying “I don’t think anyone has seen the bottom yet…[but] Lennar will be ready when the rebound comes” in reference to the housing market and their Orange County plans.
The new Village of Stonegate, north of Woodbury, has two signs from CalPac: Palmeras and Mirasol. I couldn’t find any details about either. One or both could even be apartments.
The grading and laying of utilities at Stonegate appears not too far behind similar work at Orchard Hills.
In the Villages of Columbus, William Lyon’s Mirabella luxury townhomes and Ainsley Park paired homes are “Coming soon.” From the brief description on the VOC website, it appears Mirabella is the Columbus Square successor to Kensington Court. Interestingly, they list a higher starting price point than Kensington Court (Columbus Grove, Irvine), which seems implausible given the change in the market and Tustin address.
For a good recap of Irvine project planning, see Zovall’s zoning map post.
A few interesting nuggets of industry rumor: Lennar is reportedly contemplating an end-of-year auction for at least some of their properties at the Villages of Columbus. Their end of fiscal is November, so this would likely occur in the next 30 days if true. Also, The Irvine Company is floating proposals for some kind of post-sale price guarantee to try to coax buyers off the fence. Details are very sketchy, and even if true, timing is unknown.
So the bottom line question should be: Will the buyers waiting for the market to get worse outlast the sellers waiting for the market to get better? For the sellers to win that battle, it assumes plausible the argument that the market is capable of postponing itself back to prosperity. Don’t bet on it.
While the law of supply and demand is the basis of all economics, demand isn’t the same as desire. The factor that limits pent-up demand is the ability to finance the purchase. Given the collapse of the CDO/SIV/ABCP market, the desire to purchase won’t be materialized into demand because not enough people can afford the down payment and/or make enough money to have a reasonable DTI ratio.
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I think the demand side has weakened too.
Nobody in my neck of the woods is talking about buying at all. At any price. At some point, prices will drop so far that this will change.
IR, am I mistaken or is the date you want to buy pushed back?
Great picture on the “detached” condo spacing. Ghetto spacing at what, $700,000 a pop?
I am not going to try to time the exact bottom of the move. When properties start appearing on the market that represent a savings over rent, I will start looking. It will take years to bottom, so I won’t be in any hurry.
I would rather buy while there is still a bit of a drop ahead. This is when inventories are at their maximum and sellers are most motivated. At the bottom, inventories are declining (which is why it forms a bottom) and you have less to chose from.
BTW, great work socalhousingbubble.
I think that the psychology that brought buyers out of the woodwork to pile on during the runup works in reverse. More severe drops will push even more to the sideline. In total, however, we’ve probably double-digit percentage fewer people who can be buyers because they’re trapped in their current place at a loss or because creative financing is no longer available and they don’t have a downpayment or income to support even normal prices. The number of buyers will be replenished when the line on the Goldman-Sachs chart is met by the median and no sooner. Even then, everyone who’s watched the drop will be reluctant to catch a falling knife and/or will have lost their downpayment in the drop and/or excess supply will still be on the market due to foreclosures or overbuilding due to artificially stimulated demand. So we probably overshoot. A few relatively solvent people who could afford to jump in aren’t going to change this tidal wave.
“Pent Up Demand”, huh? Sounds like a volcano ready to erupt. I guess home prices are going to explode on the upside any day now, huh?
I agree about desire not equaling demand. The post ignores (for the cynics sake) whether the market will ever underwrite the values we’ve seen, the same values the postponement camp is hoping return.
-SCHB
That’s what they’d like you to believe to try to get you to buy now.
SCHB
Very nice post. I found references to the same supposed “pent-up demand” in 1992 during the last downward swing. Here was what a homebuilder said, in reference to the fact that people were still looking at builders’ model homes, but sales numbers were still down:
“‘It shows that there is demand but that the potential buyers still want deals,'” said John Shumway, president of Market Profiles, a Costa Mesa real estate marketing consultant. ‘People are still waiting for prices to come down even more in Orange County, so they are out there shopping, turning over every stone looking for that deal.'”
http://www.southoctracker.com/2007/10/shall-we-compare.html
Last time, it still took a few years for things to turn around.
When there are an abundance of properties in the price range of $100,000 to $200,000 the market will start to pick up. At these prices it would be possible for a first time buyer to get into the market with traditional loans requiring a tax return and a down payment.
As discussed before, the market will be stalled as long as there are no “entry level” buyers that can purchase the lower priced homes and create move up buyers.
This is TIC worst nightmare. 2/3rds (my guesstimate) of the buyers won’t have either (down payment requirements, income requirements, or credit scores) to support TIC’s pricing strategy. Those that do are probably not looking for a detached condo, but rather a nice SFR at the same price point.
Move-up buyers will have difficulty selling their homes at “make-me move” prices to allow them to afford a larger house and interest rates will rise due to the added risk and investor margins being added to them.
I guess at some point TIC will have to realize that prices need to fall in order for builders to move homes. Waiting for Q1 of ’08 isn’t going to be of much help other than to affirm TIC’s fear that prices are way overinflated and builders are in dire trouble.
And what about the argument that the latest bull run tapped into future demand — people were afraid they’d be priced out forever, so bought sooner than they otherwise would have.
I don’t think so. In fact, I actually support the pent up demand theory. Unfortunately, that demand is a little too rational.
They will stretch a little bit, but in the end, they need home prices to fall in range with the trend line Goldman Sachs showed. They also need the move up chain to function. Those buyers were priced out of the market in 2003. IMHO, the majority of buyers since the beginning of 2004 were speculators. Without double digits appreciation and essentially free money in the short term for loans, they will not return.
The market will return and prices will be reflective of income and interest rates. When support returns will depend on rental rates, which in turn depend on population and income.
because of unprecedented magnitude of this bubble (overshoot not seen before), I expect price to considerably drop below the fundamental value (set by rental rate and income). We have seen this phenomena at the end of previous bubbles, but this time around market is going to burn out so many late time buyers that significant undershoot seems inevitable.
I agree with IR, capturing the absolute trough in prices is not worth it.
This means being willing to buy while prices are still dropping. If you look at fundamentals, this isn’t as risky as it might sound.
SCHB
Well, as we all know that we are at the tip of the iceberg when it comes to credit crunch and home mortgage mess. With things happening so quickly around us, I am wary of where the economy would be in 2008 and 2009.
It doesnt matter if people stay on the sidelines or they have steller credit. Afterall, they all have to have a job in order to pay for house mortgage and I am sure if shit hits the fan, we will be in deep recession when lots of job losses.
I will be the first time buyer and have been working towards saving all that important down payment, however if things get pretty worse, I am not sure if I would commit to home knowing that job may be on the line. Somethig for working class to think about.
According to the US Census Bureau, homeownership rates in the US rose during the 20th century from about 46% to about 66% . At the height of the recent housing bubble (2005-2006), the US homeownership rate got as high as 69%. The most recent number, for the third quarter 07, is 68.2%. So although the US homeownership rate has declined some in the last year, by historical standards we’re still very near all time highs.
If record numbers of people already own homes, that would indicate to me that there are fewer non-owners left who are still wanting to become owners. That’s the main reason I’m skeptical of the whole “pent up demand” argument.
Correct! The savings rate in the US is at an all time low. Many people are hard pressed to pay even for their credit card bills. On the other side, there are really lots of houses on the market now. Were shall all the masses of buyers that have a 20% downpayment in their pocket come form? This is simply wishful thinking.
:-/
And let’s not forget the impact of ever-increasing HOA dues and Mello-Roos, er, Community Facilities District taxes. Every dollar increase in those is a dollar decrease in the amount of money that can go toward a mortgage payment. When you annual HOA fees and CFD taxes equal two, three, and four months of mortgage payments, that’s some serious cannibalization. When I start getting paid annual bonuses like they do in Japan (six to 12 months of one’s salary), then I’ll consider making 16 monthly mortgage payments a year.
Unless, of course, awgee is right …
…unnervingly, his crystal ball has been working really well latelty …
The sad thing about these fees (Mello Roos, HOA dues, etc) is that they wouldn’t exist if people were unwilling to pay them.
Thanks for the vote of confidence, but if truth be known, I missed selling at the top of the re market by four or five months.
When I first visited Agrestic I feel in love with the community. While in line at the coffee shop, a young boy asked me what time it was and I answered, well it looks like it’s about 4:20 and he replied, “It’s always 4:20 in Agrestic. I new I was home!~
Little Boxes
by Malvina Reynolds
Little boxes on the hillside, Little boxes made of tickytacky
Little boxes on the hillside, little boxes all the same
There’s a green one and a pink one and a blue one and a yellow one
And they’re all made out of ticky tacky and they all look just the same.
And the people in the houses all went to the university
Where they were put in boxes and they came out all the same,
And there’s doctors and there’s lawyers, and business executives
And they’re all made out of ticky tacky and they all look just the same.
And they all play on the golf course and drink their martinis dry,
And they all have pretty children and the children go to school
And the children go to summer camp and then to the university
Where they are put in boxes and they come out all the same.
And the boys go into business and marry and raise a family
In boxes made of ticky tacky and they all look just the same.
It is not the size or shape of box that is so bad. I have been inside these many of these tract homes and they are beautiful with all the amenities one desires.
The proximity from box to box and box to street is what will stop people from paying the premium. How about some breathing room with a tree or two in between the boxes. Irvine has taken the shape of communist eastern Europe, under the rule of TIC.
Well, that’s better than Buffett that sold his place in Newport Beach in 2004 :).
Oops, details. Ok, Laguna Beach in Feb 2005
…
http://www.ocregister.com/ocr/sections/business/business_columns/article_513298.php
Sorry, details. Laguna beach in Feb 2005.
Buffett finds parable in sale
‘Value’ investor says his Laguna Beach home’s high sales price is an example of real-estate risks.
http://www.ocregister.com/ocr/sections/business/business_columns/article_513298.php
Buffett added a recap of his sale in Laguna Beach: “It was on about 2,000 square feet of land, maybe a twentieth of an acre, and the house might cost about $500,000 if you wanted to replace it. So the land sold for something like $60 million an acre.”
Ok, so you made me look up agrestic. Never saw Weeds and the meaning of 4:20 is not lost on me deadbeat. What’s your point posting about it ?
Mello-Roos are a direct result of the inability to raise property taxes (prop 13).
No Mello-Roos no new construction or even more over-priced new construction.
I don’t really have a problem with HOA fees. We pay $370.00 per month for:
Property and liability insurance (including earthquake)
Somebody to fix the roofs and paint the fences
Clean and heat the pool and spa
Pick up the trash, sweep the place
Take care of the outside lighting
Mow the grass, trim the bushes, fix the sprinklers
Tow the derilict cars and repave the lot
Fix the water leaks and get on the hillbillies
So for $370 per month, it’s not a bad deal.
Ok I’m too lazy to look up Agrestic, or 4:20, what the heck does this mean? If I want to read something inpenetrable, I’ll pull out my T S. Elliot.
I did a closing today. For the first time in 2 1/2 months. It was all cash; a bank was not involved. For what it is worth, on the space coast the Sunday paper had real estate prices on some houses which could actually be almost afforded by ordinary people. Some stuff in the mid 100s, even low 100s; lots in the low 200s. But remember our salaries are piteously low here.
Worse yet. In the high zoot models at Portola, you can sit in one of the throne rooms and there’s a window with a full shot to the 3rd floor “teenager’s room” in the house next door.
Yeah… like I’m gonna pay 1.5 mil for a home only to have a teenager look down at me while I pass judgment on my throne.
Incredible stupidity. A 4400 sq home should be on an 8000 sq foot lot at the very least.
Dude, That was awesome!
We should totally hang out. I get what you are saying and we could sit around thinking of creative ways to rebel against the establishment.
Peace!
-doobie
Buster, it’s a good deal and thank you for highlighting some of the included items. You can’t just look at a $300-$400 HOA and say it’s not worth it. You need to do the math.
LL, 4:20 is “code” for marijuana ….(all you parents out there, take note). Agrestic is apparently the name of the community that the family in the show “Weeds” lives in….I think. Weeds is a show about a white suburban woman who makes a living selling marijuana.
LL, also..I was just back home in CT and my friend the lawyer hasn’t had a closing in over 2 months. Used to be her bread and butter, now she’s trying to get out of her BMW lease and sell one of her houses….she’s sweating ! Seems to be the same all over.
There is a huge block of sellers that wont hesitate to let price drop — REOs and other foreclosure-related properties. These will fall and are in the “must sell” category. This will catalyze the price drop and force a correction in record time relative to the past.
For ever dollar increase in HOA, there is likely more than a dollar decrease in funds available for a mortgage payment. You can take a deduction on mortgage interest, not homeowners association dues. For most a buck more in HOA each is $1.50 less available to fund the mortgage…
Mello Roos aren’t typically tax deductible, but I suspect everyone is taking them on their returns, so higher Mello Roos would eat into cashflow to fund mortgage payments at greater than the dollar-for-dollar rate.
The thing that kills me with Mello Roos is the effect on AMT. It’s much better tax-wise to pay monster mortgage interest and lower prop taxes (inclusive of Mello Roos) vs. the other way around. Unless they reform AMT, the Mello Roos will keep me out of newer areas even if prices crater there.
Sienna is larger than Decada. Could be more than $700k.
SCHB
Legend around here has it- Vancouver, BC bylaw enforcement officers head back to city hall because their shift ends at 4:30 pm. This meant it was safe to light up a 4:20. Yes, I know High Times differs, but what do they know, they’re probably high RIGHT NOW.
Does anyone have any information on the Cal Pac houses that are wood frames right now coming up on the hill over looking Bonita Canyon?
I think they might be faculty housing but I am not sure. They look like pretty big homes with great views.
They are under construction right on newport coast and bonita canyon across from mariners church.
My gawd, that Sienna is the most ridiculous looking development I have ever seen. It just reeks of the arrogance and greed of these builders during this bubble. Imagine what this crap is going to look like in 20 years? Who would want to live there? This garbage they built in the last 5 years will end up ruining Irvine as we know it today.
But I suppose somebody also said that about Westpark in 1987….
Some people pay extra for that….
“Irvine has taken the shape of communist eastern Europe, under the rule of TIC.”
From what I’ve seen in former communist Germany, even the communists didn’t build houses so close together. Land wasn’t all that sparse there, after all, and no speculants could drive prices up. Of course, the appartment houses that were build are a different issue: El cheapo boxes made of precast concrete parts, ugly as hell.
:-/
$370/month?
Not worth it.
Tightly packed micro-castles? Tell me I am seeing things. Absolutely astounding!
grrrr.
When I heard pent up demand I was grinding my teeth.
People are not on the fence. The illegals are not jumping over the fence and getting subprime loans anymore. So there is not any pent up demand.
Most of the subprime loans are in Ca, and mostly in Southern California, which is where most of the illegal immigrants are in this country. Some 2.2 million in Los Angeles. The housing jumped when these people and their relatives suddenly were able to start buying homes on minimum wage jobs.
Personally, I ate dinner with a real estate agent and a mortgage broker. They revealed how great they were and how many people loved them for getting them qualified and eventually into a house, when in the past these people said they could never qualify or afford a house. They also mentioned how these same people got all their friends and family in and eventually by word of mouth were busing immigrants and others into their offices. These 2 people and their real estate office are either 1 or 2 in California for the most homes sold.
This was a huge bubble. Not only from investors trying to flip houses but from all those sub-primes loans to minorities and poor which pushed demand up. Not to mention those 2.2 MILLION illegals squeezing the rental properties.
If there is any pent up demand, like I said, its from either the illegals and sub-prime buyers who will never get that free lunch again so demand will not return to what it was during the boom, nor anywhere near it. When I hear stories from work, its all about who is losing their house. Either bought with a bad mortgage or took out huge HELC’s to buy BMW’s and big SUV’s. It’s like jack and the bean stock. The boy left to trade the cow in and came back with beans. People have traded the equity in their homes and have downgraded in the meantime.
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more on demand, everyone I know says no to buying. In fact they mention sometimes family or friends trying to sell and are stuck.
— HOA?
insurance from State farm $65 a month
grass, flowers, i.e. landscaping care is $15 a month from a few Mexicans who offered to do it.
total $80 a month,
Free, (paid in taxes though)
– the city picks up my trash,
– the police get hillbillies out of the community and the city will tow cars that are left parked for more than 3 days
– the city also has street lights
Oh, also last time I heard a HOA or a condo board meet, board members had this idea that the money they collected was for them personally and should spend it on their homes.
My parents live in a HOA, they pay $0 fees for over 30 years. Often they just get a letter from them asking to make sure the house looks nice.
law stud-
Thanks for your comments. I am not taking much of a position on how much pent up demand there is, although I think there is some.
Hopefully you see my point that no matter how many people may not be attempting to purchase a home *now* but would still like to in the not-too-distant future, the amount of housing available to fill this demand is plenty. So it won’t improve the supply & demand equation in the seller’s favor until that product is released and consumed. And it won’t be consumed until prices drop significantly more.
SCHB
I totally agree about supply and demand. Classic economics.
My position to “pent-up” demand is more from hearing real estate agents trying to sell the idea to me that the market is still appreciating or will soon.
I would change my position on pent-up demand to say that the few renters who can buy are still on the fence waiting for prices to plummet. But from what I’ve gathered is that with the prices still so high, and 2nd mortgage piggyback loans are out that it leaves few if any people to buy these homes for a long time. Average citizen in CA has no savings and no-where near the income. Some just may have left to Arizona.
So, yeah Prices need to come down substantially for most to buy. I posit thought that the Federal reserve will weaken the dollar so much in the coming years (spending on Iraq is fueling a bonfire of debt) that the dollar will continue to slide to the point where today’s prices may remain. The dollar would just be half to a third of what its worth today by 2012.
Alternative is worse. The Fed cannot appreciate the value of the dollar without causing a recession, so they won’t. If they did homes would drop and so would the ability to borrow to buy homes. Then, only those with liquidity (20% down) can buy a home. Few people during a recession are going to have that kind of cash.