Notes from Ground Zero

[lostkitty]

And yet more… this news would pertain to the southernmost portion of RightSide’s real estate shopping:

http://www.nctimes.com/articles/2006/05/05/news/coastal/encinitas/22_03_285_4_06.txt

[Anonymous]

I completely agree. I pay cash for everything that I buy, cars included, and I will do that on my next house if I can. If not, I will have a very small mortgage, and clear it as soon as I can. Just look at an amortization schedule of how much you pay over time for a house. You need a run up like we have had to be even if you pay out over 30 years. It will be about triple the sales price.

Oh, but the tax deduction, blah blah blah. All that does is cut into the triple the sales price total, it does not make it go away. You are still paying alot more over time.

There is nothing good about debt of any kind in my view. I have none at all and I love it!

[john67elco]

Damn Chris we think alike 100%. I pay cash on wifes and my car. I try tellin my wife that u pay 3 times the price of a home and so far save of 90k just renting. I really want that sucker to be low or paid for within 10-15 years. I have not 1 dollar on a visa or any kind of credit and save 4k a month (3 in savings and 1 in 401k). At this rate we should be way above most in buying a home. I guess people have 200k plus jobs to support thier high ARM’s and interest only loans (I’LL PAY ANYTHING TO GET INTO A HOUSE, syndrome). I really would like to save 100k more and then see interest rates at 15% and gas at $5 a gallon (company pays all gas). Then I would get a home extremly cheaper and pay 0 interest. That would be awesome. …….I’ll buy someones bad ARM home that forclosed on the court house steps 🙂

[powayseller]

Rightside, based on these posts, could you clarify that as a high net worth individual you are indeed paying cash? If you are, then tell us all to mind our own business.

Also am wondering what kind of business you are in, that brings you to San Diego. Is there some new growth in a new industry, that hasn’t yet made it to the employment data, or are you transferring with an existing company? I would like to better understand the type of people who can come here and buy $1 million houses for cash.

[Bugs]

I’ve been inside a number of units from each of these subdivisions at varying stages of construction and it never ceases to amaze when people buy into the lines being fed to them by the marketing machines of these builders.

I always cringe a little when I see the word “luxury” or even “good” quality bandied about in reference to ANY of these homes. I’ve seen a lot of properties in my day and I know 2×4 framing, minimal depth foundations, minimal insulation packages and prefabbed interior buildouts when I see them. About 90% of the construction in any of these subdivisions is performed by NES (Non-English Speaking) indivudals of very questionable immigration status. None of these guys have ever set foot inside a union training hall or for that matter, any other training hall. Anyone who thinks of these guys as custom craftsmen or the product they put out as being of high quality must be high themselves.

A little wood molding, tile floors and granite countertops do not make for custom or even good quality construction. We can see that in ever remodeled apartment/condo conversion in San Diego – it doesn’t change the fact that the core of the structures are of average quality at best.

As far as I’m concerned these overgrown tract homes are of no better quality construction than the acres of subdivisions selling in Riverside County for half the price.

The “Carlsbad has great schools” rationale really cracks me up. I’ve lived here for 15 years and sent my kids through their schools. My experience is that there is as much teacher apathy here in Carlsbad as in any other town in the region. As far as I’m concerned, it is the attitudes of the parents and the values taught at home that make for a successful student, not what public school they are enrolled in.

Spend your money how you will, but don’t kid yourself into thinking you’re getting anything other than a tract house on a small lot in a community with fairly mediocre schools. Carlsbad works for me because it’s been convenient for my extended family and my business. Under different circumstances I could be just as happy elsewhere.

[RightSide]

You guys made me laugh out loud. I posted this to give you some anecdotal insights from a buyer and my take on the market environment, not to get any of your advice about wether its a sound financial decision.

Actually, the advice I’m most interested in is from Bugs…I admit to being one of those ignorant about the actual housing construction and how to evaluate it. I spoke with a building litigation attorney and he told me that KB Homes is the real criminal out there, but that Standard Pacific almost never was sued and therefore he considered them a high quality builder.

Incidently, I was at the Magnolia community in Bressi Ranch, and we were checking out the family room and someone was walking upstairs and the whole house sounded like it was about to fall apart. I was pretty shocked to experience that in a brand new $2M house…

So Bugs, what do you think about the Bay Collection? Is it shoddy construction? Whats a good example of quality construction? How can I learn more so I don’t get fleeced?

Thanks.

[sdduuuude]

I think you are wise for picking out Bugs’ post. His perspective is always helpful to me also.

Like the others, I hope you don’t buy in this market, but its your money.

I don’t know what the school district is like up there. But if that is a concern for you, consider the Poway and Solana Beach Districts.

[Bugs]

Don’t get me wrong – there’s nothing wrong with “Average” and there’s a distinction to be made between the number of construction defects and the overall quality level of the structure. I’d venture to say that how a builder follows up and resolves complaints has as much to do with their litigation exposure as does their initial quality of workmanship. If the complaint has any merit at all, a builder’s post-sale support and warranty programs can overcome all. As for frivolous complaints there’s almost nothing that can resolve them.

Consider this – the difference between construction costs of “Average” vs “Good” is only about 28%. That’s 28% of the hard costs and the “base profit”, which together account for about 50% or so of the purchase price of a home under current conditions. That’s 14% of the total sale price.

Bressi Ranch has several “communities” that are built mostly by the one builder (who shall remain nameless). If you were to take the bottom 3 communities you’d see minor differences in lot sizes that together MIGHT contribute to about 10% in cost differentials and possibly a half a quality level (Average vs Above Average) or less between them. Put those two components together and they might justify a 20% spread in pricing. But the actual cost vs. price spread is closer to 30% and that spread gets exagerrated as you go up among the communities.

The cores of all the homes in all those communities in Bressi Ranch are of the same materials and they are being built by the same crews. Some of the finish work varies but I’d be downright shocked if someone could prove that any of the finish items were not off-the-shelf items. It’s all being built from stock plans in factories where the builder benefits from the economy of scale. If it costs a homeowner $10,000 to order a single set of cabinets cut to fit their kitchen from Home Depot, a builder who’s ordering 90 sets of that model cabinets for 4 of its projects in the region is getting them for less than 40% of the Home Depot retail price.

You can see the effects of retail pricing from the builders for yourself. Take a tour of the subdivisions being built by the same builders in Riverside County. You’ll see virtually the same models with the same features being sold at half the price. And here’s the kicker – You’ll also see a much more narrow spread in pricing between quality levels out there, a factor which is completely unrelated to the site costs that supposedly make all the difference. Take a look out there and ask yourself if their prices here really are justified or if maybe they’re charging $200k extra just because they can.

Then take a cruise into Olivenhain, which is in eastern Encinitas. You’ll see that it’s possible to get a truly custom built home of Very Good or Excellent quality on a 1+ acre (view) lot, with a pool, in the low $2,000,000 ranges. Compare one of those homes with anything in any of the subdivisions we’re talking about here and see if there’s any reason for a $2,000,000 tract home in Bressi Ranch.

[lostkitty]

I agree wtih most of what you say Bugs. With that much money to spend – look elsewhere. There are some wonderful neighborhoods with even better schools in Del Mar, Poway, Solana Beach, olde LaJolla, Carmel Valley, Rancho Santa Fe. Location location location – as they say…. With CA schools being in the lowest three in the nation just above LA and MS, and with $2M to spend on a home….. i would not settle for elementary schools in the top tenth percentile for the state. I would go for the top 2. I’d take a long hard look at the junior and senior high schools as well.

I disagree about the schools being what you make of them. You can try and try and try to help your children through classes, but if their teachers do not have a firm grasp of the subjects, the curriculum demands little from the kids, equipment for labs, etc is inadequate and constantly being cut back, or the more advanced topics are not even offered… then what?

There are many many people leaving CA because of the schools alone (we are one such family). I was appalled at the continual “changes” in my kids schools each year due to budget cuts. How can you take away music and art? Science labs on the cheap?

[Steve Beebo]

RightSide –

I agree with what you are doing. Right now may not be the absolute best time to buy a house, but I don’t think it’s a bad time either. It’s a lot better to buy a house this summer than it was last summer – prices have softened some, there is a lot of inventory to choose from, and for the first time in 10 years, there are some great deals out there, too. If you can afford to possibly lose some equity in the next several years, if you don’t want to rent, and if you believe you will stay in the house for 4-5 years plus, by all means go ahead and buy. This may not be a popular opinion on this forum, but for many buyers, it’s the best decision right now.

[Anonymous]

4 plex

This is somewhat anecdotal but applies directly to what your post said. My best friend is a real estate insider up here in Newport Beach. He is looking at 5 million dollar homes, and is a cash buyer.

He told me the following recently at one of our regular Flemings splurge dinners. Exact quote, “I know that 5 million bucks is not a big deal, but I just cannot get myself to fork that out for something I know is going to be worth 3 Mil 2 years from now. I am a real estate guy, and I just can’t get past this even though the money does not matter.”

Those I am sure are the exact words he used minus maybe a few words lost due to wine consumption!

So here is a guy in a rare financial echelon, that still is not buying at those levels. Just for the record, he makes about 7 million/year on average.

He owns his own commercial real estate brokerage firm just for the record. I will not state his name, as he would not want that type of thing made public.

[powayseller]

Several on this forum are actively looking for homes. Some will wait for prices to hit bottom, while others, such as RightSide, are within weeks of purchase.

Chris and Bugs and others, what would you see as reasons that people might want to buy now? I mean, even the guy making $7mil/year doesn’t want to lose money. What motivates a person from this forum, who knows about the dropping market, to buy a house now? I find this a fascinating topic.

[Anonymous]

Good call John. BTW I do have income above that level, and still would never consider one of those goofy loans.

I remember back in 95 when buying my first house. I was only making a tad over 100k then. The house in Newport Coast was 275k ( hard to believe now ). I was very nervous about being able to afford the place. I planned on living in it indefinitely, the concept of flipping was not in my vocabulary.

I remember talking with the head sales person on the development (Sancerre was the development). She told me that my income was by far higher than anyone who had bought a house there! I was in complete shock. Even back then she was talking about 40% ratios as no problem.

Now fast forward to 2006, and what a mess we have on our hands. The truth of the matter is, the majority of the people do the wrong thing the majority of the time when it comes to finances.

Congrats on your discipline! Whatever takes place, you will be in a better position to react to it than most others.

[Bugs]

If prices are declining right now what’s the point of buying – at any price – until they stop declining? Why would anyone in their right mind pull the trigger knowing that they’re going to start losing the moment they go into escrow and continue to lose until some point in the future?

It’s like talking about buying a 2005 model car in September at the full retail price, even though you know the 2005 models are going to be heavily discounted in a couple weeks to make way for the new and improved 2006 models. Nobody in their right minds would do that if they had a choice, and that’s just a $30k car that they’re going to be out of in a few years.

[Calm]

Have a listen to Brookfield Homes May 4th phone conference with Wall Street Stock Analysts: http://events.streamlogics.com/brookfield/may04-06/index.asp

You’ll hear the CEO and CFO talk about the difficulty they’re experiencing in the San Diego market. If I understood them correctly, they’re experiencing purchase contract cancellation rates of 25 – 30% this year, approximately double their average rate.

Cal

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