5% interest rate

[panda]

 

[IndieDev]

Yes. 

 

[irvinehomeowner]

Historically, but most important, fundamentally, income, supply, and demand are the biggest factors that have an effect on housing prices.

Since you're using economics, I think the one component people don't think about when measuring the downward pressure in this formula is supply.

As one smart Mr. Lloyd put it:http://www.ocreader.com/forum/viewtopic.php?p=14070#p14070

Prices will remain sticky because people who are currently in 5%-7% mortgages will have to be making a significant profit to give that up when faced with buying a new home at a higher mortgage rate. Why would you sell a $3000 payment ($450k@5%) to take on a a $4600 payment ($450k@10%) or higher unless you were making enough of a profit to cover the increase? People will just stop selling, reducing supply and raising prices.

In resale, many times the owner is also looking to purchase another home and if his affordability is affected by higher rates, and he won't get the price he wants, then he'll either be very stubborn with the pricing or take it off the market and stay put. This will constrict supply and could partially negate downward pressure demand is requiring.

Part of the stubborness in Irvine is due to the fact that there isn't a lot of "good stuff" on the market (as Shevy even said) and when it hits, people want it, regardless of interest rates so it keeps prices stickier than they should be. This will only continue if demand weakens at sellers' wish prices and because a large portion of Irvines homes are purchased with large downs, it keeps the distressed pressure at bay (less underwater sellers).

But I hated Econ in college so who knows.

 

[IndieDev]

You're right, supply is a huge factor, like demand, in determining housing prices.

The resale market inventory is growing Y-O-Y, but I do agree it is lacking in "good" inventory, and owners are stubborn.

But keep these factors in mind.
(1) TIC is increasing supply substantially this year, and the next 2 at least.
(2) How long will homeowners continue to pay bubbled mortgages? Strategic default is beginning to lose the negative connotation it once had, and becoming more common place which leads me to...
(2) Shadow inventory. Irvine's NOD/NTS rose from 2009-2010. Some of these may cure, but I'm betting the majority of them won't. How long will banks let people live rent free? How long will banks pay carrying cost for non-performing assets like empty condos and SFHs?

Too many factors say demand will weaken, and supply will increase in Irvine this year. Not a prediction, but it's hard to paint a realistic picture that says otherwise.

 

[irvinehomeowner]

I agree with you... but like you... I disagree with the certain claims, primarily the pundits who claim that rising interest rates will be the major force in driving prices down... especially at a proportionate amount.

We are both in accord that non-fundamental factors are also at play in addition to basic economic principles that point to a future decline.

The depth of the decline, however, is difficult to predict. Even IrvineRenter doesn't expect more than a 5% drop while others (who happen to not live in Irvine) expect 20-40% more (which seems impossible to me given what we've seen in the last 5 years).

The difference in the new homes going up now and the ones back in the early 2000s is TIC it totally in control of supply... if the demand does weaken to a point where we see double-digit percentage drops... they'll just hold back and since there is no builder business model to worry about... they can do that with virtually no loss. It's not coincidental that all these new home are all Irvine Pacific.

 

[IndieDev]

I'm not sure what the percentage drop will be. If it's small (2-3%), I'd be surprised, maybe a bit confused. As I said in the previous post, the factors on supply and demand side just point to a much better buyer market in the near future.

TIC could constrain new supply, but then they would stagnate their own business. It seems more likely they'd lower prices to move product like most profit seeking firms would.

Current would-be sellers could hold their homes off the market, also constraining supply, but that too seems like they'd be cutting their own noses to spite their face. The carrying cost of a bubbly mortgage far outweigh the cost of simply throwing in the towel and starting over (with current laws).

Is Irvine a market that can continue to be healthy with average home prices being 5x more than the household median income? It just seems fundamentally impossible to me, but Irvine may indeed be different. When it comes down to it, I've got the time and money to wait and find out. ;D

 

[irvinehomeowner]

My prediction was/is 5-10% (which amuses me since it puts me more bearish than IrvineRenter).

In my opinion, lowering prices is the last thing TIC would do... that would cause discord with recent new home buyers and they can handle stagnation much longer than other builders because they really have no carrying costs. Look at Orchard Hills, that was ready to go in 2008 and has just been sitting there for 3 years. When you already own the land... you can wait.

As for resellers... despite the IHB's daily profiling, I believe the majority of homeowners in Irvine can handle their mortgages (if they even have one). Just like the winter downturn, if the market goes cold... sellers will constrict supply. I'm sure there is a tipping point where some will either have to sell or will foreclose... but I do think that number in Irvine is lower than elsewhere (like the IE or Vegas).

And I don't think Irvine market price is healthy... but I also think reported median income in Irvine is a bit of a lark. As others have stated, you also need to compare other costs of housing in Irvine to get a better picture and rents are pretty high here. I believe median income is fairly close to other OC cities yet their housing prices are lower... so something is off in that equation (it's those FCBs who report zero income  ).

 

[IndieDev]

My prediction was/is 5-10% (which amuses me since it puts me more bearish than IrvineRenter).

In my opinion, lowering prices is the last thing TIC would do... that would cause discord with recent new home buyers and they can handle stagnation much longer than other builders because they really have no carrying costs. Look at Orchard Hills, that was ready to go in 2008 and has just been sitting there for 3 years. When you already own the land... you can wait.

As for resellers... despite the IHB's daily profiling, I believe the majority of homeowners in Irvine can handle their mortgages (if they even have one). Just like the winter downturn, if the market goes cold... sellers will constrict supply. I'm sure there is a tipping point where some will either have to sell or will foreclose... but I do think that number in Irvine is lower than elsewhere (like the IE or Vegas).

And I don't think Irvine market price is healthy... but I also think reported median income in Irvine is a bit of a lark. As others have stated, you also need to compare other costs of housing in Irvine to get a better picture and rents are pretty high here. I believe median income is fairly close to other OC cities yet their housing prices are lower... so something is off in that equation (it's those FCBs who report zero income  ).

So that's why A&J's Chinese food on Walnut and Jeffrey only accepts cash... 

 

[qwerty]

Every one keeps on saying how TIC has no carrying costs? Does anyone know that for a fact?  I guess its possible, but i think it is more likely that they have some debt?

 

[irvinehomeowner]

Every one keeps on saying how TIC has no carrying costs? Does anyone know that for a fact?  I guess its possible, but i think it is more likely that they have some debt?

To clarify, they don't have the same carrying costs as a builder would have if they had to purchase the land from TIC.

I'm sure there are costs involved but it's land that they've owned for years undeveloped so it's not going to hurt them as much to delay building on that land (which is exactly what they did to Orchard Hills, Stonegate and Laguna Whatever these past few years).

 

[qwerty]

Every one keeps on saying how TIC has no carrying costs? Does anyone know that for a fact?  I guess its possible, but i think it is more likely that they have some debt?

To clarify, they don't have the same carrying costs as a builder would have if they had to purchase the land from TIC.

I'm sure there are costs involved but it's land that they've owned for years undeveloped so it's not going to hurt them as much to delay building on that land (which is exactly what they did to Orchard Hills, Stonegate and Laguna Whatever these past few years).

How do you know the land is not leveraged? That is my point, we all make a presumption that big and powerful TIC has no carrying costs.  My guess if that was truly the case they would only sell at peak periods and rely on the cash coming from office and apartment buildings.

 

[irvinehomeowner]

I do not know that for a fact, but logic dictates that the owner of land would have less costs than what a builder would have to carry if they purchased that land from an owner (even if the land is leveraged).

Isn't that why Lennar pulled out of Tustin Legacy?

Again... that is my opinion and it could be very well incorrect.

 

[qwerty]

I do not know that for a fact, but logic dictates that the owner of land would have less costs than what a builder would have to carry if they purchased that land from an owner (even if the land is leveraged).

That is not necessarily true. The land has a fair market value, the buyer or owner could only leverage a certain % of that land. So the owner could leverage the land just as much as the buyer of the land can. In any event, you are right that we are all just speculating anyway. and i would agree with you that TIC probably does not have its land fully leveraged.

 

[iacrenter]

I agree with IHO. If RE tanks again, TIC will simply turn off the faucet rather than cut prices too much. With so much success with the 2010 Collection, TIC is basically trippling down their bet for 2011: Laguna Altura, Stonegate, & Cypress. If they are right, it will be another windfall year for them. If wrong, since it is all built by Irvine Pacific (i.e. TIC)  it is easy to control the supply.

 

[usctrojancpa]

There are carrying costs of land even when there is no debt on it.  You have to pay property taxes and liability insurance and then you add in the lost opportunity cost of not developing the land (i.e. based upon a return using time value of money). 

 

[IndieDev]

There are carrying costs of land even when there is no debt on it.  You have to pay property taxes and liability insurance and then you add in the lost opportunity cost of not developing the land (i.e. based upon a return using time value of money).

Valid point, but also, if Irvine Company simply stops building homes, how do they replace that lost revenue? I realize TIC isn't a publicly traded company so they don't operate under the same numbers pressure other companies are subject to, but TIC has an infrastructure of some sort that it supports through selling homes. If you stop building and selling homes, that infrastructure becomes a massive carrying cost. It seems on paper, the only way to mitigate that cost is to lay off a lot of people, or shift that infrastructure into something productive for the company.

Also what happens when other developers such as FivePoint Communities  begin to offer alternative options to TIC's offerings?

I think the Irvine Cheer Crew seems to be ignoring some important factors in the short term market here.

 

[irvinehomeowner]

While I do think TIC is wary of other developers in Irvine like Columbus Grove and the Great Park project, the fear is more out of maximizing their own profit... I think they can just not build homes and do just fine.

As bones stated, home building is only a part of what TIC does. Their retail center fees are probably the highest in Orange County and their IAC rents aren't exactly cheap. In my opinion, new homes are highly profitable for them... 10 years ago... 2000sft homes were priced at $300k, now they are $600k+ and I doubt the land cost or the building cost doubled in that time.

No one is cheering on Irvine here... just stating other factors that will affect the whole rising interest rates/downward pressure equation.

"Give me a T, give me an I, give me a C... what does that spell? Goooooooo Irvine!!!!"

 

[IndieDev]

I understand your points, but they just don't fit fundamentals.

1) Yes, supply is a major factor in determining prices, but TIC doesn't control the entire supply of new homes. Especially with the upcoming Great Park, and Legacy developments. Not to mention new home developments popping up in Aliso Viejo, Costa Mesa, and Lake Forest.

2) You guys seem to either be understating or not really understanding the revenue TIC would be giving up by not selling homes. In 2010, from January to the end of June, TIC reported they sold 519 new homes. There is no "breakdown" by type, but let us assume an average price of $450,000. That's over $230,000,000 of revenue for HALF a year. If they sold close to that amount for the second half of 2010, then you're saying that TIC is going to ignore half a billion dollars in revenue to try and artificially constrain supply? That doesn't make sense.

3) Your point is already based on a false premise, that TIC would completely stop building homes. I've looked back to 1998, and there isn't a single year from 1998-2011 where TIC wasn't building homes. It simply hasn't happened for over a decade on the incline, or the decline. So your point about "TIC can simply stop building" doesn't seem to pan out, it's a has been an integral part of their business for over a decade.

 

[irvinehomeowner]

From 2007 to 2009... I don't think TIC was building any homes... the CalPac models in Woodbury were the last ones they were builders for... everything else, including Woodbury and Portola Springs prior to the 2010 Collection were not TIC builders.

And I think you are taking the definition of "stop" to the extreme... as we don't mean stop EVERYTHING. For example, they stopped building Orchard Hills for a few years... Stonegate and Laguna Crossings too. Those were slated to be built in 07 or 08 but they "stopped" them because of the downturn.

In turn, I think you overstate what new home building means to TIC... they don't have to "ignore" anything... they can afford to extend that half a billion in revenue forward so that it's 1 or 2 billion. You also need to remember that it will not help TIC if they provide endless product at a price point that severely undercuts their recent products... instead... they will constrict supply to keep prices high or find a way to convince the buyers that they should pay a premium for their product (ie Gated Community).

But again... we are both talking from opinionated stances since neither of us know TIC's books. I don't see how you think this does not fit fundamentals... if price on my product is weakening due to the economy or competitors and lowering my profit, I either add new features to the product or restrict supply... that's pretty fundamental to me.

 

[IndieDev]

Maybe I'm looking at this the wrong way, but as an Irvine homeowner, like it or not, I feel like I'm in bed with TIC.  Their success is directly related to my home value.  The moment TIC starts slashing prices drastically is a sad day for Irvine homeowners - regardless of when/where/how you bought your property.  If you bought during the bubble, you're probably SOL anyway right now, but even more so.  If you bought cheap 10 years ago, your paper profit just disappeared.  I can care less about how "ungreat" a great room is - as long as prices hold.  If you ask me, Laguna Altura is priced too low.  Ha!

We get to it at last. 

It's natural to feel that way. Most of the middle class in America have their "wealth" heavily invested into their homes. But thinking that way, based on emotion and ignoring market fundamentals never made anyone wealthy, or even financially stable.