OC Housewife, Ponzi borrower, failed land baron

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.

IrvineRenter's Commentary

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:

7 SHIRE Coto de Caza, CA 92679

2 Altimira, Coto de Caza, CA 92679

25 Vermillion, Irvine, CA 92603

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.

2 Altimira, Coto de Caza, CA 92679

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 ~~

25 Vermillion, Irvine, CA 92603

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.

7 SHIRE Coto de Caza, CA 92679

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

Beds: 5

Baths: 5

Sq. Ft.: 5400


Property Type: Residential, Single Family

Style: Two Level, French

View: Hills

Year Built: 1995

Community: Coto De Caza

County: Orange

MLS#: S653043

Source: SoCalMLS

On Redfin: 113 days




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


80 thoughts on “OC Housewife, Ponzi borrower, failed land baron

  1. winstongator

    This answers to me my question from yesterday – why would someone making $120k, with less than $85k in their retirement accounts want to buy a home costing $1Mil. What would people think???

    My wife and I make more than $120k, have more than $85k, but never really considered buying a $1Mil home, partially because of … what people would think. Some in my family think that our $500k home is way too much, I can imagine what they’d say to a million dollar property. Or if we scaled like the $120k borrower from yesterday, what they’d think of a $2mil or $3mil home.

    The helocs into other down payments also show that they were using properties as investments. This was very common in my in-laws town. I don’t think the extra properties were ever cash-flow positive, with many of them never rented! Most of those empires have already been foreclosed. Things will be better when we have people who can afford these homes living in them.

    1. HydroCabron

      I don’t have much respect for professional investors, because many don’t seem to know much about what they’re doing, even if some actually do. That is, I’ll speak with someone who is wealthy as a result of investment in asset class X, but it’s clear that he has little understanding of the macroeconomic factors which are driving X that have nothing to do with his technical analysis.

      Again: this does not apply to all professional investors, some of whom are far better informed than I could ever be.

      But the amateur investor class is another thing entirely: pretty much 3-4 rungs down the evolutionary ladder from the lowest expert investors.

      I know a couple of failed land barons. Successful in their regular jobs, they figured it was time to plow the proceeds into real estate, which always goes up, except that it doesn’t, but that knowledge is reserved for people who actually research the asset they’re buying.

      It’s scary how much dumb money was enabled during this hysteria, because the banks augmented it was huge amounts of cheap loan money. And the dumb money was really, really dumb.

      Blaming our educational system is too popular these days, but I’m going to go there: most people have no idea what markets are, how they might work, and how basic arithmetic should apply to investment decisions. This is not about a recent decline in our schooling: many of these people throwing blood money away are in late middle age.

      A decent history course covering other investment bubbles, or the series of booms and panics of the 19th century, should have done the trick, but most people don’t connect history with now, and tell themselves “it’s different this time.”

    2. Tom

      Who cares what they’d say?

      Who cares what people would think?

      Why spend so much energy on worrying about that?

      Seems strange to me winstongator.

  2. octal77

    …She explains to the camera, “What will people think?”…

    I think that single line really sums up a prevailing Orange County mindset:

    Buy things you don’t need with money you don’t have to impress people you don’t know.

    Hard to believe some people really think like that but apparently they do.

    1. IrvineRenter

      It reminds me of the expression, “you wouldn’t worry about what other people thought about your if you realized how little they did.”

      1. MovinToOC

        I think the full quote is:

        “As for worrying about what other people might think – forget it. They aren’t concerned about you. They’re too busy worrying about what you and other people think of them.”

        – Michael le Boeuf

    2. HydroCabron

      The prisons we build for ourselves.

      It would be true that we spend the rest of our lives trying to patch the insecurities induced by who we were in high school.

      Reminds me of David Foster Wallace’s defense of religion: it allows you to be ruled by something which is not an unachievable earthly goal. Worship your body, money, brains, or social standing, and you will never be fit enough, or wealthy enough, or smart enough, or important enough, and these things will consume and destroy you. Worship some external invisible force and it will merely distract you instead of destroying you, because there’s no unattainable goal to chase.

      1. Soapboxhothead

        Well put. It also speaks to setting attainable goals and knowing when enough is enough.

        That’s the trouble, far too many people lost their internal “filters” and allowed their egos to claim their souls. Greed soon replaced satisfaction in something well done or a personal goal achieved and the rest, as they say is history.

  3. Anonymous

    What are the demographic differences between Irvine and Coto? I am wondering because minorities (ex. Chinese) often prefer to buy with areas with others of that minority there with stores to match (like Ranch 99). Seems relevant as there has been some money from China and so on spilling into real estate in Chinese havens like Vancouver, Canada, so that might help explain the Irvine-Coto difference.

    Also different buyers have different ideas of schools being equal.’a rating of 8,9,10 might be the same to some buyers as per your analysis above. But I think the Irvine buyers are more discriminating – not only do they require a 10, but they even look at shades surging that 10 as given by the premium in the irvine neighborhoods that feed into University High (#8’high school in the US per Newsweek). So Irvine and Coto are not perfect substitutes in that manner.


    1. irvine_home_owner

      I love Hedonic Wednesdays!

      I don’t think Coto and Irvine compare well either.

      Mission Viejo would compare better because it has a similar mix of older and newer homes (even shares some of the same exact builders/floorplans), straddles the freeway, has a “flake” and some elevated areas.

      Or for something newer, Aliso Viejo.

      But it is interesting to see what features are valued more, it’s a bit telling that the population down there prefers a one-story over a 3-car garage, but… the 3-car is still in second place!

      1. Jaysen Gillespie

        Love the “flake” term. I’m sure that “steps from flake” should be an entry in the Woodbridge hedonic — perhaps when we get to Irvine condos.

        Agree that Coto is not as close a substitute as Lake Forest / Mission Viejo (though that’s my personal speculation and not fact-based). LF and MV are both on our short list for upcoming models because we think they have a higher degree of substitution with Irvine.

        1. irvine_home_owner

          And I don’t mean to say this data isn’t informational.

          It does show how Irvine compares to a South County city with similar housing (or even better housing) and illustrates the difference in price drops based on location, culture (lack of the 85 or the 99) and whatever else contributes to the “Irvine Premium”.

          One thing that sticks out is the percentage drop and peak comparison. Coto has dropped 33% from their peak (which was lower than Irvine’s) and Irvine has dropped 19% which would make today’s current prices a larger variance than just 14%. Since Irvine rose higher, it should even fall farther than Coto… but that has not been the case. You can even see how Irvine is more stubborn than LAOC Case-Shiller values. You don’t have to be a bull to recognize it, but I guess a bear can use that as evidence that Irvine still has 20% more to drop.

          I think Tustin Ranch would make an interesting model comparison because much of it is TIC built and just my general observations show it is closer to Irvine’s price stubbornness.

        2. awgee

          It appeared to me that the idea was to compare, not determine that the two areas are the same I think Jaysen did a great job in explaining how the two areas are different and how that difference expresses itself in housing. Great job, Jaysen!

        3. Bob Phillips

          The BIG difference between Irvine vs Lake Forest, Mission Viejo, or Laguna Hills, is the school district. The Irvine School District opted for a higher level of education decades ago, and the Saddleback District didn’t. As an agent, I see it all the time – people will “overpay” for Irvine, or settle for less house for their dollars.

          Closer proximity to the airport and L.A. helps, as well, but the schools trump everything else.

    2. RB

      I actually managed to (painfully manually) look at the Northwood area by school district as I’d described in the comments to Jaysen’s previous post. After adjusting for age of the home, there is a clear premium to the Santiago school area, that is slightly lower than for the Canyonview area (by around 2%). I also see the Brywood area at a slight (again ~2%) premium to the Northwood elementary area. With regards to the premium for Northwood point relative to Northwood old, my results are similar to Jaysen’s (around 10%). Thus it’s Canyonview, Santiago, Woodbury, Brywood and Northwood in that order (which may or may not be exclusively due to the elementary school) which was fairly consistent with various ways of torturing the data.

      1. Jaysen Gillespie

        Thanks for the additional color. In cities that don’t have the village structure like Irvine, the specific boundaries of the school districts might be even more impactful. And it sounds like you are seeing some gain/loss to values even in Irvine based on your results.

        Costa Mesa and Lake Forest are good examples — some elementary schools rank as low as 2 and others at 9 or 10.

    3. awgee

      Coto is very much a mix. When we first moved here it appeared lily white, but now that we have interaction with my daughter’s friends and their families, we realize that many are a mix like my own. Lots of hapa haoles and other hapas. Economic demographics are what you would expect; upper middle class to rich, with a few posers who are in default on their mortgages. More Ferraris than you would guess with a few Aston Martins and Lamborghinis thrown in. Public schools are good, but not as intensely competitive as Uni. Sports are big. I mean BIG! Lots of folks like SMHS and St. Johns. And a few attend St. Margaret’s.

      Now I have to hold my nose. There seems to be a lot of folks who went to USC and send their kids there.

  4. Planet Reality

    Coto isn’t a substitute for Irvine.

    If you end up buying in Coto you were never truly in the Irvine market to begin with. It was a fantasy. You were always meant to buy in Coto. The culture is completely different.

    I agree though, I much prefer Coto to Irvine.

    1. Perspective

      That’s fair, but how would you describe the “culture” of Irvine? Is it possible?

      1. HydroCabron

        I think of it in terms of the places one’s feet touch: the Pergo flooring at home, the carpet at work, the tile at the Spectrum, and the floor mats of your SUV or BMW. The few remaining Irvine surfaces, whether covered by asphalt or no – scattered tree planters come to mind as the sole place where dirt is to be witnessed – are not to come into contact with one’s feet.

        You are allowed to walk, but only on the smooth and predictable belt of a treadmill.

      2. Planet Reality

        In terms of the nicer premium SFR locations in Irvine it’s easy:

        Irvine is a for the children for the family very well to do culture that is dominated and driven by a foreign born community. For these people Coto is unfathomable. Their Irvine address is critical.

        The premium for this is apparent in the data.

        1. Perspective

          I’d agree it’s dominated and driven by a foreign-born community, but isn’t that also a strong reason “non-foreign-born” families dislike Irvine thereby decreasing demand for Irvine-area homes?

          1. Chris

            Perspective: “I’d agree it’s dominated and driven by a foreign-born community, but isn’t that also a strong reason “non-foreign-born” families dislike Irvine thereby decreasing demand for Irvine-area homes?”

            So is Cupertino, CA but that’s not stopping it from its housing price acceleration upward during the boom and not much bust during this period. It had its Asian mayor (has Irvine had or gotten one?).

            That’s my anecdotal evidence to refute your strong reason.

        2. Perspective

          The politically incorrect version of my question would be:

          “Doesn’t the fact that so many first generation Asian families living in multi-generational situations (2 parents + 2 kids + 2 grandparents + aunt) in Irvine make Irvine a less attractive place to live for higher-earning white families (2 working parents + 1 or 2 kids)?”

          You can’t say Coto isn’t attractive to the typical Irvine family, without also saying that Irvine isn’t attractive to the typical Coto family for the same reasons. This negates any price differentials, no?

          By the way, I’ve never been to Coto…

          1. Planet Reality

            Exactly, thats why Coto is not a substitute for Irvine. It works both ways.

            However Ladera Ranch and many other areas are substitutes for at least half of Coto properties.

    2. Jaysen Gillespie

      Propensity to substitute real estate product X for product Y is going to be a very interesting topic on this blog going forward.

      Technically, all local real estate is subject to the substitution effect. As Wikipedia notes (http://en.wikipedia.org/wiki/Substitution_effect#Substitution_effect), the classic micro-economic model is to assume a fixed budget constraint and then look at how the price ratio of one good to the other impacts the propensity to buy. The classic model is not a great analog to real estate because the quantity demanded is generally only one — but the conceptual intuition is still useful.

      Because lending standards are now reverting to normalcy (i.e. your income and wealth will determine the max loan you can obtain), most buyers will be budget constrained. Thus, the consumer choice question will be “For $X, what I can get in Irvine, Coto, Lake Forest, Mission Viejo, Corona, Long Beach, Torrance, etc.”.

      Since the buyer pool for real estate all place different values on different attributes, different buyers will make different trade-offs. For a given price, some may want the biggest home possible (giving rise to the Corona buyer). Some may want to be nearest to the beach. Some may want the to be near the same ethnic group.

      All local real estate options are substitutes for each other. Coto is, indeed, a substitute for Irvine — just as is Lake Forest and Mission Viejo. The degree to which the buyer pool utilizes adjacent cities as substitutes varies but it is a non-zero effect.

      As we get more hedonic analyses completed for substitute cities, my belief is that we will be able to better understand the substitution effect on SoCal real estate.

      An interesting thought experiment, for the economically inclined, is to imagine a world where there is really is no substitution effect. That is, every buyer who wants a home in Irvine has preferences such that they won’t consider non-Irvine housing — at any price ratio. Such buyers would be willing to spend up to their budget constraint in order to secure Irvine-based housing. In such a market, we would expect the bottom of the market to rise dramatically because the Irvine location would trump the value generated by the physical attributes of the property. Cheap condos and small older homes would be bid up, and competition would be fierce at the low end. Many Irvine-only buyers would have a budget constraint that fell below the market price for even starter housing. Such buyers would risk become renters for life — or until their preferences shifted away from their initial values for Irvine-only.

      In my view, the outcomes from the thought experiment diverge from reality (low end is falling the fastest, markets clear as some buyers opt to substitute).

      A great quote to remember is that “desire is not demand.” Many buyers may desire to live in Irvine, but demand is realized only by the desire combined with the financial ability to convert that desire into a transaction.

      There are clearly many substitute areas for Irvine. The difficult part is quantifying the substitution effect.

      1. Planet Reality

        Right and silver is a substitute for gold, but who really cares when reality shows otherwise.

      2. IrvineRenter

        Please ignore Planet Reality’s non-sequitur. It’s an old blog troll technique designed to kill a thread that contains information the poster does not want explored further. It’s often effective because nobody knows quite how to react.

        Every housing option within a reasonable commute is a substitute for Irvine housing. I know a man who commutes from Redlands to his job near the Spectrum. He wanted a big house and a big yard at a price he could afford, and his tradoff was the commute.

        Nobody said Coto was the same as Irvine, but it is certainly a substitute market for people who value large homes and lots more than the conveniences of Irvine’s location. If certain demographics prefer one to the other, that is their choice. With choice comes substitution; it’s really that simple.

        1. Planet Reality

          You’re ridiculous.

          If you need to preface “substitute” with the word “poor” it’s not really a substitue. Your argument is academic, rudimentary first year business definition. Just because a physics text book provides a simple equation do you think an atomic particle gives a shit? No the electron tells Newton to piss off. Your rational never get any deeper to truly understand and accept.

          1. Planet Reality

            A fossil watch is a substitute for a rolex, in the basic academic sense. If I buy a fossil watch does it have any impact on the price of a rolex. No it doesn’t, if 10,000 people by fossil watches, it similarly has no impact on the price of a rolex.

            Over the past 6 years:

            Silver is a substitute for gold yet the premium for gold has increased. You can buy more silver with gold now.

            Investing in the S&P500; is a substitute for investing in t-bills, yet the premium for treasury bills has increased. You can buy more S&P500; with t-bills now.

            All of these more premium safe havens have seen there premiums increase.

            At what point do you say I’m going to try to understand this. You could have profited from this.

          2. awgee

            “At what point do you say I’m going to try to understand this. You could have profited from this.”

            Thank you so much for your wisdom, insight, and brilliance. How have we survived. Could I please get your home number so that I may inquire on investing advice regarding gold and silver?

            POG July 05 – $420
            POG July 11 – 1600
            + 380%

            POS July 05 – $7.50
            POS July 11 – $40.00
            + 530%

            “Silver is a substitute for gold yet the premium for gold has increased. You can buy more silver with gold now.”

          3. DayTrader

            Your ongoing logical errors are one thing (continuous use of unrelated facts to support an argument and the “straw man” fallacy are two of the frequent ones), but today’s factual error is even worse.

            Gold does NOT buy more silver today, relative to 6 years ago, as you claim. The gold:silver ratio in 2005-2006 ranged from 65 to 45. Today’s ratio is 40 to 45. Thus, gold buys less silver today.


            The Rolex example is a textbook “straw man”. Yes, it’s true that you buying 10,000 Fossil watches does not impact the demand for Rolex watches.

            It’s not true that buyers choosing 10,000 Mission Viejo homes do not affect the demand for Irvine homes. Most persons only need one home. You’ve constructed an example to support your argument (buying cheaper doesn’t impact demand on higher end goods) but the example doesn’t apply to the realm of the argument (real estate).

            Real profit would have been selling OC Housing in 2007 and putting the money into gold (or silver). You would have paid $600/oz for gold that’s now worth $1,600/oz — while avoiding a 20-40% drop in the value of your property. You could re-buy today with the gain on the gold and live mortgage free. Hindsight is 20/20 and I tip my hat to the traders who were able to make that trade.

  5. Casual Observer

    This analysis clearly illustrates why just looking at numbers cannot really tell you a true story. Coto has relatively many fewer lots that are even close to what is “normal” in Irvine. It was only after Lennar took over the project that smaller lots and product dominated what was built in Coto in the late 1990’s. Before that, Coto was known for acreage, not to be found anywhere in Irvine. In fact, there was a time when the only access was from El Toro Rd, through O’Neill park, across the creek bed. In the winter, with lots of rain, residents were stranded and food had to be delivered by helicopter. “A more rural feel”….please. The whole community backs to Cleveland National Forest! It’s more like “Redneck Acres”….remember the OC Houswives episode where Jeanna’s sons are shooting varmits? That wasn’t made up! New Money Heaven. Few Asians. Apples/Oranges. Now, if you separated the data by lot size, and only compared those along with the relative sq.ft of the house….you could draw some conclusions. Wm. Lyon has 20+ acres….where else in OC is there a property like that?????

    1. Jaysen Gillespie

      I think a fairer way to recast the above topic sentence would be that the numbers for both Irvine and Coto do tell a true story, but that numbers alone are not sufficient to gain a complete understanding of each market. A good analyst will use a hedonic price model as one many tools in his toolbox.

      However, the key comparative insights presented are true regardless of the fact that Coto homes are larger and have larger lots.

      The fact that Coto values are down 34% from peak and Irvine values are down 15-20% from peak is derived independently from each dataset. The fact that Coto buyers place more weight on square footage vs. raw land value is also derived mathematically from the hedonic regression results. It is certainly true that the physical layout of each city affects these results — but such differences in physicality don’t invalidate the approach of using a hedonic method to reveal buyer preferences.

      1. Anonymous

        If you compare Coto like houses in Irvine only (larger SFR with 3 car garage) does the percentage drop still hold? I ask because it takes a large income to support a large mortage like that. And large incomes took a big swing up during the boom.and then down during the bust. Boom had stock market up, big bonuses, and big profits for small business owners. Bust did the opposite. So in the boom there were a lot more people who could maintain a large mortgage than there are now. Hence the prices of the expensive places should swing more. For example, at the extreme end, I see many listings in Shady Canyon languishing because, really, who can afford to carry the mortgage in a 3 million dollar house these days plus mello roos, property tax, maintenance, etc? Now very many people.

        1. Anonymous

          It would also be interesting to look solely at high high end properties which are normally excluded from your model.
          Especially since the high end case s billed doesn’t really cover these. Even if there was insufficient data to cover it properly and we had to rely on anecdotal evidence. Did amen million dollar mansion rise and fall more then. Five million, or two million, or one million, or 750,000 or 500,000 or 250,000 place? Would be interesting indeed ti see more curves than we can see from the case shipped low, mid, and high tier. Especially as the high tier is just the starting point for some areas in OC.

          1. Anonymous

            Correcting typos

            It would also be interesting to look solely at high high end properties which are normally excluded from your model.
            Especially since the high end case shiller graph doesn’t really cover these. Even if there was insufficient data to cover it with your analysis tools properly and we had to rely on anecdotal evidence from Irvine Renter. Did a ten million dollar mansion rise and fall more than a five million, or two million, or one million, or 750,000 or 500,000 or 250,000 place? Would be interesting indeed ti see more curves than we can see from the case shipped low, mid, and high tier. Especially as the high tier is just the starting point for some of the pricier areas in OC.

  6. Perspective

    “…With their current $2,395,000 asking price and their underwater property at 2 Altimira, this couple is broke. If they liquidated all their real estate today, they would be left with nothing…”

    I don’t think this is fair at all. I love making fun of these pretend-rich Housewives like everyone else, but Vicki may not be completely pretending.

    From the facts above, we only know a few items on her balance sheet, without the benefit of seeing the entire balance sheet. We also don’t see the income statement. Her financials could be really strong. The fact that they’re getting HELOCs to purchase assets suggests there isn’t much extra money available, but doesn’t confirm it. A small insurance business like hers could make a healthy profit.

    1. DarthFerret

      June existing home sales drop, cancellations up
      (Reuters) – Sales of previously owned homes unexpectedly fell in June to touch a seven-month low as cancellations of pending contracts surged, indicating continued weakness in the housing sector.
      The National Association of Realtors said on Wednesday sales fell 0.8 percent last month from May to an annual rate of 4.77 million units, the lowest since November. May’s sales were unrevised at a 4.81 million-unit rate.
      The drop in sales was a surprising given that pending home sales contracts rose in May, but the NAR noted the cancellation rate rose to 16 percent from 4 percent in May.
      This was the highest since the NAR started tracking cancellations last year and was well above the usual rate of 9 percent to 10 percent, the NAR said.


      There’s that “unexpectedly” bad news again. All down news is always unexpected with the NAr. Good thing we’ve got the IHB to point out the unexpected before it bites us in the rear! 🙂


      Mortgage applications see biggest increase in 4 months
      (Reuters) – Applications for home mortgages surged last week, racking up the biggest increase in four months on a flood of refinancing demand as interest rates remained low, an industry group said on Wednesday.
      The MBA’s seasonally adjusted index of refinancing applications soared 23.1 percent, but the gauge of loan requests for home purchases dipped 0.1 percent.
      The refinance share of mortgage activity rose to 70.1 percent of total applications from 65.6 percent the week before.


      Well, with mortgage apps down, the further decline in sales in the coming months SHOULDN’T be unexpected, but somehow I think that it might surprise the NAr anyways.


      1. DarthFerret

        Hmm, didn’t intend that as a reply to Perspective…

        I thought I was making a new post.


    2. IrvineRenter


      You are correct. I have no idea what other assets they may have. I have changed to post to be more precise.

  7. Planet Reality

    Exactly its outlandish fantasy extrapalation.

    He has no clue, it’s beyond speculation, it’s a wild guess like most conclusions here.

      1. Planet Reality

        When I come here, I can tell you it’s not to learn from your astute business decisions. Updates are sadly missing.

  8. MoneyNing

    It would seem to me that the substitution effect is only prevalent for people on the fringe in terms of being able to afford the place they want in Irvine right?

    I could see people moving to Coto if they really don’t mind living there, but why would anyone actually buy in Coto (instead of Irvine, say) just because of a 35% discount if they could afford the house in where they actually want to live?

    I know there’s SOME effect when the price differences are big enough, but it would seem that the effect is small enough that it won’t cause significant supply and demand swings.

    I mean, even with a smart phone, which I care much less about than where I live, it’s quite difficult for me to buy a cheaper phone that I deem inferior because I can afford the more expensive version. Now, if I see no difference, of course the cheaper version is clearly the better choice, but a discount has only a small effect on our decisions when affordability isn’t jeopardized. Otherwise, we would all be living in Coto already, or moved to Alabama or something since it’s already been 5 years of continually seeing a bigger and bigger Irvine premium.

    1. Perspective

      See posts above – the “cultures” are different in Irvine and Coto and may attract different types of families respectively.

      1. MoneyNing

        True to that too. I would bet the majority of families who bought in Irvine in the last 3 years hasn’t even looked at a Coto home with an agent.

  9. Casual Observer

    Just curious….but how many of the sales in each of the communities, Coto and Irvine, were “distressed”, i.e. foreclosures, short sales? There is another way to evaluate the relative differences between communities. Throughout the years of active building in all of the planned communities of South County (and beyond) the same builders participated in each of them, often using the exact same floorplans and comparably sized lots….a bit like books off a shelf or a Broadway play…even with the same project name…how many projects named “Promenade” are there out there? It’s a bit more work than a data dump, but probably reflects differences in perceived value between communities more accurately.

  10. Casual Observer

    So, when is a lake a lake, when is it a flake, and when is it something else? The lake in MV is 125 acres, 4mi in circumfrance, is a licensed fish hatchery and is stocked with trout, bass and fishing is encouraged. It is over 90 feet deep which creates a circulation system that keeps the water from stagnating. It is also considered a resevoir and is part of the natural runoff drainage system. Swimming is allowed and several Olympic events have been staged there. All homes built after 1975 in MV have manditory membership, those built before 1975 can join, once they do that membership runs with the deed. The total number of potential memberships exceeds 30,000. Contrast that with Woodbridge…2 lakes, each approx 10 acres, available only to Woodbridge residents. And Lake Forest….2 lakes approximately 3-4 acres, not swimable, available only to a small number of old tracts. All of these communities have been built-out for a number of years. MV also has several recreation centers that include Olympic swim center headquarters for Nadadores Swim Team, and 3 other centers with tennis courts, etc. all now owned and operated by the City. So how are you going to factor that?

    1. irvine_home_owner

      You are correct… MV Lake is more a lake than a flake. I believe Woodbridge Flake is fish stocked too but I wouldn’t recommend swimming in it… that’s why they have the lagoon areas (does MV Lake have something like that?).

      I think Irvine might trump MV when it comes to recreation centers, tennis courts, parks, basketball courts and pools (and yes… they also have an Aquatic center and are building another in Woodbridge).

      But I think you’ve pointed out why a comparison would be good.

      I’m sure if MV had more new construction, a 99 Ranch, an 85ºC Cafe and Persian markets they could tap into that FCB money… but it’s tough to match the proximity to work centers… although not sure how many FCBs hold down 9-5 jobs.

      Too bad we can’t “hedonize” ethnicity… although maybe you can link it to the census results.

  11. Casual Observer

    Define “TIC” built….TIC built only apartments and commercial from 1987 to the resurection of Irvine Pacific in the last year. They acted only as developer and sold finished lots to merchant builders with communities amenities.

    1. IrvineRenter

      Every home built on the Ranch has gone through a design process specifically approved by TIC. Nothing happens in TIC land by accident or by any choice other than a decision made by TIC.

  12. Cachet

    Maybe it’s not really culture. I think Irvine buyers place a bigger premium on short commutes. The proximity to jobs makes Irvine a hard place to substitute.

  13. Casual Observer

    In my personal experience, (I have two grown children who began school in MV) was that on the elementary level there were tremendous differences between schools in neighborhoods of similar make up of home size, income, etc. The critical difference was the principal and his/her ability to hire, train, and administrate a good team. That effect is not as pronounced in middle school, but appears again in high school. In Capo district, the policy of the district is to “tumble” the principals….so any advantage of one school over another is diluted and diminished.

  14. Casual Observer

    Au contraire….there have been some terrible products built on TIC land. Accomodations to old pals in the BIA. Best example is the project by Pardee in Turtle Ridge. Awful!!!! Took forever to sell, couldn’t possibly compete with anything else built there at the time. Yes, it was a decision by TIC, against all advice. Stuff happens.

    1. irvine_home_owner

      I think Laguna Altura might be one of those oopsies.

      The redesign was horrible (less parks, less walkability) and the prices are ridiculous.

  15. Casual Observer

    Hold the phone! I’m not trying to promote MV over Irvine. I’m just saying that there are more subtle differences to be evaluated. Yes, folks can swim in Lake MV. The area is restricted because of liability issues/lifeguard safety. The Olympic events there have been long distance swimming events, however. And any comparison needs to be drilled down to cost and accessibility. MV has a population of 95,000 folks, give or take. The cost of lake membership is less than $50/month. The rest of the recreational facilities are also very low cost and available to everyone in MV. MV cannot have much, if any, new construction as it is built out. The demographics don’t demand a 99 Ranch market or a Persian market, not that there are not some of those ethnicities represented, but not in sufficient numbers to demand such services. But, you can purchase a SFD of 1600 sq.ft. on a 6,000 sq.ft lot for in the neighborhood of $500,000. It might not have pergraniteel, but then, again, it might.

  16. wheresthebeef

    Well, well, well, it looks like rumors of cutting back the mortgage interest deduction might be part of the debt deal. Hmmm, wonder how that will affect overpriced OC housing? My guess, it won’t be good. I can see the NAR, CAR and other clown academies throwing a fit right about now.

  17. Perspective

    Absolutely. My office is 4 miles from home and my wife’s is 5 miles away. Worth every cent!

  18. PnL

    Sure and paper is also a substitute for gold, but who would ever do that? Oh wait…everybody.

  19. Casual Observer

    Another difference that sets MV apart is it is also home to 2 substantial senior’s communities. Casta del Sol (5,000 population) and Palmila (1500 population). This is market segment totally overlooked in Irvine, but it does allow for families to stay in place while ageing. Grandpa and Grandma live separately, but very close by. So the ethnic food stores are more likely to be deli’s. Nearly all the homes are single story, most with little yard work, but some, gated/secure, with outstanding activities and facilities.

    1. irvine_home_owner

      Woodbridge has a sizable senior community with a variety of nearby housing, medical and even religious support. It’s no coincidence Woodbridge has a Senior Center.

      Other parts of Irvine can also be argued as senior-centric (the University area Park has the Rancho Senior Center).

      Does MV have a giant orange balloon ride? 😉

  20. Casual Observer

    MV also has a City owned Senior Center. It, like the senior center in Woodbridge was done after incorporation, neither were a part of the original master plans. The two substantial communities in MV were planned by MV Company, one was built by them, the other by builder JM Peters. TIC would not consider building senior housing.

    No, MV does not have a giant orange balloon ride. I guess the question is….are you trying to give it away? And why would MV want or need it?

  21. Dreamhome

    Does anyone have a job in Coto? My husband and I (childless and caucasian) live here because we work here. It’s a great place to raise a family, which will keep our home value up.

      1. cachet

        I agree that job proximity and schools were the draw. My husband and I can both bike to work if we wish or drive 5-10 minutes to our respective jobs. There is nothing that improves quality of life more than extra time. The “non-commute” lifestyle we have allows us to get extra sleep in the morning and facilitates our desire for activities or sports in the evening. Also, my two primary school age kids go to great schools.

  22. Feral

    I’ve never understood the appeal of buying expensive, high maintainance SFR’s, then using them as rentals. For the same investment one can buy multi units in a decent working class area that can be far more profitable with less risk, lower maintenance/upkeep.

    1. Casual Observer

      @Feral, you are exactly right! Financing for investment properties is based on the income they produce. Financing on residential properties is based on the borrower’s income and it’s ability to make the loan payments. With apologies to IHB, this business of “rental parity” is a part of the problem. In order to attract investors, regular, steady price appreciation needs to happen and leads to short-term ownership. Single family homes are meant to be relatively long-term ownership.

  23. Pascal

    Why does the analysis say
    – House Purchase Price … $463,500

    when the article says:

    – This property was purchased on 12/10/2001 for $1,100,000


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