IHB and Global Decision have teamed up to do an analysis of Irvine house prices versus Coto de Caza. We are featuring the property of Vicky and Donn Gunvalson of OC Housewive's fame.
Irvine Home Address … 7 SHIRE Coto de Caza, CA 92679
Resale Home Price …… $2,395,000
Who's to know if your soul will fade at all,
The one you sold to fool the world.
You lost your self esteem along the way.
And just fake it, if you're out of direction.
Fake it, if you don't belong here.
Seether — Fake It
Today's post is a detailed comparison of Irvine and Coto de Caza. I have joked about the posers and pretenders in Irvine, but by comparison, it looks like Coto de Caza has Irvine beat. Despite having far fewer homes built during the bubble, Coto is experiencing greater price declines due to foreclosures. Excessive Ponzi borrowing is the most likely culprit.
Over the last few weeks, the IHB has been proud to present Jaysen Gillespie of Global Decision. His advanced statistical analyses of the market include An accurate view of the Irvine housing market by Global Decision and IHB, A detailed look at Irvine Village premiums by Global Decision and IHB, and The market value of Irvine home features by Global Decision and IHB. If you haven't read those posts, I highly recommend them to anyone who wants to understand what is really going on in the Irvine housing market. Jaysen has also performed a more detailed analysis of the Coto housing market at the Coto Housing Blog.
Today he is back with a look at how Irvine and Coto de Caza have compared since 2000. Some of the results may surprise you.
A presentation by Jaysen Gillespie of Global Decision
Global Decision is an analytics consulting firm. While our methods are not industry-specific, our engagements are skewed towards specific industries in Southern California, such as real estate (along with online gaming and restaurant chains). We specialize in applying both foundational and advanced analytics to better understand business and economic issues.
Today continues our series on using the Global Decision Hedonic Price Model to determine how homes values are trending and the underlying factors that create such value. A large part of the value of homes in Irvine is location-driven. While we’ve explored the relative market values of various areas within Irvine (such as Woodbury vs. College Grove vs. Quail Hill), we’ve not yet compared Irvine to non-Irvine locations. Such comparisons are harder to do because a well-formed model has to be constructed for each comparison city. Nonetheless, real estate is highly substitutable across cities, and prices trends in nearby areas are very likely to impact price trends in Irvine.
To that end, we being with a comparison of price trends – based on hedonic indexes – for Irvine and Coto de Caza. Why Coto de Caza you may ask? Coto was chosen for a number of reasons. First, it’s a manageable set of data that we could easily assemble. Second, it’s a very homogeneous area that lends itself to a hedonic model (though you may need to exclude high-end custom homes on 1.5+ acres of land). Third, schools rank 9 or 10 on GreatSchools, keeping it on par with Irvine in terms of numerical ratings. It’s hard to model intangibles such as teacher quality and parent involvement). Fourth, safety is assured by gates and guards, and crime is minimal.
Finally, the actual physical parameters of the homes are substantially different from Irvine. Coto homes are much larger, with a median size of 3400-4000 square feet in a given quarter. Coto living also involves a longer commute and has a more rural feel. These differences are likely to mean that Coto buyers and Irvine buyers may put different value on different characteristics, and a hedonic model can help untangle how those values differ.
Based on the Global Decision Hedonic models for each city, it’s clear that Coto prices have fallen much more rapidly than prices in Irvine. In addition, Coto’s housing bubble – while significant, was about 10% smaller (peak vs. trough) than what was experienced in Irvine.
An interesting way to compare the performance of the Coto and Irvine markets is to plot the ratio of the Irvine Hedonic index to the Coto Hedonic index. This ratio was between 0 and 10% during the formation and peak of the housing bubble (years 2000-2006). However, because prices in Coto have deflated at a much faster rate than prices in Irvine, the ratio has moved sharply higher in the last two years.
Irvine and Coto can also be compared to known regional indicators, such as the Case-Shiller LAOC indexes. Case-Shiller publishes five indexes for the LAOC area (High/Mid/Low Tiers, Aggregate, and Condos). In the case of markets like Irvine and Coto, the LAOC High Tier would be the most representative Case-Shiller index. We plot the Case-Shiller LAOC Mid Tier above also for reference.
As discussed before, Coto’s bubble was not quite as large as Irvine’s – and Irvine’s upward path aligns quite closely with the Case-Shiller LAOC High Tier trajectory. Since the peak values, Coto pricing has declined 33%; Case-Shiller LAOC High Tier is down 29%; and Irvine is down 19%. Lower-value areas, as represented by the Case-Shiller LAOC Mid and Low tiers have suffered even larger declines. In the above graph, the Mid Tier is down about 40%.
The above data begs the question: is Coto trading at a temporary discount to Irvine? Is Irvine trading at a temporary premium to Coto? Or has something in the underlying valuation structure changed that has tilted the value ratio away from Coto and towards Irvine? With just two cities, we can’t provide much evidence to say whether Coto or Irvine is the “outlier.”
As more hedonic models become available, it will become clearer which cities are following trend and which have either (temporarily or permanently) escaped from their previous trajectories. We caution that such “permanent” escapes from typical parameters are often not as permanent as initial data would imply.
Some insight regarding buyer preferences can be gleaned by looking at the underlying factors in each model. Directionally, the impact of most changes in the property point in the same direction. Adding a car spot to the garage adds value; using three stories to create square footage detracts from value. However, there are a few interesting differences between Coto and Irvine buyer valuations.
Beds, Baths, and Beyond
As we’ve seen from the Global Decision Irvine Hedonic model, the addition of bedroom (with all else equal) does not add value to a SFR property. In Coto, the same is true – only the impact is larger. Simply adding a bedroom creates a slight decline in value (1.1%). Conversely, the positive impact of adding a bathroom is not nearly as big in Coto as it is in Irvine. We theorize that these results stem from the fact that homes with many bathrooms (4, 4.5, and 5) are quite common in Coto – but rarer in Irvine. Moving from 2 to 3 baths creates significant utility. Moving from 4.5 to 5.5 baths is nice but not as useful (see: diminishing marginal utility).
Another very significant difference is seen the value of additional square footage. A 10% increase in the size of an Irvine house creates a “flow-through” to value of about 5.1%. For Coto properties, we find this number to be an astounding 8.3%. The 8.3% is a very high flow-through ratio and indicates that Coto buyers really are all about the size of the structure. 8.3% also indicates a lower value to the underlying land, vs. the 5.1% seen in Irvine. The typical Irvine relationship between square footage and PPSF (price per square foot) creates decreasing PPSF as properties get larger. In Coto, we see very little of this impact – with properties selling for a near constant PPSF even as size increases.
When Jaysen and I first discussed looking at Coto de Caza, I was drawn to the idea because it is a ideal substitute market for Irvine. As Jaysen pointed out at the beginning of the post, Irvine and Coto de Caza share many characteristics in common, and the things that set Coto apart are unavailable here in Irvine. To be quite honest, having grown up in a town of 2,000 people in a county of 15,000, the rural feel of Coto de Caza makes me feel at home. It is certainly a market I would consider as an alternative to Irvine, and I know I am not alone. As the prices have crashed in Coto much more so than Irvine, the substitution pull becomes even stronger. At some price point, even the most patient buyers devoted to Irvine will take a look at this market.
I'm sure our resident bulls will claim the true Irvine premium is revealing itself. It's a comforting belief for homeowners, but the substitution effect is very real, and eventually premiums established in the last few years will revert to the mean. A housing crash does not suddenly and permanently make one place 35% more desirable than another.
Having looked at MLS properties in Coto de Caza, I was not surprised that Jaysen's analysis revealed what I see browsing; prices have fallen more in Coto than in Irvine. Since most of Coto was finished before the housing bubble, there is only one explanation that makes sense; the posers who emulate the Orange County Housewives borrowed and spent their homes, and now foreclosures are ravaging the place. Awgee from the Coto Housing Blog has noted that buyers always seem to step up and purchase the properties that do get pushed through to auction, but the downward trajectory of prices speaks for itself. There are more posers than buyers, and there are many more delinquent mortgage squatters biding their time in shadow inventory.
I want to thank Jaysen again for his great analysis. And don't forget to check out a more detailed analysis of the Coto housing market at the Coto Housing Blog.
Keep you in the dark
You know they all pretend
Keep you in the dark
And so it all began
Send in your skeletons
Sing as their bones go marching in… again
The need you buried deep
The secrets that you keep are ever ready
Spinning infinity, boy
The wheel is spinning me
It's never-ending, never-ending
Same old story
Foo Fighters — The Pretender
The Real Land Barons of Orange County
For those of you uninterested in statistics and heady analysis of housing markets, the rest of this post is a profile of the crumbling property empire of OC Housewife Vicki Gunvalson and her X (or soon to be) husband Donn. The property records show Donn and Victoria Gunvalson owning three properties:
There is one thing we can be certain of based on the analysis presented above by Global Decision and IHB, the value of the Gunvalson property empire is going down.
This is a property I find personally appealing. It's a big property adjacent to the golf practice facility. Hopefully, it's not so close that golf balls pelt the place.
According to Wikipedia,
In Season 3, Gunvalson and her husband are empty nesters and purchase a smaller home in Coto with the goal to downsize and simplify their lives. However, they still reside in their large residence and Gunvalson expresses anxiety of moving to the smaller home because of her perceived connection between financial failure and downsizing her home's square footage. She explains to the camera, “What will people think?” and eventually decides to sell her smaller house.
I am assuming 2 Altimira is the smaller house, and according to public records, they still own it, probably because nobody will pay them anywhere near what they owe on it.
They purchased the property for $1,650,000 on 4/6/2007 using a $1,320,000 Option ARM, a $165,000 HELOC, and a $165,000 down payment. This purchase came 10 days after they obtained a $300,000 line of credit (HELOC) on their primary residence. Coincidence? Or was this the source of the down payment?
Since property values have fallen more than 30% since early 2007, it's safe to say they are at least $320,000 underwater, depending on whether or not they used the HELOC as purchase money (What would you guess?)
Vicki seemed very worried about what people will think. So what do you think? ~~ giggles to self ~~
Vicki and Donn picked up this property on 12/21/2004 for $712,500. They used a $460,950 first mortgage, a $106,300 second mortgage, and a $145,250 down payment. Interestingly enough, they opened a HELOC on their primary residence for $400,000 three weeks prior to purchasing this one. Was Ponzi borrowing the source of their down payment?
Based on the price drops experienced in Irvine, they are probably just above water. No ongoing HELOC abuse here, just another poorly timed purchase.
The primary residence is the cornerstone of family life. Perhaps people will take risks on investment properties, but surely they won't do anything foolish and risk the family home, right?
This property was purchased on 12/10/2001 for $1,100,000. They used a $825,000 first mortgage, a $55,000 second mortgage, a $55,000 HELOC, and a $165,000 down payment. This $165,000 down payment is the only equity not accounted for by other borrowing. It was the seed of their entire Ponzi empire.
On 12/17/2003 they refinanced the first mortgage for $842,000 and obtained a $75,000 HELOC. This is less than the total of their previous mortgages suggesting they either did not use the original $55,000 HELOC, or they actually paid down the mortgage. Total property debt at this point is $917,000 assuming the $75,000 HELOC was fully utilized.
On 11/30/2004, three weeks prior to the purchase of 25 Vermillion, Irvine, CA 92603, they obtained a HELOC on 7 Shire for $400,000. That is overkill for the $145,250 down payment they needed to obtain their investment property, so perhaps they did not borrow it all? ~~ giggles to self again ~~
On 6/28/2006 they obtained a 7-year fixed ARM from Countrywide for $1,500,000. That's some serious cash out. At this point, they have added $565,000 to their first mortgage.
On 3/27/2007, about 10 days prior to buying 2 Altimira, Coto de Caza, CA 92679, they obtained a $300,000 HELOC. Again this is overkill for a $165,000 down payment they needed to buy the property.
Finally, on 9/14/2007 they obtained a $500,000 HELOC on 7 Shire. If they used this HELOC, then their total property debt is $2,000,000. With their current $2,395,000 asking price and their underwater property at 2 Altimira, this couple has no housing equity. If they liquidated all these holdings today, they would obtain nothing from their Orange County real estate.
The Real Houswives of Orange County is very instructional. The characters they find set perfect examples of how we all DON'T want to live.
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
Irvine House Address … 7 SHIRE Coto de Caza, CA 92679
Resale House Price …… $2,395,000
Sq. Ft.: 5400
Property Type: Residential, Single Family
Style: Two Level, French
Year Built: 1995
Community: Coto De Caza
On Redfin: 113 days
BEAUTIFUL ESTATE HOME ON 1.0 ACRE OF LAND IN THE WOODS OF COTO DE CAZA! THIS GORGEOUS HOME FEATURES HIGH CEILINGS AND OVERSIZED BEDROOMS THROUGHOUT, WITH ONE SUITE AND LAUNDRY ROOM DOWNSTAIRS. HOME BOASTS BRAND NEW WOOD FLOORS ON THE NEWLY RENOVATED DOWNSTAIRS LEVEL AND A DRAMATIC MASTER SUITE WITH OVERSIZED BALCONY. FAMILY ROOM WITH WET-BAR THAT OVERLOOKS A $500,000, RESORT STYLE PALM TREE STUDDED POOL FEATURING A HUGE ROCK SLIDE AS WELL AS A 5 SEAT SWIM UP BAR. THIS HOME TRULY IS AN ENTERTAINERS DELIGHT WITH ITS OWN OUTDOOR KITCHEN INCLUDING A BUILT IN BARBEQUE, MINI FRIDGE AND RECESSED GROTTO WITH TV AND FULL BATH. THE POOL AREA ALSO FEATURES BUILT IN GAS AMBIENT HEATERS AS WELL AS A ROUND FIREPIT WITH SEATING. THIS HOME IS A MUST-SEE WITH TOO MANY UPGRADES TO LIST!! THE ESTATE IS FEATURED ON BRAVO'S HIT TELEVISION SHOW, 'THE REAL HOUSEWIVES OF ORANGE COUNTY. ' THIS HOME SHOWS WELL AND WILL SELL FAST!
Proprietary IHB commentary and analysis
Resale Home Price …… $2,395,000
House Purchase Price … $463,500
House Purchase Date …. 10/3/2003
Net Gain (Loss) ………. $1,787,800
Percent Change ………. 385.7%
Annual Appreciation … 21.1%
Cost of Home Ownership
$2,395,000 ………. Asking Price
$479,000 ………. 20% Down Conventional
4.48% …………… Mortgage Interest Rate
$1,916,000 ………. 30-Year Mortgage
$415,086 ………. Income Requirement
$9,685 ………. Monthly Mortgage Payment
$2076 ………. Property Tax (@1.04%)
$67 ………. Special Taxes and Levies (Mello Roos)
$499 ………. Homeowners Insurance (@ 0.25%)
$0 ………. Private Mortgage Insurance
$216 ………. Homeowners Association Fees
$12,543 ………. Monthly Cash Outlays
-$1627 ………. Tax Savings (% of Interest and Property Tax)
-$2532 ………. Equity Hidden in Payment (Amortization)
$793 ………. Lost Income to Down Payment (net of taxes)
$319 ………. Maintenance and Replacement Reserves
$9,496 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$23,950 ………. Furnishing and Move In @1%
$23,950 ………. Closing Costs @1%
$19,160 ………… Interest Points @1% of Loan
$479,000 ………. Down Payment
$546,060 ………. Total Cash Costs
$145,500 ………… Emergency Cash Reserves
$691,560 ………. Total Savings Needed