“It Will Get Bumpier Before It Gets Better”: California
The Sacramento Bee reports from Califonia. “It might seem the worst time to start building houses in the Sacramento region with prices dropping and so many homes for sale. But a pair of deep-pocketed newcomers, divisions of a U.S. timber products giant and a major Japanese conglomerate, are positioning themselves to make sizeable new splashes in the region’s home building market.”
“‘Personally, I would like to see the upside last a little bit longer. But there are opportunities in a down market as well,’ said David Ragland, VP for Los Angeles-based Pardee Homes, which plans 4,000 new homes in the coming years in Natomas, Rancho Cordova and north Stockton.”
“Also new to the local market is Irvine-based MBK Homes, which plans to start constructing the first of its planned 600 homes in the region within weeks in Citrus Heights.”
“‘We have almost 4,000 lots and over $100 million invested and committed in Northern California markets as we speak,’ Ragland said.”
“A division of the Japanese general trading firm Mitsui & Co. Ltd., MBK plans still more houses in Folsom and Roseville. Long-range, it’s eyeing expansions into the East Bay, Interstate 680 corridor and Reno from a Sacramento-area headquarters. ‘We have the capital and desire to grow,’ said Jon Tattersall, president of MBK’s Northern California unit.”
“‘I don’t see the trend slowing down in Sacramento,’ said said Kathryn Boyce, an analyst in Hanley Wood’s Sacramento office. ‘I see the boom has stopped. The craziness has stopped. But builders are going to keep coming in here.’”
The Sierra Sun. “The nationwide housing trends are mirrored in the Tahoe-Truckee area, where sales volume slumped by 24 percent in Tahoe and 11 percent in Truckee in the first six months of 2006, according to a Chase International market report.”
“Now, with winter approaching, sellers are either pricing their homes aggressively in attempts to sell before winter, or taking them off the market and ski leasing them, said broker Gayle Blair.”
“The local market is still softening along with national trends, she said. The change does not surprise her. ‘I’ve been in the business for 30 years and I’ve seen it go up and down and sideways,’ said Blair.”
“Shari Chase, president of Chase International, warned of the market cool-down in the company’s market report released during the summer. ‘The period of huge increases in home values has come to a screeching halt,’ she wrote.”
The Desert Sun. “Home sales in the Coachella Valley dropped nearly 39 percent in September compared to year-ago figures. In September, 704 new and resale homes and condos sold across the valley, compared with 1,142 properties sold during the same month last year, according to DataQuick.”
“A month earlier in August, 788 homes sold; that represented a 41 percent drop in home sales compared with August 2005. Realtor Douglas Balog said the valley is in a ‘contraction period’ that should bring about price corrections.”
“Greg Berkemer, executive VP of the California Desert Association of Realtors in Palm Desert, said the local real estate market based on third-quarter MLS figures looks as if it will get ‘bumpier’ before it gets better. ‘The (economic) fundamentals are in place to make it more short-lived than the last time we went through this nine years ago,’ Berkemer said. ‘The first thing that comes down in a market shift is asking prices. And that’s the toughest thing for sellers.’”
“New-home sales dropped 19.6 percent to 267 in the valley last month, while closings for resale condos in the Coachella Valley plummeted 62 percent to 109 condos. The weak sales in condos may have helped send asking prices downward, because the median price for resale condos in the valley dropped 10.6 percent from a year ago to $283,500.”
“The inventory of existing homes in the valley climbed to 8,358 on Monday compared with about 4,700 last year, which has some sellers realizing there’s a lot more competition out there. Buyers are realizing they may have to adjust their asking prices and overall expectations, said Patrick Veling, founder and president of Real Data Strategies in Brea.”
“‘This is the biggest slowdown we’ve seen, locally,’ said Resa Harbord, manager of North American Title Co. in Rancho Mirage. ‘In Orange County, I’ve seen these kinds of slowdowns several times, but not out here in the valley. Buyers are few and far between.’”
“Home sales dropped by double digit percentages in most cities across the valley, with the exception of Coachella and a portion of Desert Hot Springs, DataQuick reported. In Palm Desert, for example, 65 homes sold, more than a 60 percent drop in overall home sales from September 2005. In Palm Springs, 92 homes sold, more than a 40 percent drop in home sales compared with year-ago figures.”
“Home sales in Cathedral City dropped 57 percent, while La Quinta showed a nearly 55 percent decline from the same time a year ago.”
“Mikki Wood, a real estate broker in Indian Wells, noticed that sellers have begun responding to the changing market. ‘There have been 78 price reductions throughout the valley (Monday) alone,’ Wood said. ‘The market had to make a correction, and it’s doing that now. I think it’s for everybody’s benefit that this is happening, because homes were becoming too unaffordable.’”
“‘I don’t see the trend slowing down in Sacramento,’ said said Kathryn Boyce, an analyst in Hanley Wood’s Sacramento office. ‘I see the boom has stopped. The craziness has stopped. But builders are going to keep coming in here.’”
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This will end badly for these guys! They have over-payed for the land (probably double/triple what the prices were only 2-3 years ago) and no must get some return (negative) on their investment.
Good luck suckers!
So much for the “we learned our lesson from the 90’s” or “we won’t build on spec or carry too much land on our books - we only use options”
“ …….and a major Japanese conglomerate …”
Have the already forgotten how well Pebble Beach worked out for them?
Oops, Jim beat be to this in a post below … delete
Actually, a Japanese billionaire had a couple of thousand houses in Citrus Heights. They were being let out out on 30 day notice leases when the guy suddenly decided to unload them roundabout 2002/2003 (I forget exactly when). Big hue a cry ensued.
Looks like the same scenario is going to play itself out again.
I told a bit of a lie. It was a guy named Gensiro Kawamoto, and it was only 420 houses.
Sacbee article
The article:
http://www.pacificcoastrealty.com/markettrends.html
Pretty shocking to see the prices in 2002. The runup has been enormous for those shacks.
This ranks up there with the AOL/TimeWarner debacle, complete destruction of shareholder/investor wealth. I can’t imagine entering any building market at the moment; instead, I’d be rushing for the exits. Sometimes the cost of doing nothing is less than the cost of doing something. Oh my, the pain and carnage these guys are bringing onto themselves.
Are you kidding? That was the ideal way to lock in a huge amount of shareholder wealth for AOL shareholders. With the merger AOL shareholders got 40% of TimeWarner without it they would have ended up in similar straights to the rest of the dot coms.
TimeWarner’s shareholders got scammed and are the only legitimate complainers in the whole debacle (but they’d been second class citizens there for the better part of two decades so no real change for them).
C’mon…you knew I meant destruction of TimeWarner’s shareholder wealth not AOLs and probably Ted Turner’s biggest debacle.
“‘I don’t see the trend slowing down in Sacramento,’ said said Kathryn Boyce,
You got that right… You don’t see!
“‘We have almost 4,000 lots and over $100 million invested and committed in Northern California markets as we speak,’ Ragland said.”
I think this quote it all. These guys have passed the point of no return. Just like Crispy says above, they have no doubt over-paid and already set the ball in motion. From what I have heard, builders familar with the Nor Cal market are pulling the plug on future plans. For these newcomers it will be their Little Big Horn. Yee-haw!!
The only way this makes sense is they are already ‘in’ ,and are trying to prop up share price ,or the market until they can unwind some positions…..
Either that or they are gambling on some kind of govt bailout. I don’t think the Fed will help them much there, given that they warned about the pitfalls of real estate investing way back in spring 2005, which could be construed as a signal they did not plan to protect those who chose this form of gambling However, I am not sure whether other forms of intervention are not possible to keep the party going; I noticed a report from UK today that suggested their housing price inflation has perked back up again, despite the obvious bubble problem they have on their hands. And nhz regularly suggests something similar has happened in his country.
The big problem if housing price inflation cranks up again is that more building will add to record overhang of new home inventory — a recipe for a worse future disaster than the little one at hand.
American industry is no longer capable of thinking for the long term (and by long term I just mean a couple of years).
They are completely and utterly focused on the next quarterly returns. The upcoming quarterly results will determine the stock price. It will also determine if top execs get fat bonuses or get shown the door.
This mentality creates a full speed ahead mentality. Keep building and keep churning, cook the books a little, work the deals and the angles, postpone the downside and grab the short term gains.
They aren’t focused on the future because America has no future. Just get while you can before the big collapse.
“‘We have almost 4,000 lots and over $100 million invested and committed in Northern California markets as we speak,’ Ragland said.”
That sounds really bad. Someone is getting fired.
I wonder if this is a widespread phenomenon amongst the big builders right now? In the greater east bay area the major players are STILL grading large tracts. I can only imagine how many thousands of lots this amounts to. I guess it’s balls to the wall and hope for the best.
Northwest of Phoenix and Sun City on the way to Wickenberg (Rte 93), the graders are scraping large parcels of land. I cringe every time I pass thru the area. It must not be too painful when using OPM.
Is there enough population to fill all those planned homes?
of course not
build it and they will come…
Just not THIS decade.
Someone noted sharks have to keep moving or they die.
Builders are the same. The have to keep building or they die.
Build now and increase market share, then obtain stock options at $1.00 a share cash in in six months, then company goes bankrupt. Or they could just not build and go bankrupt now.
She is total right.
The downward trend will accelerate.
I think they are going to make a killing with “Yaris style ” affordable homes.
Maybe they can get a deal on those homeless shelter domes they are going to auction on eBay from the homeless city they just closed in Downtown LA.
Build baby, build.
Not everyone is in denial.
I work for UCD. Today, I went as a real estate agent for Halloween - dressed to the 9s, Lyon RE name badge, painted on smile, visible cancelled contract and overdue BMW lease payment in my pocket, and a noose around my neck. My favotite prop is a large rubber balloon I found which I left deflated with the word housing in big letters written across it.
The folks in econ loved it and well as all the community development faculty. The folks at the Bus Management grad school were less thrilled to see me >; )
Did you really? If so - LMAO!!!
Yep, 3 yrs ago I went as Voodoo economics - a man’ gray pin stripe suit, red power tie, and an african mask made from paper mache’.
Now I’m wishing I left early and visited the Centex sandlots… errr I mean communities in Woodland >; )
That’s the coolest thing I’ve heard! Good job.
posted ““It Will Get Bumpier Before It Gets Better”: California”
Oh Yea! I have been watching some mess Centex Homes is carving out of an otherwise good dirt-bike hill in Chatsworth Ca.
No lie this was a mess from the get go…. 9 months to 1 year of heavy EQ, moving land …. before one nail was nailed. They had to build heavy duty retaining walls etc. all over the place.
The local gangs taged it up a ton…. but the pads were poured and the framing began…. I was KOed… they are zero line lots!
But always best for last…. I saw a banner over a taged slumpstone wall………. For sale in the “Low MIllions”….. this is the truth you can go to Centex Homes dot doo doo …My Lord it aint goin’ happen!
posted “It Will Get Bumpier Before It Gets Better”: California”
Brillant post AE old boy! But you failed to add “the Hummpier it gets”
Please let us bask in your glow AE!
AE this really adds new meaning to the phrase, “The lights are, but no one is home.” Just who is buying these, I would like to know?
OCDan ” Just who is buying these, I would like to know? ”
Dan the sad fact is nobody will buy them. Within a 5 mile circle of this site you can get 3times the house/land for in the mid 800’s. My guess is that this is droping daily.
As you drive up the hill to the 118 you see a new carving out of a hillside these will be Condos! I don’t get it?
The prices are just starting to crack in this part of LALALA land.
The builders have room to maneuver with their prices. Their margins have been huge the past 3 or 4 years (I’m guessing over 40%). I’m sure that they are still breaking even at 2001 pricing or lower (depending on when they bought the land). “Home owners” who took out a large mortgage in the last 2 to 3 years are the ones who will be hurting as prices are discounted by builders to move inventory.
you beat me to it. They are called Sojourn and start in low 700’s. It’s kind of sad, at least to me.
http://tinyurl.com/yx6vdt
I just pray they keep adding to the inventory. This will keep constant downward pressure on resale prices.
A look at how Sacramento’s 2006 “appreciation” predictions are faring.
Ahh yes, only last year 25 year old Mortgage brokers were moving into multimillion dollar penthouses.
A View from Above
“Kyle Kamrooz is moving on up next spring, way up to a penthouse at the Marquee at Park Place in Irvine. The 25-year-old mortgage broker is one of Orange County’s high-rise pioneers, a small but growing breed of homebuyers who have decided less is more and going up is the new direction in Orange County living.
“In real estate it’s all about location, location, location,” said the Orange County native, who dropped a cool $1.7 million to buy a 2,100-square-foot unit in on
e of the twin condominium towers at the corner of Jamboree Road and the 405 Freeway. With upgrades like travertine floors throughout, an 8-foot waterfall in the entry and a lounge-like décor for entertaining up to 50 friends, Kamrooz will move into the ultimate luxury pad.”
Sickening…utterly sickening.
I remember that article from last year - it is dated Sept 2005. I wonder how things are going today???
I Think I heard a “jumper call” on my police scanner for that address… and it wasn’t on the pool side.
I find it very humorous. He will be flat broke pretty soon. Just think, his property tax alone is close to $2000 a month, and who knows how fast his income may fall.
Good - This guy is drinking his own kool-aid!
Not kool-aid — looks like lemonade, but it tastes nasty.
Boy, I had to laugh at that one, GetStucco. But how would you know so much about it? You could have written “but I heard it tastes nasty”. I won’t ask any more questions. Thanks for the laugh.
I got my first postcard yesterday for a condo development in Hoboken. I laughed all night. It was titled “Rent vs. Own”. They are selling $500,000 condos in Hoboken and comparing them to renting in Manhattan. “Build equity instead”, it chimed. These condos are as far from the PATH train, and good transportation, as any condo in Hoboken could be. Oh, it’s going to get ugly in the Big Apple. I look forward to more postcards. I’m going to make a collage.
Why go to college and work a sucker job, when at 25 you can be a mortgage broker, strut your stuff, and make more and live better than many others who foolishly did something productive for a living.
Filling out mortgage paperwork is surely work the income it takes to afford such living.
Arbitrage at its best!
The easy money in the mortgage business is DONE. This guy has doubled down - job and home - in real estate.
The reality check coming soon to this soon to be bankrupt fool will be a wonderful site to see!
Sub prime is no longer prime time. Soon to see re-runs in 2017.
This guys is nuts. OC metro you are sooo right. What does thise guy do to make enough money for a plce like this? I for one, would like to revisit many of these folks in say, 2-3 years, and see what life is like for them and the kids, for those family with them.
Faithful reader, first time poster.
After being disgusted by this 25-year-old, I decided to use “the Google” to learn more about this condo project. What I found is predictable. The complex has 228 units, with the first residents moving in during the 2006 calendar year. Guess how many units are currently on the market according to search-ochomes.com? 56. Barely shy of 1 in 4. Granted, at the current listing prices, anyone who bought at the initial offering prices would make a hefty profit. But as we all know, if there was sufficient buyer demand to justify the current list prices, there wouldn’t be 56 current listings.
Hopefully this link works:
http://www.search-ochomes.com/irvine-park-place.htm
Good leg work Slater. I think this is a disaster that will become real messy in the next few years.
“the Google”
they say he is a ‘broker’ which could mean he has others working (ie feeding) him… and then he could also just refi himself into more term forever. I do agree though that the fact that anyone would give a guy (even a mortgage broker) what is almost certainly a 7 figure mortgage puts a spotlight on the problem in mortgage lending….and yes i agree he will probably be bk in about 2 years.
Kamrooz, one of the younger buyers, sees the Marquee as part of the evolution of a “mini-Manhattan” in Irvine, with restaurants and entertainment nearby, office buildings and John Wayne Airport less than five minutes away.
Oh, yeah…and what’s the name of the development that was compaired to Paris a few topics ago? Too funny…
I can understand the need to downsize (if that is what they are really trying to do), but not at the dollars they are signing up for. I sure would like to know the details on the mortgages they are in for….more than likely, very toxic.
BayQT~
SF you are so negative. Come on, you don’t think the kid made a 20% downpayment with what 350K? Come on, you know he banked all that money. As for the others, you should know they are all walking around with all that cash.
Sarcasm off!
LOL! I know, I know…I’m preachin’ to the choir.
I just had to get it off my chest. 
BayQT~
“ This is a new way of living,” he says. “I think a lot of people will be envious. It’s fun to be a part of something fresh. I can’t wait for that first sunrise when I am sitting on my patio. It will be priceless
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This guy drank the whole pitcher of kool-aid!
Forget pitcher; he’s hooked onto an IV delivering a constant supply of REIC enriched Kool-aid. No and not the regular kind for mere mortals; the really souped up mind-numbing kind.
Poor bastard! When this is all over, he is going to have the mother of all hangovers.
And a burning sensation in his rear-end.
Is that more like the guy in “Me, Myself and Irene” or the guy in “Deliverance”?
“I can’t wait for that first sunrise when I am sitting on my patio. It will be priceless.”
Sitting on the patio watching the sunrise. It is an ENTIRELY NEW WAY OF LIVING! I can’t believe no one has ever thought of that before.
Genius!
the development contains about 230 units and 59 are currently available for sale in the MLS and 40 are available for rent in the MLS.
that’s better than a couple of months ago when 80 were for sale. 12 have been reported sold in the MLS which means about 1.5 units per month are selling. at this rate it will take 39 months to sell the 59 units already on the market.
and when you buy here, you get to pay your $1,100 per month association fee and you’re not allowed to have any pets.
WP - thanks for the hard stats about this project.
Assuming those 80 units were owned by speculators, that’s about 35% of the building - ouch! And the 12 units that have been sold were sold during a much stronger market, so i’d be surprised to see the 1.5 units per month figure hold up.
Now, some specuvestors will be able to sell, and some will be able to choke down the negative equity month after month. But the foreclosures in that building (10? maybe 15? who knows) will definitely hurt its reputation and the resale prices.
Please keep us up to date on what’s happening there.
I remember this article from last year. Can anyone from Irvine do a title search to see if that mortgage broker still “owns” his penthouse? I noticed in the article that the builder was Bosa Development. I seem to recall them as being the ones with all kinds of recent troubles. Anyone here know?
I think you are the only one thus far that realizes this is a story from LAST year.
It references plans for some projects starting in early 2006. This guy is probably underwater, which is quite an accomplishment from that elevation! Congratulations, genius!
If the number of units in this building currently (see above comments) for sale and/or rent are anywhere near correct, then that guy is underwater for sure! Anyone for SCUBA?
Man has pissed himself so many times he was able to submerge entire building, Glub, glub, glub…
Dio - I clearly stated that “it was only last year that…”
I brought it up to contrast just how far we’ve come.
“But a pair of deep-pocketed newcomers, divisions of a U.S. timber products giant and a major Japanese conglomerate, are positioning themselves to make sizeable new splashes in the region’s home building market.”
WTF! New entrants into an already over supplied market with declining profit margins and an impending credit crunch. I’m speechless! Forget buckets, truck loads of Stupid….
Who is the bagholder? Because I am sure the U.S. timber products giant and the major Japanese conglomerate who are positioning themselves to make a splash have figured out how to shaft someone else if the splash follows a belly flop.
Same corporation probably has millions in US MBS’s to “Secure” pension fund. entrepreneurial “brilliance” runs through entire company.
Relax Mav,
It’s all over when the Japanese get in. Remember Pebble Beach?
Why are Asians so prone to being the last suckers in?
Is it cultural?
It seems like they push and shove their way in at the last remaining Greater Fool moment every real estate cycle.
No one has ever fully explained this to me.
If I’m being racist, explain that to me, too, because my eyes and ears must be decieving me.
Dont forget the Rockerfeller (sp?) center in NY or the FIB building in Downtown LA!
Rockefeller
All asian do not behave in the same manner….the Japanese, Chinese, Philipino, Vietnamese, Indian…they are all from ASIA, however I think they show their own seperate traits.
If you meant the Japanese as corporate entity, then of course it is a slighlty different issue.
Yes, Japanese Corporations still insist on making “subtle” war reparations to US even though war over for 60 years. No one bothers to tell them to stop. Why be rude?
CHiP’s was the #1 syndicated show in Japan 10 years after it died a natural death here. Erik Estrada was already pitching housing lots in Lake Shastina, Ca.
Don’t throw those Beanie Babies out just yet ……
They just need some place to park all of our debt.
Yes, Japanese are merely putting “doo-doo” back where they found it. Hoping “doo-doo” maker will kindly return and bury it for them. Japanese very “polite” society.
jim- pebble beach was the first thing that entered my mind when reading that article. Japanese investors - the true contrarian indicator?
The recent onslaught of bubble news is getting crazier with each passing day!
Every day we read about stupid buyers and realtors saying stupid things and so on. But this — this my friends is no regular stupid. Entering the RE building market at this juncture has to be about 3 or more std deviations from regular stupid.
The largest homebuilder here in Madison, WI is now using Craigslist to try and rent out the their glut of specs homes now on the market. When I look up the owner of these properties on the city assessor website, they are using multiple “shell” company names to conceal their identity. Too funny.
Joe — thanks — I think that is pretty interesting. If you care to do some further sleuthing, specific examples of situations like that are popular here, perhaps for the “local observations” thread each weekend.
Where in the Madison area are most of those spec homes that are going unsold?
Michael Feldman from NPR’s “What Do You Know” is rich celebrity. can’t they sell all these to him and his “posse”.
P.S. From the response to “Joe Smith” I think Susan “smells a Lead…” Carry on Susan.
“‘I see the boom has stopped. The craziness has stopped. But builders are going to keep coming in here.’”
Builders are still making money on every house, no matter that the price has gone down by 10 or 20%. They will keep building until there is no more profit left. No surprise there ! That is what will drive house prices right back to mid 1990s levels. That is how the economics work ! I predicted that when this blog first started, that the builders wouldn’t stop until there was no more money in building houses. Looks like I was right.
And the beauty of it is that if govt intervention tries to save the boom, we will still end up drowning in an oversupply of affordable housing. Too bad so much of it will end up to be a poor fit for the households who have been priced out by the bubble (I expect 3-4 households splitting up McMansions into triplexes and quadraplexes five years from now).
On the bright side, those McMansions will make pretty high class Hoovervilles if worse comes to worse.
But these newfangled Hoovervilles would be very expensive to heat and maintain…
With materials costs taking a hard shank, the costs of land and cooked in development fees may yet make it profitable. Sure, the 30% is gone, but there is still a ton of money to be made by driving down prices and sucking up whatever buyers are left. The owner/seller is absolutely screwed in this game.
I work in banking and have covered builders before. Their physiology is like a shark’s - they need to keep moving to stay alive. What’s a builder to do if they’re not building? Tear up the corporate charter and shut the doors? They’ll keep building to the bitter end, until every last dollar of profit is gone. And that may be a while….prices at the peak were giving these guys like 40% margin. They can build a lot more until it’s unprofitable.
Good thing is….they can price lower to move product and it puts even more pressure on FBs trying to flip.
In the near future, they will build smaller, more affordable houses.
or apts.
Bad thing is … their shareholders will get shafted with a declining value annuity whose value eventually drops below $0.
And don’t forget tweedle-dee that the prices for some of their raw materials are plummeting. As wood and other supplies fall so do their base costs. This means they can drive the prices even lower. Then you add on to that the fact that all of the sub-contractors will lower their price because they will be happy just to get work. And the cost of a new house continues down the slope.
My wife and I sold a house last year. It was less than two years old. But buyers saw it as a “used” house. They were consistently willing to pay 5 - 10 percent more for a house that had never been lived in, just a mile down the road. That means that the “investors/suckers” that bought at the peak are competing against a monster called the REIC. They are really screwed. The coming recession will lower builders’ costs even further and then it is “throw in the towel” time for anybody trying to wait out the decline. At that point they have essentially chased the market to the very bottom and met Wile E Coyote.
“Also new to the local market is Irvine-based MBK Homes, which plans to start constructing the first of its planned 600 homes in the region within weeks in Citrus Heights.”
“‘We have almost 4,000 lots and over $100 million invested and committed in Northern California markets as we speak,’ Ragland said.”
Now this leaves me speechless!!!!!!
Ben, are you sure you didn’t make this up just to keep us awake?
Wouldn’t you luv to know how much of $100m is already down the toilet by now?
Good lord, 4,000 more homes?!?
No lessons learned. What the heck is going to be left of the finance market after this shakeout? Somewhere someone is the bagholder. If nothing else, borrowing money is going to be tough in a year.
Then again, I read somewhere about a hedge fund that wants to buy land from Sears (ex-K-mart) and Macy’s (ex-Robinson’s May). They believe they could profit even if home prices drop 50%!?! (Sorry, I forgot to bookmark the link.) Does anyone think prices will drop 50% faster than they can build? Even I don’t think it will be that quick. Some will be crazy enough to lose everything. Some will be crazy like a fox and make out well.
Neil
Neil you make a good comment about borrowing money. When all the Shiet hits the fan and the shakeouts begin and the banks go belly up or file for help from the fed, you will see massive tightening of credit. Even if the fed pushes for inflation I can’t see it helping the f’d borrowers, only the institutions that need the cash. When that happens the banks will either have to work under tighter lending standards and/or will tighten the purse strings themselves. Lastly, those of us who are smart enough and on this board will still not be in the game because everything will be unraveling during that period and there will be much uncertainty. As someone posted earlier today, why not rent? Would you want to own knowing the gov’t could seize your property if need be? All this reminds me of a movie I saw years ago. Please help with the name. If I recall John Denver was in it and the gov’t sold off tons of land to pay off the national debt. I am dreaming this or was there such a movie? If I recall, wasn’t it the INdians who bought it all back?
why not rent? Would you want to own knowing the gov’t could seize your property if need be?
Whaaat? Could you explain this part further?
imploder,
I believe s/he is refering to Kelo v. City of New London.
Govt can take your land for private enterprise. So much for “private property” rights.
http://en.wikipedia.org/wiki/Kelo_v._New_London
This is insane. 4,000 homes and 100m invested? Forget all the doom and gloom scenarios of the past. WE ARE DOOMED IN THIS COUNTRY, IF NO OTHER REASON THAN… Idiots like MBK Homes making decisions in this country! WOW! That’s all I can say to this. Who they hell is left to buy this overpriced crap that they are spewing out like some overstuffed Joe Sixpack on Turkey Day? Worse yet, who the hell would finance the schmucks buying? Talk about oversaturation. These guys are clueless. Don’t be surprised if this comoany files for chapter 11 in the near future.
As an aside, looking at all those condos in OC in the story above, I really believe that people in the OC are only concerned about keeping up with the joneses. Who they hell is buying a penthouse condo for 1.7mil in Irvine. For the love of God end this nonsense. Okay, maybe 1.7 mil to live in the penthouse in say, the Empire State Building, if there ever was one, but freakin’ Irvine. All I can say is forget the saying about not letting certain people procreate, it should be changed to…not letting certain people of our society have any access to money in any form!
Did’nt these guys do their due diligence and research the market before entering? Every large builder in the nation is pulling the plug on projects.
We have a builder here in Colorado Springs, Oakwood Homes, a private company that spent almost 20M on 2000 acres and plan to build 8500 homes on it over the next 10-20 years.
Pulte is getting ready to build 500 homes and already has 75+ homes that are ready or soon to be, unsold….
Springs are already drowning in recently-constructed McMansions. It is amazing how these building plans feed on themselves…
8,500 homes. Good GOD, please stop the insanity! I mean it. Once again, who the HELL is buying this crap? There aren’t enough solvent people left to buy.
We are all solvent. We just want the price corrected. Nothing has happened in the last 4 years to inhibit the builders from doing that and still making a profit. Especially with materials coming down. They are going to CRUSH the used home sellers in the outlying areas where they can control the market. Places like I.E., Sacramento etc. home owners who need to sell look out…
What’s the big industry again in CO Springs? AF Academy, Cheyenne Mountain, …?
They build so much in that area, that Parker and CO Springs will meet pretty soon.
They’re building all homes and no factories. A recipe for national bankruptcy.
Interesting insight. Homes, being non-productive assets, nevertheless require productive resources to be built. So, on a macro-level, building too many homes is an economical liability, that will have to be paid in one way or the other.
Not only that, they REQUIRE upkeep. From things made in factories.
This will not end well.
“They’re building all homes and no factories. A recipe for national bankruptcy.”
They’re building all houses and no homes. A recipe for falling prices.
“So, on a macro-level, building too many homes is an economical liability, that will have to be paid in one way or the other.”
I believe the Fedspeak translation of “economic liability” is “imbalance.”
At $25-30k a lot they shouldn’t do to bad. In fact, if that is all they paid on average they could very well drive the market down as part of their business plan.
This IS the game. Stay ahead of previous owners on the price curve, slow down construction to catch the max return, and just totally screw the comp’s all the way to the bottom. Prices have so much air beneath them that a 40-50% drop over time can be managed. It’ll take a sharp pencil, but it could and probably will work.
Personally, I think that Turnouthtelights has it exactly right. It IS the game. Used-home-owners have no clue how screwed they are, should they try to enter this market and sell, because the builders have enough fat in their stock to undercut the former all the way to Purgatory (after the nifty Western years ago). Not only was there a huge amount of profit margin, fostered by cheap money, but also materials and labor costs peaked. Now China is not buying so much concrete, lumber is waaay down, wallboard is down, and labor is looking over the edge of the cliff as unemployed tradesmen from the first-collapsed markets begin scrounging for work elsewhere. The builders know that this means reduced construction costs for themselves and that used-home seller psychology will keep the builders on top for quite a while yet. It does not matter to a builder if his sale results in an indefinitely-unoccupied used home somewhere else. When builders stop building for spec, so to speak, we’ll know we’ve reached dead-bottom.
“When builders stop building for spec, so to speak, we’ll know we’ve reached dead-bottom.”
And what will construction workers be doing at that point?
“And what will construction workers be doing at that point?”
Hopefully, not burgling my home. The illegals will go home or elsewhere until times get better; “legals” will either switch to commercial construction and remodeling, if possible, or go on the dole, if possible, or turn to other pursuits, not all of which are comforting to imagine.
That is a generalization, of course, because there will never be a single moment at which spec building stops and the EF Hutton crowd says, “Oh… S***!” But the albatross of beaucoup unemployed construction workers will be a significant problem for local and state governments — hopefully less so for the armed citizentry themselves. The unarmed can fend for themselves, for all I care.
It’s like looking down the barrel of a gun, but now that this has been talked through, it makes too much sense not to play it this way. If I were enough of a predator, I would. Christ! Talk about eating your young.
“The unarmed can fend for themselves, for all I care.”
Another reason we prefer Florida to California.
..” It’ll take a sharp pencil, but it could and probably will work.
You may be right. Maybe the 100mil. is vulture funds. Talk up the plan to over build,and drive the market even past the -50% mark ,and snap up the wreckage. As said above, some will be killed ,and some will profit handsomely…..
This kind of “surf the decline” business plan rarely works out right. What happens is that you model a 15% yearly decline, and the thing drops by 25%+ instead.
The business plan is based on timing of cash flows. If the project takes longer than expected, then the IRR really suffers. This is based on selling more early homes at higher margins than later homes at lower margins. It is really important to sell those early houses quick.
There is one thing the race tothe boom builder hasn’t figured in, and that is forclosures and the additional dampening effect of excess inventory.
If the banks/FDIC want to move REO they will do so, since for them recovering anything more zero is a good outcome. The effect of excess inventory is more subtle but still damaging.
Basicly people want to live in a house that suits them, within a certain range of compromise. As the inventory piles up, the range of choices increases which makes it more likely that a more desireable home is out there already. This effect won’t show up untill there is *alot* of inventory out there.
The general rule with business plans is that if you need anything sharper than a black crayon to explain it, DON’T DO IT(tm)
“At $25-30k a lot they shouldn’t do to bad.”
I have to agree with you as that would be a bargain lot price by California standards, but the article did not state what the $100M was used for. Just the dirt? If so, then fine. If not, then what will their entitlements and infrastructure add to that? Inquiring minds want to know! Which CA builder will be the first to implode?
Housing Bubble Casualty: “Louisiana Pacific has temporarily shuttered its Meridian (Idaho) manufacturing plant and has laid off about 40 workers until next February. The company blamed the shutdown on the sagging U.S. housing market.”
http://www.idahostatesman.com/238/story/58182.html
How much of this will we start to see as a result of the bursting bubble?
“How much of this will we start to see…?”
A lot. And then more. It is sort of like that Disney movie, about the “cycle of life.” It goes around and it comes around, and one day there is no income from which to make the F-150 payment. Jas will confirm, I’m sure, that it is never the Wall Streeters who suffer from this, just JSP. It’s just the way it’s going to be. For that reason, I leave it to the country music writers to poke fun at dry wall hangers — to me, they’re the salt of the earth (as long as they don’t try to burgle my house).
We’ll see tons.
That’s actually 68 workers out the door. Why do I doubt they’ll be running again in February? Are their costs low enough to justify restarting production in the coming market?
Neil
These 68 poor schmucks will be foreclosed on before Feb
There was a related article to the excerpt below in today’s East Bay Business Times. Evidently Catellus is going to throw their hat in the ring now that the prior conglomerate backed out of the project. These are some major players, especially when you consider that Morgan Stanley was a partner. MBK and Pardee Homes are CRAZY! Will there still be any margin left for them when they start to sell, that is the million dollar question.
9/27/06 “Alameda Point Community Partners sent a letter Sept. 20 to the city’s reuse and redevelopment authority, saying the project is no longer economically feasible under the terms demanded by the U.S. Navy, which still owns the 700-acre property, given the downturn in the residential real estate market. APCP is a partnership between Centex Homes, Shea Homes, Shea Properties, Industrial Realty Group and Morgan Stanley that was assembled specifically for the purpose of redeveloping Alameda Point. It has been working with the Alameda Reuse and Redevelopment Authority on a plan to develop the land for five years. The members of APCP have decided that further investment in this project is no longer prudent relative to the high degree of risk,” APCP said in a news release Tuesday.”
I think this all just proves how incredibly profitable homebuilding is when prices are so absurdly inflated. Someone speculated above that they paid $25-30K for the lot. Can someone post links or information pertaining to actual land and construction costs? Can they build these $600K in 2005, $400K in 2007 boxes for $200K? I though construction costs were over $175/ square foot in CA now. Does anybody have hard numbers on this?
I just saw Cramer pumping housing stocks again, saying they have hit bottom. Based on my puts it looks like lots of investors are buying his load. It seems to me it will take a huge price correction AND years to work off the current oversupply once the loose lending is stopped (which, I think will happen after some big MBS portfolios go belly up next year).
awaiting:
The costs really depend on the location. Some municipalities have outrageous entitlement and building fees while others do not. Depending on the product type I think that construction costs are running around $150/ft right now. Still, I think it would be easy for a lot to cost $150-200K before hard construction costs. So, they still have good margins. At least so far.
Tell me there isn’t appraisal fraud going on in these pics:
http://tinyurl.com/y7y7hf
That one with the furry leg hanging out the vent is HILARIOUS.
Can’t say, because I don’t know what the appraisal is versus comps. But the property certainly is not inviting. Mice are a source of protein. That knowledge can be good, if you are a stuck seller, but is worthless if you are a buyer.
I wonder how things turned out for the Jap who evicted and planned to sell 600 houses around Sacramento and Santa Rosa. He probably got out with a nice profit, but imagine if he had waited until 2004.
http://www.news10.net/storyfull.asp?id=959
Although the margins aren’t as high, I think builders can still make healthy profits even at much lower house prices. This is the factor which will bring down the market. The new home prices will be undercutting the existing home prices. Who would want a 20 year old POS when they could get a new one with up to date construction and amenities?
And now for a housing bubble success story…
My wife and I bought a house in April, 2001, in Rancho Palos Verdes for $660K (all the money in the world, put 200k down, owed $3584 a month for 30 years, yikes~) watched as things got silly and then got downright crazy and we realized the only way to cash out, early in 2005 was to move somewhere else, or be an “equity refugee”, of sorts and we like to backpack and have always admired Three Rivers, Ca. and have friends in town, a population of 2,600, nestled in the foothills of The Sierra Nevada, the last town before Sequoia National Park, on the west side of the park.
So we put the house on the market in July, had a few opening houses and 85% of the lookers were asian and had but one offer on our ruthlessly unupdated 1967 tract (the inhouse intercom system still worked) home, with a 2 mile away view of the pacific ocean from that master room and part of the backyard, only.
We played back and forth, a Korean gent offered 1.2 mil, from our initial offering of 1.3 mil and we counteroffered back and forth settled on $1.24 Million (wow, a million deserves capitalization don’t it?) and took a little backpack up into the lower reaches of Sequoia N.P. to watch the Perseid meteor shower and then go back the next day and look at houses in 3 Rivers, as our house in RPV was in escrow and a done deal. We bought the 1st house we saw (we’d narrowed it down to just a few houses, looking on the internet) and traded our tract home for 10 acres on the South Fork of the Kaweah River and a 2600 foot house with views everywhere of the mountains and we own 700 or so feet or so of the river. We own the house free and clear and pocketed $120k…
Yes, there are going to be some amazing losers out of the oncoming freight train that’s gathering speed down a snaky mountain grade, that epitomizes the real estate market now. I remember the early 1990’s market in el lay and had friends doing real estate that told me then how dreadful things were (back in the day when being sneaky with your loan was paying just 10% down, instead of the suggested 20%) and now, in the 1st worldwide real estate bubble, with a myriad of neutron loans about to take out bob and betty bitchen’ from The UK, Netherlands, New Zealand or more than likey here, the worldwide implications (1st world) of a toxic stew, all on the magic carpets of easier than easy credit suddenly falling to the ground is becoming evident more every day…
Nice to sandwich the reality of now, with our good fortune to have rode the coat tails of the bubble to a nice conclusion~