February 19, 2007

OC Down $42,000 in one-month. Where is the Mainstream Media?



Let us run a quick stat check:

December 2006 OC Median Price: $642,000
January 2007 OC Median Price: $600,000


That is a 6.5% drop in one-month. All those cheerleaders talking about double-digit declines that are impossible are sorely in the wrong ballpark. Keep in mind that 2007 has only started and we do not even have first quarter stats being reported. The sub-prime market implosion that is going on behind the scenes is making people in the know feel that 2007 is the year of change. With New Century Financial based in Irvine going south to Mexico we realize that eventually someone will have to pay the bill; only time will tell whether it will be the tax payer or home owners and speculators taking it on the chin. If you think the government will step in and intervene, you are sorely mistaken.

We all know how efficient large bureaucracies that cater to those with large capital can be especially when they have their motives at heart. The response will be as usual, an after the fact a day too late type of reaction. The government as we have learned throughout history is largely a defensive mechanism when it comes to intervening on things economical.

So what are people doing? We’ve all seen the U-haul rates of places in California going to other states. Let us do a fact check:

From Irvine CA to Austin TX; 26’ truck = $3,650
From Austin TX to Irvine CA; 26’ truck = $486


Guess where most of the middle class is going? There is a book called Life 2.0 by Rich Karlgaard where he discusses the phenomenon of middle-class families selling out of equity rich states and going to other parts of the country. By looking at the rates above you can tell where the demand is coming from. Even the L.A. Times published an article in their real estate section a few weeks back highlighting this change.

Again, why did prices drop so precipitously last month in Orange County? For one, let us look at the sales data. Year over year sales fell from 2,868 in 01/2006 to 2,400 in 01/2007, a drop of 16.3%. This is typical in the beginning of a bear housing market; sales fall drastically while prices follow in line. Why does this happen? Well go out to any local area or take a look at the real estate classified section. Currently sellers and speculators are living in real estate yesteryear hoping for the peak prices which will never materialize. So sales drop as these folks hold out and those that desperately need to sell do so but at market rates. And did you get the memo? We are in a buyer’s market. So prices are dictated by what is being offered while those educated enough to know about real estate market cycles realize that they now have all the time in the world.

What goes up eventually comes down especially in the OC where interest only exotic death defying loans are the mainstream way to finance a house. Speaking to a person in the know, Irvinerenter we are beginning to see that those that have the most insight into the market, builders are quickly liquidating and selling developments at losses to hedge their own bets on a collapsing market. Ask yourself why someone would leave money on the table if we are in a temporary dropping market? This is not the case since these folks see the writing on the wall and are quickly getting out. There is a condo complex coming online this summer that had prices at $499,000 last summer; as I drove by this past week they were selling these same units at $399,000 – still overpriced because they are nothing more than glorified OC stucco apartment boxes. Point being, these builders need to unload because they do not have the luxury of a landlord of simply renting out the place and waiting the market out. Interesting to see the market unfold eh?

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5 Comments:

socalappraiser said...

Doctor,

Another great article and I enjoyed the Hamlet vs Quixote on as well. I was in a KB development today in Riversippi. Some decent foot traffic through the sales office. One of the comments almost made me spit up the free M & M's I was munching and pocketing. Sales agent was talking with prospective buyer who said he was an agent as well. The sales agent stated several times that if the prospective buyer wanted the house there was a non refundable $7500 deposit and they were only accepting non contingent offers. The first green M & M almost came out when he (the agent!) asked what non contingent meant? He did speak with an accent but his English was perfect. The blue one came out with his stating that he "would be doing a 100% financing and placing his current home on the market ASAP" as to not miss out on this gem. All the homes are 2400 - 3500 sq ft Mcmansions in the 550 - 675k range that will be worth mid 300's to mid 400's in 18-24 months.

As I cruised into the competing developments (all 3 yrs old or newer) I saw the brown lawn, non landscaped backyard, lockbox on the door, ghetto chic abandoned shopping cart (you think no HOA is a good thing?), little slice of paradise that the subject development will be in 2 years reset time. Think how Moreno Valley is now versus what is was in 89-92 and thats the future here too.

Anonymous said...

you can't compare Dec and Jan this way because of seasonal changes. Trends can only be observed using a trendline over a minimum 6 month period. It's still too early to see if we are downtrending or will flatline for a while before a downturn begins. Also remember that foreclosures are increasing and REOs will be coming on the market in the later half of 2007 increasing inventory, those REOs are "must sell" properties that need aggressive price cuts.

Dr Housing Bubble said...

socalappraiser:

What you are describing is bottom feeding. This is common in a down market. These folks are trying to lure any buyers into the market by offering whatever incentives they can muster together. If anything, the folks jumping in at this point are definitely the last fools.

I do recall the Moreno Valley; big homes and lot of gang activity currently. The draw at the time was big homes for half the price. Heck, take a look at San Bernadino now. These super suburbs have nothing more charming than a low-key development out in the Texas boondocks. Lot of home at the cost of many social amenities (i.e., good schools and location).

Dr Housing Bubble said...

Anon:

You are right, there is always a seasonal drop between January and December. And it will take time to see this trend play out. Nonetheless, the major drop does show what happens when there are no buyers in the market and sales are dropping. It is a preview of what is to come should the housing bear predictions play out.

AnalysisGuy said...

The local media is too scared they'll lose advertising dollars to print the truth about real estate!

Orange County Historical Prices