[Bugs]

I’m a commercial appraiser (since 1985) and I also do some residential appraisal review work for one of the nation’s biggest banks. I’ve been working in SD County since 1990 and worked in the OC/LA areas prior to that. I also develop and teach continuing education courses for appraisers.

I’ve reviewed a number of appraisals from the different “communities” in Bressi Ranch, including Heather Court. In the last 3 weeks I’ve reviewed 2 appraisals for purchases from there; one in the “Cassia” project and another in the “Canterbury” project.

By my count there have been 10 sales at $890k and above in Heather Court, the highest two being the models for the project, both of which sold back in 02/2005. In the beginning of the project, back in early-mid 2005, they were selling the 3019 SqFt model in the $800k+ ranges, with most of the sales closing in the mid-800s. The three yr2006 sales have closed at $834k and $757k (01/2006), and at $729k (03/2006). Keep in mind that these closing prices are greatly influenced by the levels of options and upgrades chosen. For example, the model homes always sell with every possible option, including landscaping and patios, window coverings, artwork, rugs, and sometimes furnishings. This is the reason why there is such a big spread in these new projects for otherwise similar homes. Ironically, it’s been my experience that after about 5 years or so, the premiums paid by the original buyers tend to basically disappear in the resale market. In my opinion, options and upgrades are a huge “profit center” for the developers, if you catch my meaning.

The lower 01/2006 and 03/2006 closed sales are a good $70k lower than the previous low sales in 05/2005. That $70k doesn’t even represent a 10% reduction, though. While it would seem to be a little quick for such a big markdown, I’m not particularly surprised because I’ve seen it go like this before. I knew it was going to happen sooner or later, and by my reckoning it’s going to get a lot worse as time goes on – we ain’t seen nothing yet.

Speaking for myself, I wouldn’t want to be one of the yr2005 buyers right now. Based on their recorded financing and considering it costs money to sell, it looks like about half of them effectively have no equity right now. I sincerely hope they all have staying power.

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A developer cannot afford to sit on a completed house for very long. The carrying costs are massive, especially in a price range like this. They’re still in construction on a lot of homes over there and they will eventually have to sell every one of them, one way or another.

It would be interesting to see what the retail markup will be for options at these base prices. Average mark-ups in Bressi Ranch for options and upgrades have been running just under $40,000 per unit over there, with a few units up in the $80s and even exceeding $100k. It wouldn’t surprise me if Lennar finds a way to boost their $800k loss leaders back up to $900k by the time they close. I’m sure they’ll try, anyway.

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SDRealtor,

Just out of curiosity, how long have you been in the business?

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A few years back the Fox Network’s MadTV used to run a series of visual gags called “Lowered Expectations”. They depicted singles who would normally sit on the bench, but could play as long as they were willing to settle for (much) less in the way of their expectations. As it relates to the singles scene it was pretty funny. I’m guessing the concept as applied to standards of living isn’t going to be so funny for a lot of our kids.

The term “Global Economy” doesn’t mean raising everyone’s standard of living to equal ours’ any more than welfare programs can equalize everyone into the middle class. In order for ‘social justice’ to prevail we will all have to suffer equally.

[Bugs]

I’ve analyzed budgets for condo projects so I know where most of the money goes.

The different areas of allocation typically include some utilities, like water/sewer/trash, electricity for the common areas, gas to run the laundry rooms, property managements fees, insurance premiums to cover the structures and common areas, reserves set aside to maintain the common elements, salaries, benefits and indirect costs for employees and contractors who provide services, and legal/accounting fees for the association. For some projects there are also property taxes for the common elements, which are assessed separately from the units. It all adds up.

Different condo associations manage their finances differently. Between the management of their finances and the enforcement of their CC&Rs it can have an effect on the value and marketability of units in their projects. A lax HOA can allow maintenance issues to accrue, services to not be rendered, and can even go indo debt for their expenses and repairs. This is especially true for unanticipated major expenses, like paying off a lawsuit or replacing a major structural component before it’s time.

As a sweeping generality, the HOAs run by the older generation tend to be more conservative in their management styles, and that includes enforcing their CC&Rs – that’s how you can wind up with condo projects where kids are not allowed to play on the lawns in front of their units or where it’s forbidden to leave your garage door open. HOAs with younger members are generally more lax about both their finances and their CC&Rs. It can be a real mixed bag.

[Bugs]

Just one – maybe we need to lower our expectations to more realistically fit in with the global economy. Migrate to India, expect to work 10 hours a day, get a bike and learn to be happy with having less. Okay, that’s over the top, but I do think we need to take stock of our current expecations and see how reasonable they are in relation to the world we live in.

Maybe we really don’t need the 4,000 SqFt tract home or the Beemer in the driveway.

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Well, the Union-Tribune ran that article the other day on the relocation of Buck Knives. In it, they quoted some economist as saying that the number of jobs leaving the state were somewhere below 1% of the employment, which obviously isn’t going to be a biggie. How San Diego’s employment stacks up might be another thing, though.

One thing that I keep wondering about is how the mix of jobs will trend. I mean, I don’t think that simply counting heads in terms of employment is all that meaningful when it comes to forecasting the number of wage earners who make enough to buy San Diego property. If only 10% of the households in the county earn enough to pay the mortgage (at a fixed rate) on a median priced home then in a way it almost doesn’t matter what’s happening with the other 90%.

Take Buck Knives, for instance. I think it was 85 out of 225 jobs that relocated, and they were talking about average wages on the factory floor at $15/hour. Okay, some are making more and some are making less but I’ll bet that there weren’t many of the 225 (non-family) employees who were making in excess of $50k.

When the economists and politicians talk about job growth, I’m more interested to see what type of jobs are being created than how many the total is. I wanna know how many $70k+ jobs are being created – my suspicion is that it’s nowhere close to the 10% of the total new jobs coming online.

Another thing to consider is the stability of employment at those salaries. I don’t think an MD would have a problem replacing an employment situation, but there are a lot of incumbant job holders in those salary ranges that wouldn’t be replaced at the same salary range right now. When one of those employees leaves town and their job gets replaced there is no loss of the job but there is a loss of a home buyer’s salary. There are so many variations of the employment vs. homeowner game it makes my head swim.

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Oohhh yeah, you’ll be getting weekly mass mailings from appraisers – and non-appraisers, too – to solicit tax appeal work. The thing is, with automated valuation models like Zillow.Com the opportunity is there for a savvy homeowner to pull their own data to support their appeal, thereby skipping the appraisers and the real estate brokers altogether. It’ll be interesting to see how many people will take the initiative to take advantage of the availability of information.

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In California there is no automatic review/reduction process. Each case has to be appealed separately. That makes sense for the Assessor because it becomes a case of “unless otherwise directed”, where they’ll continue to collect the taxes until it’s decided otherwise.

What usually happens is the property owner files for the appeal and presents the appraisal or in some cases just the raw data to show that their property is currently overassessed. If the Assessor agrees or otherwise decides not to contest it they just go ahead and reassess the property based on the lower value. If the Assessor decides to fight it they get their valuation together and take it to a hearing.

The reduction in taxation isn’t permanent because the purchase price will always serve as the basis where the Prop. 13 limitations apply. So if a property loses 30% in value relative to its most recent purchase price the lower taxes will only apply for as long as the “loss” continues, and it is subject to annual adjustment up to where the adjustments to the prior purchase price take off – THEN the Prop. 13 limitations apply.

At any rate, since there is some time and effort involved in the appeal process, I wouldn’t anticipate that most homeowners would spend the money necessary to reduce their annual RE taxes until their potential savings get to be at least $1,000/year. Of course, during the last cycle when average home prices were 1/3 of what they are now and the overassessments were only measured in the $100s of dollars rather than the $1,000s of dollars there wasn’t too much appealing going on. Now with annual RE taxes for recent purchases starting at $5,000/year and up, it would only take a 15% hit in market values to make it worth these taxpayers while to appeal.

As an example, an $800,000 purchase of a new tract home in Carlsbad in 2004 would result in annual taxes of about $8,900/year. A 15% reduction in market value relative to that purchase price would justify a $1,335 reduction in taxes for however long it took for the market value to return to the $800k mark, at which point the Prop 13 limitations would hold the annual adjustments down to the 2%. If the market value went up 15% since then it would take a 30% loss (from today’s value) before that property owner had enough of a loss to make it worth their while to appeal.

[Bugs]

I’m one of those people who will be DIRECTLY hurt by a declining market – I still think it’s going to happen, though and I can’t see any reason why it won’t.

In my mind it’s as simple as this – people will stretch and pay 50% of their income for housing when they think there’s an upside to it. Most people won’t continue to do that once it becomes clear there is no short term gains to be had and when their financing crutch gets taken away. There’s still an income gap that can’t be closed, too.

I agree that Oceanside was undervalued for a long time relative to its attributes, and good for the people who were smart enough to recognize that and benefit from it. But that area is by no means the most stable market in the region – I’m already seeing a couple areas that are taking a beating and a couple more areas that are teetering. Hopefully you were smart enough to stay away from the back gate area near Pendleton – that area’s eventually going to end up awash in foreclosures.

[Bugs]

I’m betting they go from restating the original theme (which is a favorite trick of politicians) to outright stonewalling – no response at all to your follow up.

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Proposition 13 basically makes residential development a net loss to a city because of the limitations in future tax increases regardless of how much the infrastructure costs increase. In California, the local governments HAVE to get their infrastructure paid for in advance. There are some areas of the nation where the taxes are reassessed on an annual or bi-annual basis, and on top of that their tax rates are higher. In a few areas the tax rate is almost double what it is here. Can you imagine what would happen to property values if the property tax assessment got tied directly to the current value into perpetuity? People would be unable to anticipate how much they’d have to pay in 10 years. That would put a real crimp in price growth expectations.

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In all fairness they’re damned if they do and damned if they don’t. Had they been more agressive earlier on they would have been accused of being a drag on free enterprise. we expect our government to be reactive and to let us do what we want. That is, right up until it’s too later – then it’s 20-20 hindsight all the way.

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The feds recently issued a letter to the lenders warning them to not issue ARMs unless the borrowers can fully debt service the permanent rate. ARM availability has dropped tremendously since then. Having been specifically warned, these lenders can’t get caught going against these instructions later on down the line.

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The question is WHY have land values been increasing. The answer is that the developers can still afford to pay more because above and beyond the increases in costs there are increases in profit that make it worth their while to do so. When it comes to developable land, it’s only worth what a developer will pay for it. Once demand for new construction decreases, which happens in every downleg, the land values will also subside accordingly.

Make no mistake, a declining market will put the brakes on the construction industry. People will indeed settle for less when faced with the prospect of settling for nothing. When that happens and the level of competition among the various suppliers goes back to a normal level, land costs will go down, materials costs will go down, labor costs will go down, financing costs will go down and profit margins will go down. The only things that won’t go down are the gov’t fees and associated costs.

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