Open Thread 6-27-2009

I found a few interesting cartoons to share this weekend. I guess brutal represssion is getting harder to hide these days, and blogging can be dangerous.

blogging in Iran

There are a some interesting blog posts for you to check out:

Which future Irvine community are you most intrigued by? and Puzzling home listing of the week.

My Alma Mater found me: Land development grad’s book details housing boom, bust in Southern Calif.

Remember, this coming Tuesday is our IHB Block Party.

IHB Party 6-30-2009 at JT Schmids at the District

I hear a thunder in the distance
see a vision of a cross
I feel the pain that was given
and that sad day of loss

My Own Prison — Creed

Buy now and be priced in forever.

Even at 40% off, this property seems overpriced.

Asking Price: $310,000

Income Requirement: $77,500

Downpayment Needed: $62,000

Purchase Price: $502,000

Purchase Date: 11/17/2006

Address: 147 Sanctuary, Irvine, CA 92620

Beds: 1
Baths: 2
Sq. Ft.: 1,050
$/Sq. Ft.: $295
Lot Size:
Property Type: Condominium
Style: Mediterranean
Stories: 1
Floor: 1
View: Trees/Woods
Year Built: 2006
Community: Woodbury
County: Orange
MLS#: S579055
Source: SoCalMLS
Status: Active
On Redfin: 4 days

Former model home in the exclusive area of Lombard Court in Woodbury!
Hard to find single level home full of upgrades including an open floor
plan featuring a large kitchen with granite counters, pull outs,
breakfast bar, custom window treatments, custom built-ins, crown
moldings, rich wood flooring, truly a must see! Enjoy entertaining your
guest in the relaxing courtyard, take a dip in one of the many
association pools, roast marsh mellows in the fire pit, wind down with
a soak in the association spa at sunset! Close to parks, shopping,
freeways, and Award winning schools! Wheelchair accessible, Don t miss
this opportunity!

Don’t miss this opportunity to get trapped in a one bedroom apartment for a decade…

I hope you are having a good time this beautiful weekend. I am finally going to take my son to Wild Rivers and enjoy the waterpark.

24 thoughts on “Open Thread 6-27-2009

  1. MalibuRenter

    In addition to all of the other problems in CA, I am watching the State budget impasse.

    In 2008 dropping housing prices caused State budget cuts. In 2009 it’s about to become a cycle: 1. dropping home prices cut off the home ATM and State and local revenues drop; 2. budget problems are so bad that streets don’t get paved, crime goes up, more homeless people are on the streets, and more people who can get jobs out of state leave; 3. housing values drop.

    If more people who can afford homes are leaving the state than entering, there is no theoretical bottom to home prices. In addition to irresponsible financing, one of the prime drivers of bubble pricing was the belief that more people would move to California, and that would help prices keep rising. In an area with expectations of continued population decline, home prices can drop below rental equivalence and stay there.

    1. IrvineRenter

      It sounds like you are describing Detroit. Some cities here in California may experience the Detroit phenomenon. Santa Maria, Bakersfield, numerous small Central Valley communities, and others experiencing population loss will not recover until a new engine of economic growth is discovered.

      I wonder in cities like that if there is a point where prices are so low that business comes in to take advantage of the available infrastructure, low wages and low cost of living.

      It will be interesting to see who feels the brunt of the budget cuts in California. We have a number of special interest groups on the Government dole that will probably suffer greatly. I suspect the budget cuts will not be felt uniformly because of the high degree of dependency among certain groups. We will all feel the pain due to a faltering economy, but some groups will feel much more pain than others.

      1. MalibuRenter

        Detroit’s population has had a very long slow decline. The population has dropped by 1-1.5% per year on average since the 1950s.

        To a pretty good approximation, the number of households in a city continues to equal the number of housing units. Prices drop, and somebody takes the home. When houses start to get really cheap in a depressed area, people move there precisely because they can live cheaply without a job. As you might expect, that leads to high portions of people on government assistance and in the “informal economy”. Whether or not the source of income is illegal, the informal economy pays taxes on a much lower portion of income.

        Detroit shrank which the suburbs grew. The region’s population stayed about the same over the decades.

        CA has some unusual risks regarding people leaving. The major urban areas have more renters than elsewhere. The State has many more people who moved there from elsewhere. While some never want to go back (e.g., political refugees), many have long said that they would move back to Mexico, El Salvador, Illinois, West Virginia, etc., if they had saved enough, or had a good job offer.

        I have no problem at all coming up with scenarios where many areas in CA lose 2%+ of their population for years in a row. It doesn’t take much imagination for that to occur if CA’s unemployment rate is 3-5% above the rest of the country.

        I need to pull the research back out, but I think CA lost more than 2% of its housing stock each year due to replacement with other types of buildings (e.g., retail, office), road building, deterioration, fire, quake, and other causes. However, many of the alternate uses will be on hold for a long time. Not a lot of new retail will be built in the next 5 years, nor office, or hotel.

        Where does this leave CA? With a very strong need to have new employment. I have been trying to figure out exactly how to model this, but on a 2+ year horizon, migration due to unemployment is a much bigger risk than home price declines due to the bubble. The bubble will be nearly fully deflated by the end of 2012. However, if population and employment decline, home prices will keep declining slowly.

  2. MalibuRenter

    Another note. When compared to the recession of the early 1990s, there are far more vacant homes in 2009.

    In the early 1990s, there was net migration of out CA. I expect this to happen again, but more severely in 2009 and 2010.

    1. IrvineRenter

      To me the large number of vacant homes suggests that we will have problems with blight over the next decade. Eventually these vacant homes will be occupied, but in the process, many homes in undesirable neighborhoods, particularly where there is out-migration, will simply be abandoned. Once undesirable neighborhoods start to be abandoned, they become permanently blighted, crime becomes a problem, and the government must step in to do something. These places may create opportunities for affordable housing projects to clean up the problems.

    2. NewportCoastRenter

      During the bubble years, I recall being told that the price declines of the early 1990s were driven by cuts and job loss in the defense industry and that the same catalyst would not exist this time.

      I predicted that job losses in the real estate industry itself would be the catalyst this time. And fortunately, I have been vindicated.

      Hope to see you all next Tuesday at IR’s gathering.

      PS: Congrats to IR and MR on the TAMU article…

      1. MalibuRenter

        Yes, and while I have never found the educational background stats on realtors, I suspect it’s not a lot of phds or masters degrees. There are a lot of people who won’t be making that same kind of money again.

        1. Nancy

          Hallelujah to that! I’ve met Realtors who are plain illiterate, or were transplanted here from a village abroad just a few months prior. They claim all they had to do to become a Realtor is pass a test… no logic, high math or analysis requirements.

          Why do these illiterates lacking common sense deserve such loft compensations, beats me.

          We need good alternatives to break this market hegemony. Redfn’s very few agents with hundreds of clients sounds like a meat shop, doesn’t cut it for me.

          One small suggestion I have is for sellers to give buyers the option to pay the agents fees / closing costs, and reduce the home price by the same amount. The Seller will net the same, and the buyers will save over the years in Prop13 property taxes… it’s smart for cash-rich buyers.

          1. thrifty

            The agent and seller have agreed in writing on the commission. the buyer is under no obligation to accept that amount if the seller is not paying it at the close of escrow. What’s to prevent the buyer from attempting to negotiate a different (read lower) commission before signing the contract of sale? Do you think realtors would be in favor of making that buyer’s contingency standard in every contract?
            It does sound good, however.
            I still favor the seller simply paying the listing agent an hourly rate. They then negotiate any split with the selling realtor – or let their local association set suggested splits (similar to the suggested msrp on new cars) that are non-binding.

          2. USCTrojanCPA

            As a realtor that only deals with proactive buyers I have come up with a compensation system that seems to work for my buyers and myself. I agree upfront with them that I will contribute 50%+ of my net commission towards their escrow (to be used for either their closing costs or lenders costs). The more time I spend working with them, the closer I get towards the 50% split. If I’m just representing them to buy a new home where there’s almost no work for me, then I’ll contribute 80% of my net commission (net because I do have a commission split with my broker). This structure does not require the seller and listing agent to amended/revised their listing agreement which spells out the commission for the transaction.

          3. Nancy

            But the buyer doesn’t save on the Prop 13 property tax in the long-run; the sharing of commission is a noble and respectable gesture, however. Reducing the purchase price by having the buyer pay the closing costs saves the buyer from having to pay tax and interest on the seller’s closing costs implicitly built into the inflated home price. Why mortgage and pay property taxes on closing costs?!

            Buyers should have every right to challenge ridiculus commission rates – let the buyers who actually are the deal makers, decide what they wish to pay for closing costs and commissions that are otherwise implicitly built into the home price.

            This idea will yield a shift in the current hegemony – agents know the money is in becoming a listing agent, and yet these agents do nothing but talk down your home once they get your listing. Listing agents don’t do practically anything but use their back-office marketing services and promote their own business (look for potential new listings and buyers) during open houses. They don’t work for sellers from what I see, and often farm out the listing job to other agents who have their own personal agendas – why should we pay for their personal agendas? Show me a listing agent who doesn’t push a seller to mark down the home below market in order to sell in 2 days – they work for buyers and mainly for themselves.

          4. Nancy

            How motivated you think the listing agent will be to sell a home, if paid hourly?!!!! Come on… most of unqualified agents who don’t know how to sell a home should seek new opportunities in this land of great opportunities.

          5. thrifty

            Your easiest alternative would be to simply leave the system as it is. When you decide to sell, simply turn over 3% of the selling price to the listing agent, regardless of how much or how little they do after getting your name on the listing agreement. The selling agent will get the same % regardless of how much or little they do.

          6. Nancy

            I’m sure realtors (especially listing agents) will resist my idea; it’s not good for them, their commission will be heavily bargained for at the sale-contract time. This idea probably appeals to a small fraction of buyers–cash-rich buyers who plan for the long term. These may be informed and objective buyers who understand long-term financial planning.

            Most of those buyers aren’t thinking in terms of buy versus rent… they think in terms of the cost of long-term debt and plan to be mortgage/debt free in 15 or less years and the feasibility of retiring in CA. These may also be the type who invest in bonds/muni’s, not equity/NASDAQ junkies chasing sexy schemes and fads.

          7. USCTrojanCPA

            I have done a net present value calculation about what the most beneficial use of the buyer’s agent commission would be and it seems that the great benefit comes from paying down the interest rate on the loan. A $20,000 contribution from the buyer’s agent will only result in a savings of $200/yr in the property tax which is less than $20/month. That $20,000 could buy down the interest rate by about 3/4% which can be well over $200/month depending up on the size of the loan. There is no magical solution for the compensation structure for real estate agents, but I’m trying to do my part to create a win-win situation for everyone involved.

          8. Nancy

            Can you share how you came up with a savings of just $200/year? A $20K reduction in price for a 15 year 4.5% loan is eliminating nearly $1000K/year in interest ($74/month, $7500 over life of loan). For a 30 year loan, it’s even higher savings. There’s just one party that loves loan origination points upfront – lenders. Helps them pay the cost of their loan brokers. I never regretting never paying points, and got mortgages directly from S&L banks at lowest cost possible.

    3. LC

      Yeah — in the 1990 recession, there was a lot of vacant commercial property, I mean “neutron bomb nuclear winter” type of industrial wastelands. But the houses remained occupied. There was trouble renting out unit for many years, though.

      1. MalibuRenter

        Yes. To some extent there is often a substitution effect. If you only have an oversupply of condos, some of them might convert to apartments. If you only had an oversupply of retail, some of it would get used for office or storage.

        This time, there is an oversupply of nearly everything in CA: single family, condos, retail, office, hotel, storage. I haven’t seen whether light industrial is a glut in CA, but can’t come up with a scenario where it would absorb large amounts of already-developed space.

        Oh, and coming soon to a downtown near you: extra government space.

  3. newbie2008

    On the the main draw for business to CA was low cost of operation due to land prices, all year working weather and harbors with the military-industrial-educational-media complex. Post-WWII land prices started to rise in relation to other US states. Educated work force with good work ethics was another draw in the 1950’s to 1990’s. Ship building, the navy, military bases and aerospace are almost all gone from CA. CA is left with high land prices, high taxes, electronic design companies, and a small highly educated group. The vast majority are under-educated without basic life skills, e.g., reading, math, trade and reasoning. CA has lost much of it economic draw in relation with other states. MalibuRenter’s cycle is already in progress. Only the education and media complexes are in CA but in a weaken state. CA streets were not getting re-paved during during the good times of the 1960 to 2000, so why expect them to be re-paved now.

    Detroit also HAD economic draw with auto’s, rail lines, education and media. Detroit is now known for urban blight, but Detroit still has some very exclusive areas.

    My new handle should be Jerry as in Jeremiah.

  4. thrifty

    I recall an excellent and in-depth article in the LA Times published about the middle 90’s that looked at expected changes in California during the next decade or more. I remember specifically that there was a prediction that net in-migration was predicted to continue for all socioeconomic groups with one exception: upper middle class whites. That demographic was predicted to fall in absolute numbers. I’d be interested to know if anyone has any data concerning what has happened since 2000.

  5. Nancy

    Rumor has it the same Economic Hitman assisted by their WallStreet cronies also hit the American middle class this round.

    On more positive news, Dr. Doom (Nouriel Roubini), the pessimistic Economist who correctly predicted the current global crisis while people laughed at him, is now seeing recovery in sight. When there’s good news from Dr. Doom, I pay very close attention:

    I hope the audience of this thread doesn’t humor him; we’re supposed to be smarter than those who fall prey to Group-Think every time.

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