The homebuilders are obviously stuck in a rut. Sales of new homes in and around Irvine have ground to virtual halt, and in response the builders have attempted one of the following remedies:

• Suck it up and finish buildout. Communities that are more than 80% built out may find it easier to finish contruction and offer the last units for sale. Observed behavior has been to lower prices modestly and/or wait for someone to buy at a long-standing price.
• Postpone. This can take the form of postponing the start of a community (Orchard Hills), or postponing the sales even though models are built (Woodbury East). It is theoretically possible for a partially built & sold community to suspend sales with the intent of re-opending, but I am not aware of any examples.
• Bail out. This can take the form of abandoning plans to build, or more interestingly, actively euthanising a partially built community without any intention to return. Portola Springs’ Decada and Columbus Square’s Astoria are good examples; each shut down after one to two years of sales and not even reaching half of originally planned buildout.

Despite the fact that the market has changed so drastically from that of two years ago, I don’t sense an appropriate level of urgency on the part of homebuilders or the Irvine Company in adapting to the new downward-moving market. I’d like to offer my constructive analysis of what will and won’t work to get customers buying again. Some of these are based on what has been attempted or might be. Others are just ideas.

What Definitely Will Not Work:

1. Sell even harder the great lifestyle that awaits. We’ve all seen a nauseating number of markeing pitches showing thirtysomethings drinking wine in a back yard or at a dining room table, sunlight trail biking/exercise pictures, and a strange emphasis on shopping that is two minutes away (as opposed to having to drive a whole six minutes to get to the on of the other dozen retail areas in Irvine).
2. Try to make a big deal out of underwhelming discounts that are (at least) months behind reality. It is not just naive private sellers that demonstrate proclivity in chasing down the market. Despite some relatively aggresive cuts early in the slowdown, new homebuilders also participate in the “day late and dollar short” school of thought by offering $25k or $50k off of residences that were $75k-$100k overpriced when first floated and are now $125k-$150k or more overpriced because time has elasped, the market has worsened, and the prices haven’t changed.
3. Offer ‘until close of escrow’ price protection. With virtually no sales taking place and inventory likely ready to go, anyone who does purchase probably will have a 30ish day escrow. In this slow of a market, no reductions are likely to take place in that timeframe, and if they did, the buyer can always play the game of I-won’t-close chicken to secure discounts.
4. Lightly subsidized and/or teaser interest rates. This seems to be a favorite of Laing, and I don’t understand it on two levels. Consumers have learned they can refinance if rates fall, and they know they pay taxes forever on the sales price of the house. Also, weren’t teaser rates the huge contributing factor to the current pickle the market finds itself in? With increased consumer wariness of any “you can afford it for the first XX years” arrangement, it seems unlikely these woudl prove popular.

It has been a long time since I have posted, but I was inspired when someone posted some DataQuick zip code stats in the forums. I realized I have the April 2006 square foot pricing and sales data. So, I plugged the data into excel and here is what has happened since April of 2006. I do not know exactly when the peak was, but we all know some month in 2006 was the peak, and April is close. I have the June and July 2006 data to compare to as well. One thing… I do not know why DQ has never had the square foot pricing for 92602. My only reason I can think of is the difficulty getting the data from the new home sales. Oh, and the square foot pricing is for SFRs only, sorry no condos.

One thing I found interesting was SFRs are only down -7.9% in sales, but condos were down -42.2%. So while sales are not down that much for SFRs, the square foot price is really down and headed even further down.

Now, here are the NODs for Irvine via Foreclosure Radar…

Here are the Notice of Trustee Sales…

And, the REOs…

With 137 sales last month, and the amount of purdy red, green, and blue pins in Irvine, it looks to me like we have a must sell issue here. Go ahead and call me a nutter, I am used to it, but I have been right more than I have been wrong, and actually… I have been overly optimistic on the foreclosures. BTW, once I have the June foreclosure data, I will do a post on how bad it has become, with some great chartpr0n. Judging by how bad the numbers are so far for June, I may have to adjust my charts to accommodate for the increase in foreclosures; my chart didn’t go beyond the high of 96.

Also, OCR reporter and fellow blogger Matt Padilla has a book coming out Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis.

Matt was kind enough to send IHB an advance copy, and I am only a few chapters away from finishing it. I have to say it is a great read, and anyone who wants to know about the birth of subprime, the players involved from Lewis Ranieri to Bill Dallas to Brad Morrice to Ralph Cioffi to Stan O’Neal to Roland Arnall, how it went up and down, who screwed who, the death of New Century, who snorted the Kool-Aid, how Merrill got high off their own supply, great pot shots on the Tan Man and his tan, and how the Tan Man drops the f-bomb faster than he can sell his stock, then I suggest you order a copy now. This is a fantastic book, and I am not just saying that to promote Matt Padilla, as he knows I would dissect the book for what it is. I will do a full review once I finish the book, and once it is released. I don’t want to upset the publisher when they could be publishing the book that would complement this book, The Great Housing Bubble.

Burning Down the House — The Talking Heads

Today’s featured property is a very rare find in Irvine — a vacant lot on which you can do what you want. You wouldn’t have total freedom, this is still Irvine, and you would have to deal with the Turtle Rock HOA, but you would not have to deal with the Irvine Company or one of its approved builders. You could create a custom home exactly the way you want it, without having to buy an existing house and demolish it. Our challenge today is to figure out what this lot is worth.

Asking Price: $549,900

Income Requirement: Depends on Structure

Downpayment Needed: $549,900

Address: 19441 Sierra Chula Road, Irvine, CA 92603

First, a refresher on how to value a lot from Land Value 101:

Individual Lots

The market value of a individual lot is equal to the revenue it
could generate minus the cost of creating that revenue. Sounds simple
enough, but what is the potential revenue and what are the costs?

Sales revenue will largely be determined by what can be built on the
lot and how much that house would sell for in the market. The
dimensions of the lot, building codes, and the local zoning ordinances
will all create constraints on what can be built. Most often there will
be some variety in choices available to construct on a given lot. Each
of these options will have a potential revenue and an estimated cost.
The combination which yields the greatest profit is the product that
should be built.

Imagine a 6,000 Square Foot lot that is 60′ wide by 100′ deep. A
typical lot such as this would have a front setback of 20′, side
setbacks of 5′, and a rear setback of 30′ leaving a 50′ wide by 50′
deep envelope for the house foundation. This site could comfortably
accommodate a 2,000 SF house (some area is lost by not making the house
a perfect rectangle.) For the sake of making the calculations easy,
let’s say this house could sell for $1,000,000 (peak prices).

An individual speculator would be paying retail prices for house
construction. This would be upwards of $150 SF. The cost of
construction would be around $300,000 (2000 * 150 = $300,000.) There
would be a 6% sales commission (1,000,000 * 0.06 = $60,000), plus
financing costs, overhead costs, and other miscellaneous costs which
will add up to about 10% of the project cost (1,000,000 * 0.1 =
$100,000.)

Therefore,
your revenue minus expenses would be $1,000,000 – $60,000 – $100,000 –
$300,000 = $540,000. This is how much money would be available to pay
for a lot at the breakeven point. Since a speculator would want to make
a profit, the lot is discounted from $540,000 until an amount is
reached to compensate for the risk and the headaches that go along with
the project.

Perhaps the speculator would want to make $120,000 (approximately
12% of sales price) in order to do this work? If so, the speculator
would be able to offer $420,000 ($540,000 – $120,000 = $420,000) for
the lot. If they are the highest bidder, they get the lot, and the
project is theirs. (BTW, this same basic calculation also works for
tear-down projects — often called “scrapers.”)

.

Interesting that the example above written almost a year ago is so close to what a buyer would be dealing with on today’s featured property.

To value this lot, the first task is to estimate the final value of the property after the structure is built. IMO, Turtle Rock will hit bottom near $250/SF, maybe $275/SF for a typical 2,000 SF home like the one that could be fit on this lot. New construction might command a premium of $25/SF, but not much more. That would put the final value near $500,000. Of that, $300,000 is going to go for construction of the house. Since this would be an owner-occupant, the remainder could go toward land making this lot worth about $200,000. Of course, you might want to put a larger house on this lot, and that might justify a higher lot price, but the old structure was only 1,796 SF, so a smaller structure might be in order. I suspect the surrounding neighborhood probably averages about 2,000 SF.

The interesting thing about this calculation is that you see just how sensitive the price of the lot is to the price of the house that sits on it. The $549,900 asking price might be warranted in today’s market as houses are still going for $900,000 in the area. As nearby prices fall, the value of this lot will fall right along with them. The difference being, there isn’t much of a floor beneath lot prices. If house prices in Turtle Rock fall $400,000 in this area, so with the value of this lot. If this lot doesn’t sell soon, it may only be worth $150,000 a couple of years from now. If you don’t believe the price of lots can drop that much, I can tell you that lots in Riverside County already have. Finished lots are going for less than replacement cost there. When you are stuck with an asset nobody wants, the price is only what some buyer is willing to pay. With speculative real estate, that isn’t very much right now.

If you really want to drink the kool aid, buy this lot. You will get every dollar of the change in prices in the surrounding neighborhood — up or down, and you wouldn’t have to deal with renters, maintenance, or other issues associated with the “box.” Of course, few lenders will loan money on something like this, so you would probably have to do it with your own cash. At the bottom when they are going for $150,000, finished lot deals like this one will be the real “home runs” of the next speculative real estate cycle.

.

Watch out
You might get what youre after
Cool babies
Strange but not a stranger
Im an ordinary guy
Burning down the house

No visible means of support and you have not seen nuthin yet
Everythings stuck together
I dont know what you expect starring into the tv set
Fighting fire with fire

Burning Down the House — The Talking Head

Luxurious — Gwen Stefani

Some people still have not figured out there is an epic price crash taking place. When you look at the asking prices in Irvine, people are still of the opinion their houses are worth at or above peak prices. The fact is that prices have dropped more than 20% and they continue their downward descent. Even when confronted with neighboring properties selling for less, people lapse into denial and believe “my house is worth more.” I guess $15,000 in pergraniteel can add $150,000 in luxury value to a property. Who knew?

Asking Price: $800,000

Income Requirement: $200,000

Downpayment Needed: $160,000

Monthly Equity Burn: $6,666

Purchase Price: $556,000

Purchase Date: 7/24/2003

Address: 206 Tuberose, Irvine, CA 92603

What is that picture supposed to show me? The flash of the photographer? The adjacent house through the window? Are they that proud of the cabinets and window treatments? Perhaps its the plants?

Catheral elegant living room? Do you go there for a catheter? Maybe it will cure your Tuberose?

gold package
surround sound? Now I see where the value comes from. They have gold buried in the speaker system.

Full Back Flash?

Title Case, or Random capital Letters?

Notice the pergraniteel is mentioned several times.

Does that description scream “pretentious bull$hit?”

Here is the bullet-point recap:

• The property was purchased in 2003, and the owner put 20% down.
• On 10/20/2004 they refinanced with a 1% Option ARM for $650,000 taking out their downpayment money plus an additional $96,000.
• On 4/29/2005 they refinanced with another 1% Option ARM for $650,000 and took out a stand-alone second for $90,000.
• On 6/30/2006 they refinanced for $750,000 and opened a HELOC for $137,000.
• On 10/31/2006 they refinanced again for $749,000 and opened a HELOC for $142,200.
• On 2/26/2007 they refinanced one last time for $750,000 and opened a HELOC for $100,000.

It isn’t clear whether or not this last HELOC has been tapped. It is clear that with the $750,000 first mortgage that these people have taken out their initial equity plus an additional $196,000. If they have tapped the HELOC, then their total mortgage equity withdrawal is closer to $296,000. If this property sells for its WTF asking price, the first mortgage will be paid off which is why this asking price is what it is.

I had to laugh at the listing price history. This property was listed for $750,000 and then raised to $800,000 a few days later. I guess they didn’t want to give it away with all this frantic spring buying activity. This price is ridiculous at $533/SF in a neighborhood plummeting under the $400/SF mark. So what would this place successfully sell for in today’s market? The neighbor at 210 Tuberose recently sold for $715,000. Another neighbor at 224 Tuberose just went into escrow for $649,900. This is a major comp killer. It is an identical floorplan about 100′ away. For today’s seller to get their asking price, they must find a buyer stupid enough to pay $150,000 over recent comps, and do it with a large amount of cash. Lenders will only loan 80% of the recent $649,900 comp price, so the remainder will need to be cash. I hope their place is very luxurious.

.

Working so hard every night and day
And now we get the pay back
Trying so hard saving up the paper
Now we get to lay back

Working so hard every night and day
And now we get the pay back
Trying so hard saving up the paper
Now we get to lay back

Luxurious — Gwen Stefani

If you can’t make fun of this, you lack imagination…