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“I’m too lazy to look at 1990s data, but I think that the high-end will drop even more than the low-middle range.”

That did happen during the 1990s and I expect it to happen again. I refer to it as price compression where the price structure not only declines as a whole but the range contracts with the middle and upper ranges showing more loss by both price and percentage than the lower end.

Realistically, how many $900k+ tract homes does this region need?

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Nor should they sell. Nobody should be concerned about people who got in at the beginning of the upswing. That is, unless they were among the sheeple who refinanced 6 times in the 9 years since they bought it. Those people who did that may not have much choice in the matter.

Incidentally, the people who bought in 1989 didn’t make it back from being upside down until 1998 or so. Whether they booked the loss or not, they were upside down and paying a lot more on their mortgage than they would have paid for the same place had they rented it. Same thing applies right now.

We don’t even know how long it will take to get that house back to $900k. It could be easily 15 years, not 4. Maybe even longer. The next swing might bring a $285k average (at the low point of the cycle) back up to only $400k or so, not $560k. With this massive distortion we are now in uncharted territory. There is the possibility that this next time really will be different, but not in a good way.

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I am not a football fan. However, I think a football metaphor is in order.

Regardless of which of these opposing teams a person finds themself, it would be foolish to declare the winner of this game before it ends. That is, until this economic cycle completes and starts over again. If we attribute the peak of the market as representing the end of the 2nd quarter of the game, that would mean that we are currently in the beginning of the 3rd quarter. We are a long ways off from the end of this game.

Now it could be that the 2nd half of this game will go a lot faster than the 1st half; that’s what our soft landing crowd thinks will happen. It’s also possible that the 2nd half could last just as long as the first half; that’s what our Revert-to-Mean adherents think will happen.

We already know that the uber-bulls who were pumping the New Paradigm were flat-out wrong because the market has already gone where they said it wouldn’t go. So the RtM crowd already has a partial victory. Many of the people who did purchase in the last 24 months have already seen their “profits” evaporate, whether they have to sell right now or not. So much for how smart they were.

As for rents, there are a couple things we need to never forget about rents. For one, renters have no long term upside; that is, they have no expectation of profits from appreciation. That means they approach housing costs as being solely about housing, not about retirement or moving up the property ladder or impressing their buddies at work with their financial acumen.

Secondly, rents are tied to solely to wages, not investment income. San Diego wages are increasing only slowly and unevenly, and there is no reason to think they will double or triple in the next 10 years. In fact, in a global economy they CAN’T double or triple in the next 10 years.

That’s why there is only so much room for rents to increase. Unlike a short-horizon investor, a renter has no incentive to spend 50% or more of their income on their housing because they do have options. One of those options is to leave town – we know this because that’s what has been happening here in town for a couple years now. Some of the people leaving town were homeowners and others were people who wanted to be homeowners.

So the bottom line on rents is that will not double or triple in the next 5 years and they will not support the current prices less losses at the soft-landing level.

Now if you have something other that “this is SD and everyone wants to be here” we’d love to listen. But if you want to influence our opinions you’re going to have to back that something up. So far, NOBODY has brought anything in that will stand up to even casual examination.

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An individual can join the National Association of Realtors and become a “Realtor” without even holding a license to sell real estate. For instance, there are a few Realtors who are appraisers, not agents or brokers. NAR even offers professional designations for appraisers (RAA for residential appraisers and GAA for commercial appraisers).

One of the most politically active groups in the affairs of The Appraisal Foundation is NAR and its Appraiser section.

Not all agents or brokers are Realtors and not all Realtors are agents or brokers.

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I think the PR thing might actually be a feeble attempt to counteract the media’s impact on buyer psychology. A lot of the bulls have been complaining about how all the negative talk actually pushes the market into a self-fulfilling decline.

Funny, I never heard them say anything about media influence when the market was on it’s way up – they swore it was the fundamentals driving those increases. I always thought the fundamentals come into play more heavily in corrections than in distortions, but what do I know?

I think you can skip the indirect indicators. An absorption of 15,000 of the current listings should be all the warning a prospective buyer would need to recognize a turn in the market. By the time the masses have figured out that RE is a good buy, most of the playahs on this board will already be two steps out in front.

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So right there we have the “different strokes” effect: PerryChase likes the mix and JES doesn’t. That’s why appraisers don’t care, because they recognize that tastes vary.

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It’s not the homes themselves, it’s the marketing machine I don’t like. There’s nothing wrong with an average quality home built on a mass scale. If the initial designs are functional AND if the different floorplans and elevations in the project complement each other then you can end up with a neighborhood that has some homogeneity.

The marketing machines are something else, though. Many of these builders treat their homes like they’re cars, offering a base buildout that almost nobody will accept at that price. Then they price their better finishes and buildouts as a separate profit center that allows them to jack up their average price by 10% and the homes with real options by as much as 25%. Those markups are outrageous in relation to their retail cost, let alone the wholesale costs the builder gets them for. It’s the classic bait-n-switch.

As for Bressi in particular….
I’m not feeling Bressi Ranch because they mix and match their elevations and floorplans to result in a disjointed “feel” for the neighborhood. I realize there are people who decry the idea of cookie cutter subdivisions that only offer 4 floorplans, each with the one elevation; but I also think it’s possible to offer 3 elevations of similar theme for each floorplan. Each of the Lennar projects at Bressi mix Tuscan, Ranch, and that wierd Traditional thing they’ve got going. I find that mix to very disorienting. Nobody could drive into that neighborhood and think of it as a neighborhood that matured over a 30-year period, so why try?

But that’s just me as a consumer. The appraiser side of me doesn’t care one way or another because…..we basically don’t care one way or another.

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Before we’re off to the races I should clarify a couple things:

1. I have no idea if the company that owns the houses in this auction is affiliated, directly or indirectly, with the builder.

2. These homes have not sat vacant; they’ve been used by Lennar as the model homes for their projects. That means that when a buyer is out shopping for a new home, they walk through one of these tricked out models with all the options and upgrades. A model home is the equivalent to a demo at a car dealership.

3. While I assume there were leaseback agreements with Lennar, I have no idea what the rents were or whether those payments exceeded the market rents for a fully furnished home (the excess portion being that portion that could be characterized as an undisclosed payback). The example I gave was of a DIFFERENT builder, NOT Lennar.

4. If an appraiser uses a model home as a comparable for one of the later units, they know to consider the effect on the sale price of furnishings and options packages, as those will vary for all the units in the project. What no appraiser can know about a model home sale that occurs prior to the other sales in the subdivision is whether or not the sale incluldes a leaseback, what the rental terms are and whether those rents are typical for what the residential occupancy of that unit would be during that time.

5. Regardless of the sales inside the subdivision, typical appraisal practice is to also include at least one or two sales from different outside subdivisions as a cross check. So in terms of pricing a builder can’t get too far out in front of their competition – even in an overheated market – because it’s still an open market and their buyers still have options.

Like I said, this situtation might be a little smoky or it might not, but there’s no point in getting excited about it until you see the fire. After all, there is the possibility that what we can see is all there is to see.

I still wouldn’t buy a new home from a subdivision builder, though.

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I have no idea if this particular investor group is directly or indirectly affiliated with Lennar. I do know that this kind of thing has happened in the past.

What’s interesting is that when there’s a new subdivision, the first couple of closed sales are generally considered to be the most indicative comps for the homes that get finished later. I know for a fact that these homes were used by appraisers in appraisals of subsequent units from those projects – I know this because I personally reviewed some of those appraisals.

The thing is, an investor group can work a deal out to buy a model home at whatever price the builder wants to set, and then recover some of that sale price in the way of excess rents during the 12 or 18 month period that it takes to sell off the remainder of the project.

For example, I recently saw a model home purchase from a builder (NOT Lennar) where the leaseback was for a 12-month term with 18-month option and the rental rate was about 350% of what the home would have rented for had it been exposed to the rental market. In this case, those excess rents would have amounted to over $120,000 just for the first 12 months. That payback essentially amounts to a sizable sales concession, and that sales concession would be invisible to every appraiser and every buyer who came into that project thereafter. There’s no way anyone coming in from the outside would have found out about the true sale price of that model home.

Sneaky stuff. That’s just one more reason why I know there’s a lot of room in the current prices for contraction. Sure, some of the costs have gone up in response to the demand, but the builders are also using various ways to hide a lot of profit in their transactions. At this point, I’m pretty sure I’d never buy a new home from a subdivision builder, any more than I’d let a new car dealer sell me a car based on the monthly payment.

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These homes are all appear to be owned by an investor group that made a bulk purchase of many of Lennar’s model homes in Bressi Ranch in 02/2005. The upgrades and options represent the best of what Lennar was offering for these projects. Model homes often sell complete with some or all of the furnishings, depending on whether the buyer wants to pay for them.

It looks like at least some of these homes are currently listed in the MLS, generally at prices that would result in a break even or a slight loss from their original prices after considering brokerage fees. I assume the original purchases all involved lease-back arrangements with the seller. Many of the lease-back agreements I’ve seen involve exhorbitant rental fees that far exceed what a typical tenant would normally pay. More than enough to pay the mortgage and insurance. If this is the case here, their losses may not be that high – they could possibly break even or clear a small profit.

Of course, all this assumes that the “investor group” isn’t another entity of Greystone/Lennar itself. If they actualy are investors I’d imagine they’re not that happy with the performance of this particular investment.

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Assuming this end of the cycle follows the same patterns as the last two, we can expect most of the movement in prices to come in bursts, followed by longer periods of relative stability. It worked that way when the markets were increasing, too. I find nothing strange about a reduction in listings and sales volume at the end of a summer selling season that started late and ended early. Frankly, I would have been surprised if the summer selling season had lasted longer this year.

I’d anticipate a relatively stable market during the Fall, followed by some more big pricing declines after the n
New Year. I see no signs of a reversal of this trend nor reason to think any of the fundamentals are going to do anything but get weaker. However, I do think different sellers will come to their senses at different times. Lucky for us.

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Just as with the housing market, you don’t decide which side of the argument was right until after the cycle has completed. The RE market is just starting downward, whereas the stock market is now on an upward swing. We’re nowhere near declaring a winner on the stock market cycle.

The predominant theme here is that success is not measured by how much you can make, but by how much you can keep after it’s all over.

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Umm, more likely Bakersfield and La Jolla.

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I’ve been experiencing deja vu so often lately that I had to check my closet for acid washed jeans and top siders. Next thing you know mullets and shoulderpads will be back in.

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Interesting. Most of these rents represent monthly rent multipliers of between 285 – 300, with a few above and below that. A Gross Rent Multiplier (GRM) for single family and 2-4 properties is found by dividing the sale price by the monthly rents. For example, a $550,000 home (at peak pricing) renting in the $1,900 range would yield a GRM of ~290 ($550,000 / $1,900 = 289.47).

What’s interesting is that back in the mid 1990s, GRMs were commonly running in the 120-150 ranges, depending on location and other attributes. Right now, a $1,900 monthly rental rate would indicate to a $285,000 purchase price if using a GRM of 150. That’s a long way from a $550,000 peak price.

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