[docteur]

Powayseller – I have been away for a while, enjoying my summer and now I come to find that you have been trashing me in my absense. I had no idea you had such contempt for me.

OK, I am going to respond and this will be my last post (and believe me, I will keep my word, I will not post again but I will continue to read this forum). And you can “take me seriously” because when I make a promise, I keep it.

First off, I don’t need any “education” from the likes of you PS. You are offering opinions and predictions, not education. In my 40 years in real estate, I have managed to weather several real estate cycles (this is simply another one and no, it is not different this time but I believe the way it shakes out will not follow your “sky is falling” scenario…it never does). I have ended up after 40 years in this business in the top .01% of wealth in this country, all earned from real estate. So please give me a little credit for knowing my field of endeavor.

I appreciate your posts when they provide verifiable data. Those that don’t and are filled with prognostications, opinions, or worse personal attacks and the like, I simply do my best to ignore them. You love to create controversy (albeit false) and think by stirring things up with your personal jabs, you are “educating” people. Nothing could be further from the truth.

Have you ever considered that I might find you in “thick denial?” However, I have never attacked you personally but you go too far with this thread (and a few other recent ones) and it’s time for me to tell you the truth.

You offend me with your ourbursts, splattered across this forum like those of a selfish little child who is seeking attention but being ignored by her parents. You think the louder you scream the more attention you will get and when that doesn’t work, you pull out the name calling.

You are highly intelligent but use your God given gifts to spread fear among those who trust you. Your propaganda is nothing more than veiled attempts to bolster your recent decision to sell your home and your investments based on your fear of the future. You are pretty transparent and it is clear to me that fear is what motivates you, not rational thinking and thoughtful analysis. You are a scared little child and puff up whenever anyone questions your judgement or opinions.

Your arrogance absolutely astounds me. You make sweeping predictions and then lash out at those who disagree with you, instead of looking at what you might learn from their experience.

Shame on you for attacking me (and others) just because my perception of this market is different than yours. (Even though, in spite of what you say, I continue to make millions in real estate profits, without heeding your advice and learned counsel). Had I followed the advice of fear mongers like you over the years, I would probably be broke and renting an apartment someplace where I don’t want to live.

I think you are the one in “thick denial” and deep down wish you had never sold your house, the one you designed and labored over yourself. You have been trying for months to convince those of us who know better that you made a wise decision.

I call BS. You are trying to convince everyone else (and yourself) how “smart” and ahead of the curve you were. Such grandstanding I expect to see in a six year old, but not an adult. Time will tell if financially you were smart but emotionally, just by where you are coming from, I’d say the sell decision was an absolute disaster.

Maybe no one takes you seriously because you have been spewing the same old tired dribble for months on end. Beating a dead horse doesn’t make it any more dead. It just makes the offender look like a huge horse’s ass.

And your absolute certainty about the future in your outlandish predictions! Please, stop overcompensating to cover your fear of what lies ahead and just accept that you are afraid. These are scary times. Everyone on this forum is apprehensive. But we need to acknowledge our fears and then deal with them head on. Not act as if we know it all. That way we can move through these tough times with confidence and start making choices that benefit us instead of choices that create doubt.

I have to ask you, if you are so damned smart, how come you aren’t incredibly wealthy? How come you command no respect beyond those in this forum who follow you like lemmings over a cliff? Facts are always subject to interpretation and how we use those facts determines how we end up in this life. We shape our own destiny and so far I’d say I’m doing just fine for an old dog that is in “thick denial.” Thanks for trying to save me from myself but I am addicted to success. Oh, poor me. I am so stupid and can’t see my ultimate demise and financial ruin like the great seer PS.

Get real. Give it up. There is no hope folks. Housing prices in my neighborhood will not fall by 50%. I absolutely guarantee that. And my certainty is based on 40 years in this business, through some pretty nasty cycles, not on some misinterpreted data and a lame prayer that I can steal a coastal home for less than it costs to build. One NOD and a few sales at 100% gains instead of 150% don’t mean that I am going to lose big just because you say so. Do you know any one personally that has lost money in this market yet? I sure as hell don’t.

PS, Why are you so afraid of the future? Why do you continue to leave this forum and then come back again? Cry wolf enough times and nobody believes you; your credibility disappears and you sound like a spoiled brat. You are like someone who takes one too many curtain calls. Either leave and stay gone or cut the BS and just deal with it.

Shakespeare said it best when he penned this line in Hamlet “The lady doth protest too much methinks.” In your case, way too much.

Sheesh, get a life, learn some manners and respect those who may have something useful to offer you. No one on this forum, not even you, who thinks she is responsible for our “education” and the savior of us poor folks in denial about the approaching real estate storm upon us, has any corner on the market for information nor a second sight into the future. Botton line: Nobody knows what is going to happen. NOBODY. Not even the great prognosticator, Powayseller. And if you think you know, you are clearly delusional.

The purpose of being on this forum is to share our experience and then make our own choices and decisions based on our individual analysis, as thinking adults. If I am wrong, well then I will take responsibility for my choices. I don’t need you to tell me how stupid I am.

Right now, I actually see huge opportunity looming on the horizon and intend to capitalize on that and a lot of what I see is based on the insightful posts of a lot of folks who happen to have a different perspective than yours. And thank God for them!

This forum is valuable to each person who participates, regardless of how much he/she participates. Some of the greatest pieces of information I have found on this forum are from those who rarely post but when they do, they have lots to say and their words have power. They don’t scream at me. They tell me with quiet confidence what they think and I listen very carefully. Their words have integrity.

Park your ego at the door and allow those of us who have been successful in the business of real estate (or any other business for that matter) to teach you something useful so you too can create real wealth and security for your family and stop letting fear run your life.

You see, the beauty of my position is this: Even if real estate falls 50%, I don’t give a rat’s ass because I am not attached to be being right. I’ve got nothing on being wrong. I’m where I want to be, debt free and loving life with millions in cash reserves to back me up. If real estate tanks, I’ll just buy it up (like I did in the last recession). Either way, I win. Right or wrong.

Neither you nor anyone else will ever convince me, based on my years of experience in real estate, that I am going to be in trouble. You see, I trust myself. I have no fear for the future because I know whatever it holds; I will deal with it effectively. That’s based on experience, not data or opinions or because someone said so.

I can make money in any kind of market, regardless of what you say because I have the experience, the capital, and the strength of my convictions, based on my knowledge of markets, and the belief in my abilities to be successful. And, up until now I have been willing to share my knowledge with anyone who cares to listen on this forum.

I believe your hostility towards me comes from envy. I’m where you would love to be. Living in my dream home, debt free, flush with cash and loving life. You stated in one post that had you been in a position to pay off your home and keep it, you would have, revealing to me that because you weren’t able to pay it off, that you had to fabricate lots of rationalizations of why you sold. And then you built an entire career on trying to convince the participants on this forum that you made the right decision.

You are so attached to being right, you spend most of your time looking for evidence (and then positing it) to support what you did. It’s almost comical how many times you can say the same thing with different data. OK already, we got your position on what you think is going to happen and how right you think you were in your actions. I mean, who are you trying to convince, me or yourself?

You even went so far as to ask if anyone needed a good analyst because you are so learned and know so much about these markets and exactly what is going to happen next. Wow, that really took the cake. Well, taking credit for making this forum what it is was a close second. Wake up! Who in the hell do you think you are?

Get clear on this: My life is not about being right or saving people through my superior intellect or my ability to post reams of facts and “educate” people. My life is about winning the game and creating my life the way I want it to be and more importantly, setting a good example for others to follow so that they can also create their life to be miraculous.

Be. Do. Have. Success leaves clues, in all areas of life. All you have to do is copy those who came before you, keep your integrity and I guarantee, you will produce the same results as that person who provides an example for you. It’s really pretty simple. Cut the chatter and get to work. Don’t tell me what you know, show me by your actions. As they say in my neighborhood “Make a bet on the bullshit.” Because PS, that’s all it is anyway. Nobody knows.

You are just another person trying, like all of us, to figure out which way the stream of life is going to flow next. You have no special powers nor do you have any more insight than anyone else on this forum. Learn a little humility and you will be amazed at how quickly your life improves and the fear disappears. You are no better, nor no worse, than anyone else who posts on this forum.

Lastly, you owe some folks on this forum, who come here in good faith to share information, just as valuable as anything you might have, a huge, public apology. Be bigger than your considerations about it and just admit that you got out of line. Especially with Mr. Gin. I was appalled that you had the audacity to call him a liar. He is a respected man in his field, regardless of whether you agree with him or not. That is a lot more than I can say for your current station in life.

I will forgive you in advance for offending me because I will not respond to anything you or anyone else posts on this forum from this point forward. So, be clear, I forgive you for what you have said and for what you will probably say down the road.

I wish all of you who post on this forum the best and hope that you live honest, purpose filled lifes. I hold no animosity towards any of you. I only want you to have the best of success in your life, to achieve your dreams and most importantly to enjoy the journey and help others to do the same.

Remember, no one has a corner on the future. And as I have stated before: “Communication is the appreciation of differences.” Welcome those whose perceptions are different than yours. They may have something of tremendous value to give to you. And thanks to all of you for communicating with me over these last several months and for your comments in the future.

What you have to offer (assuming you offend no one purposely) is of value, not matter how insignificant you may think it to be. Speak up, post often and with confidence, let no one person make this their personal soapbox and be sure to stop personal attacks on anyone as soon as you see them.

Do not confuse quality of posts with quantity of posts. Speak up when your moral compass starts spinning.

By being here and participating in this forum, you acknowledge Rich Toscano. Remember that each time you post. After all, he was the one who started this wonderful discussion board and continues to carry it forward without want of financial reward. Truly he is someone who wishes good on all of us.

Thanks again Rich for what you have created. I am proud to be one of your early premium members and will continue to come here to get different perspectives on the state of real estate in San Diego. I know I can always trust you to be honest, straightforward and clear in your communications.

Take care all. Good Bye.

[docteur]

As a land subdivider, I know that a lot of single family home developers use rolling options on subdivisions, so they can develop in phases and treat each phase as if it was a separate build out.

For example, let’s say they want to take down a 150 lot subdivision with the first phase being 25 lots and the remaining phases the same (six phases of 25 lots each).

There are certain costs — fees, mass grading, architecture, engineering, improvement plans, etc. which represent an upfront load that may take two or three phases to recapture but the last three phases could work on a stand alone basis as they move through the buildout.

If the market tanks, the developer walks on the last few phases, the landowner retains the balance of the final map /subdivision with mass graded lots and attempts to resell them again to another developer, holds them until the market recovers or sometimes builds out the project himself (much lower land basis).

I have heard that several large builders (and condo converters) are letting go of their marginal deals that are under option and focusing only on deals that make sense in a softening market (those deals that were purchased a few years ago and still have plenty of upside).

I recently read that one large public builder in particular let go of several optioned projects across the country, at a cost of $ 5 Million in lost option consideration (just a cost of doing business).

By using options, builders minimize their exposure and reduce market risk and, as opposed to buying, also show no debt on their books (a big plus for a public company) while controlling a project as if they owned it. It also improves dramatically their Internal Rate of Return (IRR) because they have much less cash out at any one given time. So a difficult deal under a purchase scenario can pencil quite nicely on a rolling option scenario.

So, builders have other choices than to continue building out a losing project. Believe me, they have learned a lot during the last few housing recessions. These are large, well diversified and extremely successful companies that operate in many markets across the US. Many of them have been in business for several decades and are often passed from father to son. They’ve made it through past recessions and they will make it through this one too.

[docteur]

Thanks. I hope everyone on this forum is having fun this summer and not worrying too much about the impending “correction.”

I am having a great summer…so much fun in fact, I have not had a lot of time to keep up on this forum. Surfing, sailing and swimming this time of year are activities that can oftentimes take all day because of our beautiful weather!

Lots of good stuff being posted though and I will do my best to stay on top of it! Sometimes it takes me hours just to catch up but it is definitely worth it.

[docteur]

SDRealtor – Great data. Just the facts, Mam. Thanks!

[docteur]

PerryChase – Thanks for your comments but I have to disagree with them. SDRealtor has a better handle on what’s involved in building a house.

I have been subidviding and selling land to builders for 30 years. I see their proformas and know how much they earn.

Builders make a lot LESS than you think. Booking profit is done through large volume and quick turnover in dollars, not high margins. Building is an extremely competitive business and builders keep one another in line in their efforts to bring buyers into their subdivisions.

$ 100 per foot for a new home (cost) is high. With the economies of scale, you can build a very nice tract home for $ 80-$ 85 per foot in today’s market (upper end and possibly more for less expensive homes — at basically the same spec level, a larger tract built home can oftentimes be cheaper per foot than a smaller one).

A custom or spec built home is a whole different analysis and in some areas can be as much as $ 300 per foot, depending on the level of spec. The cost to remodel a home can easily reach $ 400 per foot, depending on the improvments (my brother is a contractor and just finished an addition on a home on a flat lot that was $ 425 per foot because the home was older, demolition cost and matching of materials was difficult, etc.)

In the old days the rule of thumb for merchant builders was 1/3 for the land (finished lots, ready to go vertical), 1/3 for construction and 1/3 for overhead and profit.

Those ratios disappeared at the start of the last boom as land prices began to soar, in part due to the fact that entitlement processing took longer and longer because of the massive increases in environmental restrictions. (The last land deal I did took 15 years to bring to market – long lead times add to higher home prices because of the huge processing and holding costs of land).

Today, land can be as much as 50% of the cost of the new home (and higher with single built spec homes), and if construction is as much as 40%, it doesn’t leave a whole lot for the builder for profit and overhead. Again, merchant homebuilding is very risky because of long lead times.

An actual case in point from a recent transaction I participated in: Land $ 500,000 for a finished lot (all costs and fees); Construction $ 82 per foot (including financing), with the average size home being 3,800 SF. Projected sales price (homes are still being built and will hit the market in late fall): $ 900,000. Gross profit margin to the builder before taxes: 9.8%

The above analysis is fairly typical in today’s market. And margins are falling as prices are falling and the market is softening. At the height of the building craze on this last go around I saw margins as high as 20%, but those builders had bought the land years ago and entitled it themselves (they did not purchase “retail” lots).

But to say prices across the board will fall far below replacement cost, just doesn’t sit square with me. Again, the entire construction and building industry would disappear and we would be in deep caa caa. We better pray it doesn’t get to that.

So, although retail pricing may reflect $ 200 -$ 300 per foot or more, depending on the market area (my current home in Carmel Valley was purchased new at $ 308 per foot (with about $ 150,000 in builder upgrades) in 2003 and was recently appraised at $ 588 per foot, but I also put in about $ 300,000 in landscaping and other improvements. Will my home fall to a value of $ 294 per foot (50% drop) to a resale value of just under $ 1 Million?

I seriously doubt it. Again, I just don’t see prices falling across the board to a level that is far below replacemnet cost. There would be no incentive to build anymore and then existing housing stock would start to increase in value until an equilibrium was reached in pricing that caused builders to come back into the market.

Quite frankly, I am amazed at some of the predictions made on this forum. Just because someone says it doesn’t mean it is so. As I have said time and time again, nobody knows what is going to happen and the best we can do is simply observe, without emotion, the trends and then follow them.

Additional comment:

Daniel – Thanks for your perspective but again, long lead times are what keep land prices and indirectly, home prices high.

One recent deal I did went down as follows: Land Cost in 1988 dollars – $ 1.2 million; Processing Costs $ 5.3 Million (including carry). Sales price to give investors a reasonable return on capital: $ 30 Million. Time to bring to market (start home construction): 18 years.

There was tremendous risk in this deal and we didn’t get our approvals until 2003 (so for 15 years we didn’t even know if we would recapture our $ 6.5 Million, let alone make any profit). For nine years I negotiated with the Resource Agencies and almost got my land turned into a park. For that kind of risk, you want a decent return or you will move into other kinds of investments (which I have now done. It’s just way to risky at this point in the game to subdivide land in California, especially San Diego).

Again, long lead times (in California anyway) just kills you. In Texas you can get entitlements in some areas in 90 days. By the way, San Diego is one of the most environmentally restricted areas to build in the nation. We have huge bio-diversity here due to the climate and extremely aggressive environmental agencies and laws. Only Kauai Hawaii is worse as far as I know.

Believe me, these things keep land prices and indirectly building cost artificially high. The stuff you see going up now, especially in master planned communities, was designed and planned in the early 80’s and in some cases took twenty years to bring to market. Land prices are holding up remarkably well and I don’t expect to see any dramatic adjustments anytime soon. Most land guys I know would rather hold through a downturn than sell out at a hugely reduced price.

[docteur]

So, is the consensus on this forum that housing prices, assuming they drop 35% – 50%, will fall far below replacement value?

Most builders work on 10%-15% margins (in good markets and a lot less in bad ones). A 50% drop puts a new home (or a resale) at a price way below the cost to build that home (including the land).

Is that what is being predicted here? Not only will land values have to fall a long way but also the cost of all construction materials and labor. With commodity prices increasing I certanly don’t see that with materials and the cost of labor can’t fall too much either.

Honestly, if homes values fall 50% on a mass scale, the entire building industry, not to mention all those related businesses, at least those which pertain to residential construction, will collapse and disappear from the landscape.

[docteur]

PS – Yes they probably did reset at lower rates. But I am curious at what rate most of the suicide loans were qualified? Was it the start rate or a fixed rate?

Because now that I think about it, I got a great start rate but had to qualify, full doc, at the fixed rate at the time, which was back in 1986.

Can a realtor or a mortgage person on this site tell me how those loans were made recently, say within the last two years?

[docteur]

PS – I got an adjustable rate mortage many years ago and was not qualified at the teaser rate but at a rate that I believe was equal to the teaser rate and the cap on the rate.

Are there any mortgage brokers out there that can clarify how these suicide loan borrowers are qualified, even though it might not make a difference if it was a “stated income” loan, because the borrowers could lie to meet the qualifications anyway. Just curious…

[docteur]

SD Realtor – I spoke with a neighbor who knows the buyers and she said they are solid and plan on closing sometime in August. The seller is a young guy who successfully flipped another property in Santa Barbara about two years ago and then rolled into this one. His plan was to keep it but I guess he couldn’t afford it after he booted the renters out and put in several upgrades before selling. But we’ll see how it goes…

[docteur]

As an aside…5562 is also in escrow.

[docteur]

Thanks…that is good news.

[docteur]

SDRealtor – What is the address of the house that is pending?

[docteur]

I have to agree with SD Appraiser. Zillow is all over the place — high in some areas and low in others.

It is worthless as far as giving an accurate picture of value is concerned, especially in a market such as we now find outselves. Total rubbish.

The home next door to me just went into escrow at a sale price that was more than $ 300,000 above the current Zillow value. I’m sure when that sale closes in a few weeks, the value of my home will magically increase and jump another $ 300,000 (or more).

Here’s another example: Scott Street and San Antonio Place in Point Loma have a row of houses right on the bay. Zillow lists two properties I am interested in (not on the market) one at $ 801,000 (a double lot) and another at $ 1.13 Million.

Both properties have a private dock (there are only five homes on San Diego bay with a private dock) and the minimum value of either of them is easily north of $ 6 Million (I would buy either one of them at that price in a New York minute).

Those values Zillow has for that area are probably based on very old sales (because no one sells in that area except maybe once every few years). The last listing on San Antonio Place was a new home (which was recently pulled off the market – why I have no clue) which was listed around $ 7 Million and another spectacular home to the west was listed at $ 9.95 Million (off the market also).

The most recent comp I have in the area with access to a private dock was a home that sold about two years ago for $ 5 Million plus in overbid. That homes shares a private dock. Zillow has the home next to it valued at $ 1.01 Million. I WISH I could buy that home at that price.

Zillow isn’t even close in value on any of the homes in that area, which number in the dozens.

Only a fool would rely on Zillow’s valuations.

[docteur]

CFO – I do not believe we will see equilibrium at today’s levels at all. My experience is that inventory is peaking and will fall off over the next several months as will sales. At some point, it will be a slow tradeoff of inventory and sales. Where that is, I haven’t a clue.

I agree with you some folks will be hurt but in my mind certainly not 90% of the income earners in this country.

I know of many people who sold at lofty prices and downsized or rented, taking sizable amounts of cash with them to other areas of San Diego and some even out of state.

Others who bought the big house, thinking they could do the same, now realize that they can’t so they will simply stay put and choose not to sell.

I believe the “have to sells” are a much smaller percentage than most. People usually sell their homes to move into a larger home or a different locale. Forced sales are a small amount of the overall market activity. And yes, the less fortunate will sell at the worst possible time. That is part of a free marketplace.

And no, it isn’t fair. But it is reality.

I for one bought the home I intend to die in and own it free and clear. There is no amount of money anyone could offer me to sell and no place else I would rather live. I have many friends who purchased their homes with that same state of mind. So, my experience of this market is obviously quite different than yours.

I commend your concern for those that will take the hit and your willingness to continue to keep as many as possible employed in what could be an ugly outcome. Maybe there are more “minority share” business owners like you out there that will soften the blow down the road and help this irrational market to unwind in an orderly fashion.

I for one am also creating opportunities for others to continue working and earn a decent living. I believe we all want this current situation to resolve itself with as little pain as possible and the uglier it gets, the more we will rise to the occassion.

I believe that we will adjust gradually and it won’t be as bad as some people think. After all, we are in this together.

Nobody has certainty on this and no one knows the outcome. So, I for one will continue to observe the markets, make adjustments as necessary and do my best to keep others informed as to what I see unfolding. I will also do my best to keep the emotion out of it and plan responsibly for the many contingencies that can arise in the future.

I can only tell others what I believe and what I intend to do based on my experience of similar situations. I cannot predict what will happen nor would I ever tender advice to others (except maybe that they spend some time on this website).

Thanks for sharing your perspective and for participating in this forum. Each point of view enlightens us all.

[docteur]

I agree with SDR. In my experience (not a prediction of things to come, just what I have observed in the past), inventory peaks along with prices and then continues to rise as sales fall off. (Obviously, the less homes sell, the more the inventory will linger).

The more folks think they can “get” for their homes, the higher the percentage of those that list to test the waters. Greed is the motivating factor and I believe a lot of the listings out there are people who are late to the price run ups trying to squeeze that last dollar out of their homes (the old “darn, I should have sold yesterday” crowd).

Once a “pricing” threshold is reached and folks realize they can’t get what they “want” for their homes and they don’t sell at those lofty asking prices, inventory starts to fall off as those testing the waters simply pull their homes off the market (as opposed to inventory falling due to sales).

That’s why sales were falling off and prices were continuing to rise in some areas. Price exhaustion was being reached and now in most areas it has already has been achieved.

An inventory/pricing equilibrium will be created at some constant level of inventory and then a long period of flat sales will result, along with some price reductions from those that “have to sell.”

Then when everyone accepts the new pricing paradigm and readjusts to the cooling market, sales prices may then start to fall more rapidly because only “real” sellers will be in the market (those that must sell and if they do, inventory will decrease even more).

In my experience, folks who have to sell hate to sell in a falling market and wait to the last minute to sell because they keep hoping the market will improve.

But all that takes time (several years maybe). It won’t happen overnight and it won’t be an instantaneous crash. I would describe it as a long, hard, drawn out landing, where the market is skidding to a stop on a slippery runway.

When prices fall to a certain level (very low), inventory will also fall because many folks will refuse to sell at those “really low prices” (those that don’t have to sell anyway) and real estate will go into a holding pattern.

That was my experience of the last real estate cycle and is my experience so far of this market. Not a prediction, just an observation.

[Author]

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