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Just as a side note it might be helpful to consider exactly what the margins are for lenders and how much (or how little) profit they actually make.

I once saw a local commercial bank get threatened with insolvency as a result of a single loan on a single property. If memory serves, the loan amount was less that $2,000,000, but this particular borrower decided to duke it out in court and he ran the lender’s costs to foreclose so high that they took a beating by the time they got the property back and sold it; and their initial loan was by no means unreasonable in relation to the value of the property. That borrower was savvy – they stopped making payments and used their attorney to abuse the system.

I have to believe that there are legions of attorneys out there who are ramping up their “stop foreclosure” arsenals even as we speak. They know that a certain percentage of overstressed homeowners will gladly work the system in exchange for a year’s free rent prior to eviction. And it won’t take very many of those lawsuits to further clog our legal system. Increased costs to foreclose will take it’s toll on both lenders and the availability of credit, which in turn can exacerbate pricing declines.

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I don’t see why we’re quibbling over the percentage of recent mortgagees (which number includes far more than just the people who have recently purchased) who are overextended enough to be susceptible to foreclosure. And we definitely shouldn’t be limiting our analysis of the percentage to any single year’s sales volumes because the credit overextension spans more than one or two years, and those totals are cumulative.

If the rate of foreclosures were to exceed even 5% of these mortgagees that number would be much more than sufficient to drive the market. A rate of 5% of mortgagees over the last 3 years would be more than 15% of any single year’s sales volume, especially in a year of reduced volumes. In such a market, if 1 sale out of 6 is from a lender you better believe those sales will dominate the market pricing. A 10% foreclosure rate among recent mortgagees would be catastrophic to lenders. A 5% rate might even be too much.

How many $50,000 losses would it take to put any one lender down for the count? I don’t think it will take very many. When you consider a $50k loss is less than 10% of the current median prices here we would need to be very concerned for any price corrections exceeding 20%. Such a loss on a regional scale would wipe out many of the equity positions held by recent mortagees and start cutting into the mortgage positions held by the lenders. That’s at 20%. The risk to the lenders could increase exponentially if the price corrections were to exceed 20%, as some people believe may happen.

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The 6% commission structure covers a lot of services. Scouting out properties for purchase or listing a property for sale are only a couple of them. While it’s true to some extent that the use of online services can in some fashion replace this portion of what a full service brokerage does, they can’t come close to replacing all the services that 6% covers. I think there will continue to be a place for full service brokerage for a long time.

That’s why in a real estate market where the average home is still selling for less than $200,000 the 6% commission structure makes a lot of sense. There are a lot of those areas in the nation yet. In a market where the average homes are selling at higher prices, that commission structure starts to look out of place.

Why should a Bressi Ranch tract home generate $60,000 in realty commissions if the same home in Riverside County would only $30,000 for the same service? Same thing goes for mortgage brokerage, too. It takes just as much time and effort to build a loan package in a $200k market as in a $1,000,000 market, why are the commissions not rated on a sliding scale?

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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.

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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.

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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.

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This is a topic we’ve touched on before.

The number of people who DESIRE to buy comprises the demand for real property. RE permabulls love to point to the simple demand for homeownership as being one of the big fundamentals – as far as I’m concerned this is a blatant lie and they know it.

Simple demand is basically irrelevant when it comes to real property market activity. It is not until an individual’s DESIRE to buy is backed up by the ABILITY to satisfy their desire that the simple demand for property becomes “effective demand”. That’s the only number that truly matters and the permabulls have been ignoring it.

Regardless of how many people are coming or going from San Diego, the only numbers that would have an effect on pricing is the number of people who make the wages or otherwise have the money to afford the sale prices resulting from that pricing. That’s why when the permabulls point to gross employment as being relevant I go into convulsions. It doesn’t matter how many service jobs we create because basically none of them contribute to the effective demand for real estate here in this region. Every homeowner or homebuyer wage that moves out of the region has to be replaced by a homebuyer wage or else the effective demand that has supported the pricing (so far) erodes.

Net population outmigration is particularly troubling because those numbers include an inordinate percentage of homeowners/homebuyers, and they are largely not being replaced. It’s one reason we have more inventory than buyers right now.

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Okay, here’s another one to chew on. The best way to track price trends on the neighborhood level is to use sales of the same property that occurred during the time frames in question. These paired sales don’t come up that often so when they do it’s interesting to take a look. As always, one example is just one example. It doesn’t get beyond interesting until we can accrue a bunch of them.

This one is also located in San Marcos near the Carlsbad border; up on the hill overlooking Palomar Airport Road/Rancho Santa Fe Road.

For those who have access to the data, this home is located in the Rancho Dorado subdivision (1128/A-3). It’s a 2001 home of 2680 SqFt with a view amenity, on a 17,000 SqFt lot. It originally sold in 06/2001 for $371,000, which was higher than average for that model at that time and is indicative of above average upgrades and possibly a site premium.

This property has 2 recent sales. It sold in 06/2005 for $767,000 after 7 days marketing time, and was subsequently relisted in 10/2005 for $774,900. It was reduced to a range of $735k – $760k before going into escrow in 03/2006 after 149 days marketing time. It closed in 04/2006 at $740,000.

Now anyone with access to the data can figure out which property this is and verify the facts for themselves. I try to avoid listing addresses on the internet because of privacy concerns, but if someone already has access to the data then my discussion of it is not divulging anything that isn’t already available to them.

Both sales resulted from fairly typical marketing times. There is no indication that the 06/2005 sale was high. In fact, a similar model directly across the street with no view sold 2 months later in 08/2005 for $776,000; and its original sale price in 06/2001 was lower than our subject ($359k vs. $371k). If anything, it indicates our subject’s prior sale in 06/2005 was low, not high.

So, a solid $27,000 reduction in price demonstrated by 2 well exposed sales occurring 10 months apart. The loss itself is less than 4%, but if annualized it would be over 4%. This is by no means a radical loss and it doesn’t necessarily jibe with a blanket assumption (for those who are so inclined) that the market has already receded by 10%. We would have to assume the 06/2005 sale price actually was low to come up with a higher percentage of loss. Obviously, assumptions aren’t what we should be looking for in something like this. It does demonstrate the wisdom in Rich’s motto – “In God we trust – everyone else bring data”.

If this were a cash flow investment it would be a rather painful way to lose the cost of sale ($25,000+), the property taxes ($8,600 or so) and the mortgage payments of at least $25,000. It wouldn’t be quite so bad if this were the primary residence and the interest could be written off and the mortgage payments stacked against the rent. Still, you add it all up and the cash this investment lost in principal loss, carrying costs and costs of sale is nothing to sneeze at if you’re a wage earner here in San Diego County.

I’m headed out of town for a week, so I won’t be following up on this topic any time soon. But if you guys can rustle up some more paired sales we can look at them when I get back.

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No one sale should make or break a neighborhood. If the average exposure time necessary to get a sale at a reasonable price is 4 or 5 months, that 4 or 5 months starts when the listing price is set at a reasonable level. Being compelled to sell faster changes the conditions of sale from being a market sale (willing seller under no undue pressure to sell) to being a quick sale or liquidation sale. In other words, such a sale is no longer a market sale, per se.

When it starts to get tricky is when a bunch of sellers are compelled to sell. Once it becomes common it is no longer a case of “undue pressure”. Such sales can and do set the market values for everything else because they represent the readily available substitution for the sales that are not discounted.

Saying that a seller is compelled to sell now in a listing is like begging for a further 5% or 10% reduction on every offer that comes in. I wouldn’t read too much into what happens on this sale unless you start seeing several of them.

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Absolutely. The role of the appraiser is supposed to be that of an outside observer. We are required to certify to that impartiality in every single appraisal report we sign. The very worst thing an appraiser can do is to join either one side or the other. I wish I could say that it doesn’t happen very often but I’d get laughed off the island for saying something stupid like that, and rightfully so.

Lenders have several options for dealing with fraudulent appraisals. They can sue in civil court, they can file administrative complaints with the state licensing agency, they can complain to the FBI. Any of those remedies can put an appraiser out of business. One of the byproducts of licensing appraisers is that of all the co-conspirators in a mortgage fraud case, it is virtually guaranteed that the appraiser will get just as heavy a penalty as the people who initiated and profited from the schemes. Every week some appraiser ends up going to prison for committing fraud, and the irony is that an appraiser’s “profit” in these cases is always limited to the measly appraisal fee – they never get a big piece of the action; so crooked appraisers commit their crimes for cheap.

Our bitter reality is that there are a lot of appraisers who, in an attempt to keep the work coming in, will lie on appraisal reports in order to enable their client to do what they want. It is these appraisers who demean themselves and us all by betraying the fiduciary position we are supposed to uphold. It is these appraisers who represent the single greatest threat to our occupation as well as to the safety and security of the lenders and other users of appraisals who rely on them to make informed decisions.

You’ll NEVER catch me sticking up for a crooked appraiser. Matter of fact, if anyone has a legitimate complaint to make against an appraiser – one that they have proof for – I’ll be happy to assist them in filling out the forms and putting the complaint together.

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I think credit is one part of it, but I think if that was the primary cause then the results would be more evenly demonstrated in every other market in the U.S.. All areas of the country have equal availability to these credit terms and yet many of these other markets have not (so far) demonstrated such outsized gains.

What’s interesting is watching the investors migrate from market to market. San Diego was hot but now these guys have moved on – first to Arizona, Las Vegas and Florida; and now on to Seattle and some of the smaller markets in the Midwest and the South. They’re trying to keep the ball in play and as long as they can do that there’s a lot of money to be made.

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That’s true. Face-to-face is a different situation, just as the relationship with the property owner is different. We assert a lack of bias and are not (supposedly) part of the transaction, whereas you guys are advocates for your clients and directly benefit from the transaction. We have different roles in the process and I daresay different ways of defining the value. We use different measures for professional performance. So yeah, I’d completely agree that there are some big differences.

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May I assume you felt the same amount of concern when you were telling buyers they’d have to come up with another $50k to purchase as the market was on it’s way up? ‘Cause that’s the deal – if a seller is “losing” the $50k it’s because the buyer isn’t paying it and vice-versa.

If you don’t like giving people bad news about their values then you’d really hate being an appraiser – we do it on a regular basis. Even when times are good about 30% of all appraisals I perform come in lower than the property owner’s opinion. When times are bad that ratio goes up.

Right now I’m finishing off an appraisal on a property that’s listed at $1.9mil and my opinion of value will probably come in at $1.2mil or so. Trust me when I tell you this property owner is going to be very unhappy and my client probably won’t be making this loan. The fact that this property owner is a professional realty broker will likely add to their frustration.

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I use SS as an avatar (not an alias) on another forum I participate on, and it relates solely to my vice rather than to any delusions of grandeur. Come to think of it, my alias here wasn’t a good choice because I’m not really like this cartoon character, either.

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Guilty as charged.

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