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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