BizWeek on the new Housing Bubble

[spdrun]

Out of those 1000 buyers, how many will seriously put in offers AND be qualified during the period that those same 21 listings are on the market? Not saying this is an ideal situation, but you have to keep in mind that not everyone buys at the same time.

Some may even go elsewhere for investments since the East Coast and parts of the South are in a similar pickle now as SD was two years ago. (And it’s a lot easier to get a decent cap rate on 1-3 families there than in SD.)

[SK in CV]

[quote=spdrun]
Some may even go elsewhere for investments since the East Coast and parts of the South are in a similar pickle now as SD was two years ago. (And it’s a lot easier to get a decent cap rate on 1-3 families there than in SD.)[/quote]

Historically, most buyers of singe family homes have not been investors. Particularly in CA, investing in SFD for cash flow has generated a horrible return as compared to multi-unit housing. Single familys, even condos, are much more labor intensive than multi-units. Try being a landlord for 12 houses scattered across the county or even the country, compared to a 12 unit apt building. I’ve done both, and the SFD are just a pain in the ass in comparison. And they’ve almost never had anywhere near decent price/rent ratios. For some hard working buyers, that changed for awhile when rents rose a bit and prices collapsed. But those days are probably close to over. If there isn’t appreciation, there’s not going to be much reason for investors to be in the SFD market.

[spdrun]

I’ve seen the opposite in the 75-200k per unit range — condos seem to have better yields, but come with risks of financial insolvency and/or HOA fee rises. This is one of the reasons that, while I have offers out in SD, I’m also looking in NJ and the outer boroughs of NYC.

You can get an 1-4 family in a decent area a lot cheaper than in SD. In the case of NYC, purchase prices are higher than NJ, but taxes make Californian property taxes look horrifically expensive. You can end up paying $100/mo for a $300k house or $300/mo for one worth a million or so. (This only applies to 1-3 unit buildings — 4+ units, even if they’re condos, have much higher tax rates(*).)

(*) – taxes are often vastly reduced for new-build condos for a period of 10-20 years. Even if not, my rate is about $1000/yr per $100k.

[SK in CV]

It’s possible now. You’re a hard working buyer. I don’t expect it last much longer. Out of curiosity I just looked at some of the condo complexes where I’ve owned units.

This one caught my eye.

http://www.sdlookup.com/MLS-120049239-7757_Margerum_Ave_148_San_Diego_CA_92120

It’s a 35 year old complex. The HOA should be in pretty good condition. I’m guessing it could rent for $1400/mo. Other than interest rates being much lower now, the numbers look a lot like they did when I bought a few units there in the early to mid 80’s, selling for about 100 times monthly rent. (the numbers are just about double then, I paid around $70K and they rented for $700 to $750.) No idea what kind of financing is available. I was buying then with 10% down. That seems unlikely now. Cash flow was maybe a little better than break even. (I ended up selling all of them around 1990, when my kids were little. Just too much of a pain to collect 25 checks a month, write 25 HOA checks, 35 mortgage checks, plus repairs and vacancies. After sales costs, probably netted a whopping $1500 profit per unit. Timing wasn’t perfect.)

But what I’m talking about is historical price/rent ratios. In 2005 this unit sold for $328K, and I doubt rent was much different than it is now. That’s probably the two extremes. Somewhere in between is probably more normal. And not a real good cash flow investment.

[bearishgurl]

[quote=SK in CV][quote=bearishgurl]
CA coastal counties were never “set up” in the first place to attract the country’s masses of low and moderate income residents. That’s what CA’s inland counties (and NV/AZ?) are for.[/quote]
I’m pretty sure that no modern city was ever set up to handle more than 2 million people except for Brasília. Cities evolve and adapt. Some better than others.

I understand your hate of CFD’s and that process. I can’t argue with you, you know a lot more about it than I do. (Though I think you believe that it is a primary cause of California housing problems, and that can’t possibly be true. If it was, Vegas, Phoenix, and much of Florida wouldn’t have had any problems.) There have been countless mistakes by city planners with respect to CFD’s, but I think blaming the process is misguided. In theory, they still make a lot of sense. It’s the practice that need improvement.[/quote]

I never stated that CFD’s were the cause of CA’s housing problems. I stated several times here that they were the direct cause of CA jurisdictions going bankrupt in recent years or otherwise not being able to pay their bills (with the exception of Mammoth Lakes). By their sheer numbers of housing units built within them, the existence of CFD’s magnified the “boom and bust” nature of CA’s RE market manyfold. When these new subdivisions were all originally purchased into around the same time (with “funny-money” mortgages), these thousands of owners all tended to go down at the same time, taking owners in their entire “sub-region” with them. The non-CFD owners in these “sub-regions” could have had little to do with the cause of the “bust” (didn’t borrow subprime/had little to no home equity withdrawn, etc) but their home values suffered for years, nonetheless.

This is what happened in ’07/’08 and beyond in Chula Vista and other areas of SD County where there had been massive CFD formation allowed to go in adjacent to long-established communities.

[quote=SK in CV]I’m a bit surprised by your elitist attitude. The growth of San Diego during the 2nd half of the last century was driven by median income homeowners. They filled Clairemont and created the commercial district in Kearny Mesa, and then Allied Gardens and later San Carlos, as well as the bedroom cities of Chula Vista, National City, La Mesa and Lemon Grove . That wasn’t an accident. It was by design, to attract moderate income homeowners.[/quote]

Actually NC is 3-6 miles from dtn SD (top to bottom) and western Chula Vista is 7-13 miles from dtn SD top to bottom. These aren’t “bedroom communities.” As you know, they are right on the bayfront. They are closer to dtn SD than any of the other communities you mentioned.

In those days (’40’s thru ’70’s), SD HAD to attract “moderate income homeowners.” The city had plenty of production and mechanical (blue collar) positions to fill in local companies which had ongoing contracts with the military.

Except for NASSCO, SW Marine and Kelco on the bayfront, those positions are now long gone.

[quote=SK in CV]You can argue that many of the newer developments in the last 30 years in Chula Vista, in the north county coastal cities, in north county inland in RB & Poway and PQ targeted some higher end buyers, but none of those areas were exclusively higher end (with the exception of CV). RB if you recall, was originally planned as a retirement community. That pretty quickly fizzled, but if I remember correctly it included the first PUD in the state.[/quote]

I don’t know a lot about the early residents of other areas but, actually, most of the new construction in Chula Vista did NOT attract “higher-income” buyers. It attracted low and moderate income buyers. During the era of NINA lending, it also attracted all manner of “phony” buyers, including straw buyers for agents/mortgage brokers and non-US citizen-buyers who somehow successfully availed themselves of NINA financing. When the owners within these CFD subdivisions “crashed” all at once, it created a VERY dysfunctional RE market …. for EVERY owner within a ten-mile radius.

[quote=SK in CV]You can whine about growth all you want. I grew up in San Diego. I remember when there was almost nothing but cows in Mission Valley. And where Fashion Vally Mall now stands, there was a brand new 8,000 seat baseball park. A lot has changed since then. But San Diego and other CA coastal cities aren’t attractive to people as a destination by accident. People WANT to live in SD. You can’t keep them out unless your goal is to drive major employers out. And that bus left a long time ago.[/quote]

New residents can and will come, SK. But we no longer have the social-service infrastructure and funds to “bail them out.” They have to buy or rent something they can afford for the long haul or stay where they are. SD County and its cities are not obligated to provide “new construction” or low-income housing on the beach or anywhere close to it for newcomers.

A lot of the “population influx” in SD’s South County in recent years did NOT pay their own way. Not only did they get NINA mortgages and cry how unfair they they were “treated” by their lenders (after “squatting” for months/years), they enrolled their kids in the “free breakfast/lunch” program at school, used low-cost (subsidized) HeadStart and YMCA childcare, got CA cell phone and home phone subsidies, and, after losing their homes to FC or SS, filed applications for TANF and EBT cards and used South County’s 2.5 assigned domestic judges for their divorce case :=0. The list goes on.

From what I’ve seen, the lower-tier “new construction tracts” (many PUDS with “zero lot lines”) attracted locals and newcomers who wouldn’t otherwise have purchased here, were it not for developer incentives and buy-downs and the ability to get in for “no money down” or, as in the past, with NINA mortgages.

Chula Vista would have been much better off if they hadn’t approved any new CFD’s since 1992 (Eastlake Greens) and just left well enough alone. They’re now struggling mightily with about 60% of the employees they had in 2005 and there is no relief in sight, due to having its population nearly triple since 1992.

Chula Vista’s PTB did it to themselves but ALL residents bear the brunt of their bad decisions.

[CA renter]

[quote=SD Realtor]SK as you know my feelings are much different with regards to the policies that were implemented. The intended goals were met, however I feel they were met at a tremendous cost to the public. I believe that the following should have happened.

Let the foreclosure process run unfettered. No moratoriums, no slowdowns, no HARP, no HAMP, no loan modifications. Nothing. Granted that the delays in servicing were huge and caused by lack of foresight by the servicing entities to deal with the wave of short sales and foreclosures. However I also believe that if the servicing organizations were not pressed by the investors, they can act as slow as they want. If the investors were bailed out, then how much impetus do they have to press the servicers to foreclose or complete a short sale?

No bailouts should have been granted and tax revenues should not have been used to bailout the institutions that held the debt. I understand the magnitude of that statement and that many of the entities that had investments in that debt were mainstays of society. However I would have been okay with the govt keeping those investments above water directly.

I believe we would have had a much more robust recovery. I believe that housing prices would have dropped further to a much more affordable level. This would have enabled many people who were well behaved savers to take advantage and purchase property. This would have also enabled many middle class people who were financially stable to purchase rental properties. We would have formed local price bases in various cities in a much more natural manner. Yes it would have been a harder fall at first but it would have resulted in a firm price level and all of underlying assets attached to the bad debt would have been washed away. The holders of that bad debt would have an asset attached to it that was much less valuable. The govt would refund the difference in the principal to the investor directly.

I believe this would have accomplished several things. First off wash away all those who were underwater and simply could not afford to stay in a home they could not afford. They would move and rent and live within their means. There would be no more bad debt at the investment level. Finally I believe this would have been much more affordable then the trillions used for bailouts. Lastly base price levels would have been reached due to a glut of inventory. That inventory would slowly be sucked away. Now maybe we have inventory shortages but only because of organic reasons, no more of this, if you cannot afford the home, you get to stay anyways.

So yes, I agree with you that the goals of the policy implemented by the govt along with the snail like movement of the investors and servicers, and a few trillion of tax money worked. The market is more or less stable.

I simply believe we could have gotten better results for alot less money.[/quote]

In total agreement with you, SDR. Not only that, I would NOT have made investors whole, with the exception of those who owned bonds that were explicitly guaranteed by the government from day one. Of course, all FDIC, SPIC, and NCUA insured accounts would have been made whole, up to the insured amounts. Yes, prices would have fallen dramatically and we would have experienced a period of serious deflation, but with deflation, there is always a bottom from which everything can be built back up without these gross misallocations of resources and without the huge wealth/income disparities seen today.

IMHO, that is the foundation from which a healthy and sustainable economy can be built. There should be no taxpayer-funded inflation guarantee. It harms responsible savers and workers (whose wages have not kept up with cost inflation at all), and it rewards those who take incredibly stupid risks because they expect the government/Fed to always bail them out whenever things turn against them.

[SK in CV]

In 1960, National City and Chula Vista were bedroom communities, unlike most of the newer developments, with their own commercial districts.

My apologies, the “CV” I was referring to as a higher income area was Carmel Valley. I should have made that clear.

Price wise, correct me if I’m wrong, new Chula Vista is all over the place. Everything from starter condos to homes that sold for well over $1M, no?

(and I think you’re jaded by your disdain for “those people” who ruined Chula Vista. I don’t doubt it was as you say, I just doubt that those same circumstances were near as common across the rest of the state as you think.)

[bearishgurl]

[quote=no_such_reality][quote=bearishgurl]craptcha, if you’re a prospective buyer in 92127/92128, may I ask what’s wrong with the 21 listings that you presumably CAN make an offer on?[/quote]

The fact that there are probably 1000 buyers looking.

This isn’t a market that is in balance. This is a market that is horribly constrained….[/quote]

It’s just as I thought, craptcha ;=0. You’re just one of the many Piggs at the trough trying to muscle your way in to nuzzle for scraps. You’re afraid your offer won’t even get noticed, right?

Well, get a more “credible” agent then, or find another trough. Foreclosure Ranch and surrounds (with its mostly substandard lots and exorbitant MR which will cost you a fortune) isn’t the only game in town. Why don’t you get out of the CFDs and branch out a little bit with your search? Believe it or not, there ARE established areas around there (that the Piggs aren’t fighting and up-bidding one another over) which are no doubt close to your workplace. They have plenty of infrastructure nearby as well, some even moreso than Foreclosure Ranch.

Your search is too narrow. At this rate and with your current agent, you may not be able to buy anything this year.

[bearishgurl]

[quote=SK in CV]In 1960, National City and Chula Vista were bedroom communities, unlike most of the newer developments, with their own commercial districts.

My apologies, the “CV” I was referring to as a higher income area was Carmel Valley. I should have made that clear.

Price wise, correct me if I’m wrong, new Chula Vista is all over the place. Everything from starter condos to homes that sold for well over $1M, no?

(and I think you’re jaded by your disdain for “those people” who ruined Chula Vista. I don’t doubt it was as you say, I just doubt that those same circumstances were near as common across the rest of the state as you think.)[/quote]

OK, SK, if you say so, but NC and ChulaV’s commercial districts are quite old (perhaps 50-80 yrs old). Perhaps you and I have a different version of what a “commercial district” is.

Yes, Eastlake Vistas (91915) had a few blocks of ~3000 sf homes built after 2000 which sold new for $600-$700K. The vast majority of them were foreclosed on or sold short. Even though some had been heavily remodeled and landscaped by 2010, the average sold price for that subdivision in early 2012 was about $530K.

Perhaps you are thinking about the over $1M homes build in Eastlake and Rancho Del Rey custom areas by 1992. I could be wrong, but I don’t think there were any like that built after 2000 in the South County.

Yes, SK, the phenomenon of lower/moderate-income families buying into lower-tier new subdivisions happened all over the state.

Tracy, Stockton, Merced, Fresno, Modesto, Paso Robles, Sacramento and surrounds, Victorville, Palmdale, Adelanto, the Temecula Valley, and Chula Vista, to name a few.

This population was only able to buy into these subdivisions because of developer assistance, and, in recent years, were assisted by developer salespeople in signing up for 100% NINA mortgages and PM second trust deeds (carried back by seller/developers and cities).

Obviously, no thought was given by buyers OR sellers reps as to how these buyers were going to afford the HOA/MR and mtg rate hikes for the long haul.

In addition, developers specifically pandered to this population via radio and billboard advertising in select low-income urban and suburban areas of CA.

Had this “recipe for disaster” not been set up for them at the builder’s sales offices, the masses of low and moderate income buyers who became ensnared into buying in these substandard developments would have stayed put.

I blame Big Development for the mess but most of all, I blame the elected leaders of CA’s various cities and counties who gave Big D carte blanche to turn HUGE swaths of CA’s undeveloped land into a grossly-overbuilt eyesore full of “McHomes” . . . that is, after “rolling in the sheets” with them for YEARS :=0

[SK in CV]

BG, It was the older commercial districts I was referring to. The older cities in SD county had them (La Mesa, Lemon Grove), as opposed to the suburbs that didn’t (Clairmont, Allied Gardens). I’m not sure why I even brought it up.

I don’t know a single development name in the newer part of Chula Vista. I’ve driven through the area maybe a dozen times since eastward expansion started 25 years ago. It was just my probably unqualfied observation that there is a pretty large price point mix. Even after your comment, I’m not sure if it’s mostly lower or mostly higher price points.

I guess where we really differ is how much the CFD’s contributed to the problems. Surely if the homes hadn’t been built, it would have been a non-issue. But it was the lenders making all those loans. And the builders facilitating. Should the cities and municipalities that approved the CFD’s known what was going to happen? In hindsight it looks pretty obvious. But in 2000-2004 when many of them were approved? I don’t know the answer to that. By the end of 2004 I was pretty sure that absorption levels were going to be an issue by 2007, and the state would be overbuilt. But I had over 3,000 hours in my project studying it, and it was done for builders, not cities. I’m not sure they should have known just because I did.

That doesn’t mean I don’t think there weren’t foolish mistakes made.

[bearishgurl]

[quote=SK in CV] . . . I guess where we really differ is how much the CFD’s contributed to the problems. Surely if the homes hadn’t been built, it would have been a non-issue. But it was the lenders making all those loans. And the builders facilitating. Should the cities and municipalities that approved the CFD’s known what was going to happen? In hindsight it looks pretty obvious. But in 2000-2004 when many of them were approved? I don’t know the answer to that. By the end of 2004 I was pretty sure that absorption levels were going to be an issue by 2007, and the state would be overbuilt. But I had over 3,000 hours in my project studying it, and it was done for builders, not cities. I’m not sure they should have known just because I did.

That doesn’t mean I don’t think there weren’t foolish mistakes made.[/quote]

Yes, SK, the city/county leaders should have known that their own future finances were at stake in consummating these deals they made with developers. They knew the bonds issued by CFDs were ONLY used for infrastructure. They knew their own employees would have to service the subdivisions within these CFDs. When ChulaV had to start hiring employees (around 2003) they felt “rich” due to all the new property taxes coming in, from which they got a cut. Instead of having someone pay attention as to how these unsustainable bubble prices were being financed within their CFDs, they kept hiring until AFTER their property tax receipts had been severely reduced, due to practically the entire city of market-rate taxpayers qualifying for a reassessment under Prop 8 and a subsequent reduction in their property taxes!

Some of these new employees they ended up having to lay off no doubt stayed the required five years to be “vested.” So now they’ve earned a “pension,” however small.

By F/Y ’09/10, the county assessor had adjusted EVERY county homeowner’s taxes (who had purchased up to about ten years prior, in most areas) in order to prevent them from filing assessment appeals because they didn’t have the staff to handle them.

By this time, it was too late for ChulaV. They conducted massive layoffs after a couple of years of receiving a shorted share of their property tax proceeds and shuttered many of their public counters for one day per week and lunch hour.

In short, Chula V’s leaders were positively giddy over the initial property tax proceeds (for ~2003-2005) emanating from the CFD’s. From there on out, they were asleep at the switch and not nimble enough to realize that that party was dwindling down and soon to be over … with a bang … until of course, after the fact.

We now have more than double the population in ChulaV without the city and county personnel to properly support it.

I believe the last CFD in ChulaV was approved by the City in around 2000. There is a bit of a a time lag between the formation of a CFD and a developer being able have the first phase of a subdivision within it ready for market (2+ yrs?). This is due to the developer having to build a certain amount of infrastructure (shaving hilltops off, bringing in utilities and grading and forming streets, curbs and storm drains, etc) before pouring any pads for homes.

This same sad story could be told all over the state. The saving grace of ChulaV is that it was “coastal” and already had established upscale areas, a longtime established population and was wedged between SD (multiple job centers) and the int’l border, and thus its RE values didn’t suffer as much as they did in other, less well-located cities who approved multiple CFD’s during the same time frame (such as San Bernardino).

I’m curious, SK. What did builders want to know from the results of your project? And, if any of them learned that SD (or CA) was “overbuilt,” did they then leave the state in search of buildable land as a result of your report?

[SD Realtor]

CAR agreed about not making all investors whole. However there were alot of county and state pensions that held investments as well. So yes I would have advocated a pick and choose.

[SK in CV]

[quote=bearishgurl]
I’m curious, SK. What did builders want to know from the results of your project? And, if any of them learned that SD (or CA) was “overbuilt,” did they then leave the state in search of buildable land as a result of your report?[/quote]

Essentially they wanted to know probable absorption rate for new housing based on a gazillion assumptions. Three of the four that contracted for the work paid attention and removed work from the pipeline primarily after 2007 and stopped buying land inventory. And one is bankrupt.

[bearishgurl]

[quote=SK in CV][quote=bearishgurl]
I’m curious, SK. What did builders want to know from the results of your project? And, if any of them learned that SD (or CA) was “overbuilt,” did they then leave the state in search of buildable land as a result of your report?[/quote]

Essentially they wanted to know probable absorption rate for new housing based on a gazillion assumptions. Three of the four that contracted for the work paid attention and removed work from the pipeline primarily after 2007 and stopped buying land inventory. And one is bankrupt.[/quote]

This is all good to know. As it should be.

Thank you, SK!

[CA renter]

[quote=SK in CV][quote=bearishgurl]
I’m curious, SK. What did builders want to know from the results of your project? And, if any of them learned that SD (or CA) was “overbuilt,” did they then leave the state in search of buildable land as a result of your report?[/quote]

Essentially they wanted to know probable absorption rate for new housing based on a gazillion assumptions. Three of the four that contracted for the work paid attention and removed work from the pipeline primarily after 2007 and stopped buying land inventory. And one is bankrupt.[/quote]

As you know, I’m one of the biggest advocates for DB pension plans, but even I would not have made them whole on their investments. There are other ways to fix the problem which would include changes to benefit formulas (reducing benefits), but that would have had to go hand-in-hand with asset price deflation. This way, the purchasing power of retirees would not have been affected as much since the price drops would have kept their purchasing power fairly stable even with the reduced benefit payments.

Instead, what they’ve done is reduce the purchasing power of fixed income earners — affecting both current workers (public and private) whose wages have been stagnant/declining, and retirees — while enriching the wealthiest asset holders…all at the expense of taxpayers. That is just wrong, IMHO.

[Author]

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