San Diego Housing Bubble News and Analysis

Yes to all of the above.....

Iam sure there are some people doing that....I KNOW everybody is at least "thinking about it"....especially those underwater

I've heard people joke about setting fires to get out of work.. if it has been joked about then there's someone that will do it especially to get out from under a 500k debt obligation...

Fire-riot mentality?

Emotions aside....

Short term, my thinking this may help continue to push prices down...

Long term, I'm wondering how much San Diegans' home insurance will rise.

I don't understand this line of reasoning. If someone's house burns down, the insurance company pays them for the replacement cost of the home, not the home AND land. This won't give them anywhere near enough to pay off their mortgages. They are left with an expensive plot of raw land that nobody would buy, just enough money to rebuild the home, their original mortgage debt, and no place to live (although insurance should pay for a rental while they rebuild). How does this bail them out?

rich

LOL, I totally agree. I guess my thought was most people don't think like that honestly. They don’t know how it works if their house burns down. I know some floppers that are in trouble and they really think that this could be a "good thing". I've already talked to a few on the phone.

Maybe my title should be different? (Kind of like your title about real estate is not a hedge against inflation).....j/k

Exactly, Rich.

It seems as if you have spurred a bunch of ignorant posters with no sense of how things work in the real world.

FYI - it works the same with your car if it is stolen or destroyed. I love the stories of people who are upside down in a lease and joke that they are going to leave it at the border with the keys in it so it will get stolen and taken to Mexico. Insurance may pay the replacement cost of the car but if you owe more than the value of the car, you are on the hook for the difference.

I don't understand this line of reasoning.

Rich, people don't understand their insurance. They don't understand that they may not have replacement value. They don't understand that they will only be paid for the house and not the land.

We see it everytime there is a disaster, people then discover when the insurance company starts to fight that they have exclusions and terms in their policies. We see it with people with cars, people are stunned when they smash their new car and find out after insurance 'totals' it that they still owe $5000.

People equate insurance with the insurance companies will replace it for me or give me the money I 'paid' for it, which is rarely the case.

Auto Lease - how many people decline the "gap" insurance...lots

If your house burns down, it's much easier to claim hardship and walk away. Plus you get plenty of sympathy.

On the reconstruction side, does the insurance company pay the homeowner, or do they pay the contractors directly for the rebuilding work? Can someone who has rebuilt before clarify this situation.

If the insurance company gives someone $300,000 and says here, go rebuid, then it's too easy to walk away with the money and let the bank foreclose on the land.

Rich - Thanks for providing a dose of sanity. Any homeowner with insurance knows (or should know) whether their insured value is cash value or replacement cost. They also should know the dollar value of the strcuture(s) covered and the cost to replace them. They also know that in San Diego, often the cost of a property is primarily the land, with the structure often being less than 50% of the property value.

There seem to be a rash of ignorant posters who do not understand this. An FB who paid 700K or so might get less than 300K to replace their property. In the best case scenario, a homeowner has a replacement cost policy AND paid for enough coverage such that the replacement cost is no more than 150% of the value of their policy coverage. (Replacement value insurance typically covers up to 150% of the policy coverage).
It is highly unlikely that in the current market a charred empty lot would command the kind of prices paid for the improved lot with a structure on it.

Even in good economic times for housing, many in Scripps Ranch had to cough up significant funds to make themselves whole again after 2003.

A house burning down is not going to help an FB in San Diego.

However, it remains to be seen what the longer term effects of the follwing factors might be: lost housing stock, increased insurance costs, added construction jobs, and psychological effects on buyers.

Finally, my deepest sympathies go to those who have been displaced, lost their homes, apartments, and memories.

Hi PW - The thing is, you don't really have to claim hardship to walk away. You can just walk away. (You'll get less sympathy, I will admit).

However, that's a good point about taking the money and running. That's a pretty huge loophole though, and maybe they have things in place to prevent it. Hopefully someone with some experience or knowledge in this area can chime in.

rich

The insurance company doesn't care if you rebuild, the lender will.

Your loan docs will spell out who gets the proceeds from the insurance settlement.

If your house is paid off, you get a check for the amount to rebuild. You can do anything you want with it. The insurance company can't make you rebuild.

Some of you are missing the point of the post; it wasn't to dissect if the destroyed home would help or hurt the FB/flopper. It was supposed to be about the mentality of the FB/flopper in a desperate situation that might have a “way out” (in their mind) and also how it will affect the Diego economy/housing prices.

(Alot of the people that are in the mess of being a FB/flopper are the same people who have no clue how their insurance works.)

Good point SD, the leinholder would surely be entitled to the insurance payout, it seems to me.

rich

So if the appraised value is way higher than the actual value, could the lienholder take the money and just leave the property an empty burned out lot.

The fire will reduce supply and increase demand for houses. (For rental apartments, too.) Ergo, prices go up. Not so much (or not at all) in peripheral areas - it'll be hard to sell a house that sits on the edge of thousands of acres of dry grass waiting for the next wildfire. More so - in safe areas like LJ, PB, Clairemont.

Emotions aside....

In cases of extreme loss, the market gets depressed as the people severly hurt like to stay away from the place of loss. Look at south Florida after major hurricanes and NOLA after Katrina. Mass psychology has its tipping point too.

Do insurers even pay out for fires like these which may be considered "acts of nature" or "acts of terrorism"? I wonder if there might be a clause in most homeowners' insurance that distinguishes between a fire caused by say faulty electrical wiring in the home as opposed to a massive fire like this?

This would seem to be a somewhat parallel situation to what happened after New Orleans. One side was arguing that the damage was caused by flooding and the other side was arguing that the damage was caused by the hurricane because the typical policy only covered one of those acts.

In any event, I sure wouldn't want to have to rely on an insurance payout in a situation like this. I'm sure the insurers will fight hard and it's not like they have infinite capital anyway. We may soon be reading about FIs (effed insurers).

It is surely within the realm of possibility that someone could intentionally torch their own home. Let's be honest and admit that even if it did happen, we are likely talking about a very limited number of instances, like one or two in the entire county if any at all.

Big picture impact on the housing market and economy, I have to think that the net will be negative considering the costs of fighting the fire, the losses that individuals will face even if they get an insurance payment, and the impact it will have on insurance premiums and the fear people will have about buying in fire prone areas. Of course, there will be more work for builders and money from insurance payments will lift up the housing related industries, so who knows.

Regarding fires and the effect on housing costs/supply/demand:

I think the fires in all of southern California will end up driving some people out of the area. Let's assume the majority of people in danger aren't facing foreclosure; they are seeing values decline and some may still be able to sell at a higher price than they paid. Those facing resetting ARM's are probably more likely, but even those who aren't may have job affordability problems with soaring costs living, and just need the last straw to say adios.

It would take a lot more destroyed homes for this to reduce the 11 months supply on hand to drive prices up.

Not to mention, in all the areas where houses were close to fires do you thinkthe average emotion-based financial descision-maker would go buy anytime soon?

Regarding the insurance question. My mother had serious damage to her house due to a hurricaine. The initial insurance payment went to the lender to pay off the note. She then applied for a construction loan to rebuild the house, and then once the U&O certificate was issued, she refinanced into a traditional, brand new mortgage. She ended up even to a little bit ahead when all was said & done. This was many moons ago but I assume the process is the same. The lender doesn't care if you leave a burned out shell. But generally the city/township does. They can't make you rebuild, but they can make you take down the damaged building and landscape the lot. Not sure what effect/power the HOA has in such a situation though. My thoughts and prayers to all affected.

"replacement cost is no more than 150% of the value of their policy coverage"

well 150% is still a good chunk of money. A new $1 million house in 4S ranch might have assessed value of buildings in $500k range.

The bigger question is, does 150% really cover what it costs to rebuild, when the house was originally built by a megabuilder like Lennar as part of subdivision containing 200 identical houses (so that Lennar could cut costs), and now it has to be rebuilt by custom contractors?

Quick follow up-
I just read in the paper the # of lost homes in SD is 655.

To put that in perspective I did a quick search and found that in October of '06 3,282 homes were sold in the county, down 21% from 4,155 12mos prior.

The current number of homes lost is ~20% of last October's monthly sales volume.

Here's an even better question. When these houses are re-built, does the 'closing' go down as a sale in the books? If so, over 800 homes just went pending with closing dates in the next 6 months - 2 years.

Stop with the "Terrorism" talk. The CIA's definition of Terrorism is:

"A terrorist is an individual or group who uses acts of violence and intimidation to achieve a desired social, political, or religious outcome. In American society, a terrorist is also defined as any group or individual that uses violence to oppose US domestic or foreign policy. What this definition of terrorism fails to recognize is the revolutionary or guerilla force that is combating an unresponsive or oppressive government. To understand terrorist motivations, one should first determine the political, social, or religious goals of the terrorist group. There is a critical difference between a revolutionary group that is trying to overthrow a dictator, and a terrorist group that is using intimidation and force to enforce its view of the world on an unwilling society. It is only through understanding what the terrorist is trying to accomplish and why, that their actions and motivations can be understood."

Arson is vandalism, not terrorism.

Don't compare these numbers with existing home sales.

If people who lost their homes are in position to buy new homes to replace the ones they lost (and it seems from this thread that they aren't), this has the effect of absorbing ~1 month of production of new homes in the county.

If not, the fire simply creates temporary additional demand for 700 rental apartments/houses.

I don't follow you juice. Unless these homes were on the MLS before these fires, they would have nothing to do with pendings or closings. The title to these properties doesn't change. The owner of a burned home could choose to sell the lot , but then it's no longer a SFR.

Question for all:

I live smack dab in the middle of RB. While the number of homes burned isn't very significant in the county overall, it is very significant where I am and where I would like to buy someday.

My assumption: Many won't wait to rebuild-they will purchase another house now, rebuild, and then sell the rebuilt house. Or, they will pay off the mortgage and sell the lot. I think an empty lot in the middle of RB where you can custom build your house is more appealing than some think.

So, my assumption is that this provides support for prices in the near term, with a possibly depressing impact as the rebuilt houses come back online. My rental contract is up in March, and I am likely screwed on that front as well since competition just increased 5-fold.

Fire Away at the above.

Stan

interesting thread, I was fortunate enough(!) to catch some of a local channel last night. I believe the individual talking was a fire department official, the gist of his statement was (paraphrasing) "we will investigate every structure that burns down", and listed the various fire/arson terms such as point of origin, how the fire spread, acclerants etc. His comments seemed Very pointed.

"Trend in prices?"

Based on what we saw after the Cedar fire, I think the answer to this question will be mixed. Last time we were in the midst of a housing boom and taking some of the existing inventory offline spurred additional local demand. Some additional construction jobs came up that wouldn't have come up. Since there were very few commercial structures there weren't many jobs lost.

I've been chewing on this question for the last couple days and I think this time it will be different. There will be some people who will choose to move into a rental and stay there, those who are underinsured or on edge anyway may move into the rental market for lack of any other options. I think that the rebuild number will be lower this time than last time.

But I still think a lot of people will rebuild and carry on, and a few people might have the means to buy another existing home instead of rebuilding.

The news reports are talking about the loss of some commercial structures, which we didn't have much of last time. To me, that reads to be the equivalent of saying that several businesses will close down for good and those jobs will be lost. However, the rebuilds will also add some more opportunities for contractors and laborers that they wouldn't have otherwise had. Retailers will benefit, too, as people replace what they lost.

Will a significant number of people decide that twice is more than enough for them and leave town? I dunno. I do know that this disaster will eventually end up costing us all. If there are losses then somebody is paying, and that somebody will always pass it back to their customers the first opportunity they get.