Bear Market? Your input appreciated

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elmosam_IHB

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<p>I have to say that I enjoy this forum very much, and have learned a lot. I would like everyone's input about one subject I find a bit troublesome as it runs counter to the bear market attitude here. It seems that the higher end homes (> 1 million) are doing well. There are new developments priced at the high end (e.g. Orchard Hills start at 1.25 m), Belle Cliff in SJC had a long line and people camping out) and a recent article in the OC register indicated that high end homes continue to sell well. This is supported to some extent by the monthly sales figures posted in this forum.</p>

<p>So how do we reconcile the bear market belief with the strength of the high end homes? Is it that you feel that the high end homes will come down eventually, or is it that they are insulated from the subprime fallout and likely will not be affected?</p>

<p> </p>

<p>Thanks!</p>
 
<p>High end home buyers are usually prime borrowers, so the subprime fallout has had less effect. There is the trickle up effect, and I've seen it, as people I've talked to are ready and able to upgrade their home <em>except</em> they can't because they can't sell their lower priced home.</p>

<p>But rates are still low, and credit is still easy to come by for prime borrowers. As a result, all it takes is a slight price adjustment, which many communities have made, just to lure in the high end home buyers.</p>

<p>But if you've read enough on this forum, you know they are not <em>immune</em> to the effects of a negative housing market. In addition, I wouldn't take Belle Cliff as representative of the overall market. There was pent up demand, and the demand has tapered quite significantly. Also, take everything you read with a grain of salt, whether its in the OC register, other media, or even this site.</p>
 
Think of the "progression" in the mania...





The last to the bubble party were the condos/townhomes....





So the first to really experience the drop will be the last to the party...condos/townhomes.





$1mm + homes are bought typically by people who can afford them (thus prime borrowers and better credit holders)





The murky area I always suspected would be the $600-$900k SFR's. That's going to be the next group to watch.
 
<strong><em> The murky area I always suspected would be the $600-$900k SFR's. That's going to be the next group to watch.





</em></strong>IMO these homes are already starting to take a hit, maybe not in Irvine, but if you look at the rest of Orange County, especially South, they are getting hammered. If you get a chance get onto Craigslist and check out all the homes up for rent or lease to buy...amazing.





$1MM + homes will start having their problems in the next 6 to 8 months, IMHO.
 
Just a guess. Many expensive home buyers can afford to make two payments for awhile, so they are not as desperate to lower their prices. What I do find interesting is just how many vacant or staged high end homes are on the market, and my guess is that the owners have already bought their move up home and are trying to sell their first home.
 
<p>One thing I'm trying to figure out is if now is a bull trap in this housing market. I mean, it <em>seems</em> like it's a decent time to buy if you can get your price. There is little competition, if your bid is hit you may get a significant discount to a listed price, and rates are low.</p>

<p>Or is this the beginning of the end as many would have us believe?</p>
 
elmosam - I have given this issue some more thought and although I am unfamiliar with the Belle Cliff situation, I have driven through Shady Canyon and the custom home section of Covenant Hills a few times over the last year or so. If you drive through either or both those areas, I think it will be obvious that sales in the expensive home market in OC are dreadfully lacking. There are many vacant spec homes which have been sitting vacant for awhile and more being finished. But mostly, both areas are full of finished lots, vacant except for weeds and for sale signs. Can you imagine what the total monthly vig is on all those finished lots and spec homes?
 
<p>I'd be curious to find out just what it costs a builder to carry unsold inventory. They must pay some tax on the land, but nowhere near the tax that the new homebuyer pays. I'm guessing they probably don't have to pay into the HOA or the Mello-Roos either. Maybe the reason you haven't seen many fire sales (Lyon's later phase homes in VoC being one exception that I know of) is that the builders figure they can bleed out their remaining inventory at a slower pace and still make enough money to justify the carry costs.</p>
 
awgee...I appreciate your input. But given the situation you describe in Shady Canyon, why on earth are there so many high end phases about to be released/recently released? It would seem to me that TIC market analysis has suggested to them that there is still a real market for homes over 1 million. TIC rarely seems to get things wrong.
 
<p>"TIC rarely seems to get things wrong." This is definitely not true. During the last bust they were the holdouts on the layoffs and when they finally conceded they laid off a major portion of staff. It seems to me that they are doing it all over again. </p>

<p>I also do not see a real market for homes over $1mil. I too have seen many sit and sit and are still sitting on the market. Also the $1mil homes are starting to feel the pinch. 11 Solstice 92620 was sold at the foreclosure auction for $734,700.01 a penny over the opening bid while two homes on DeLano are for sale for over $1.1mil. 41 Rose Trellis 92603 went back to the bank for less than $1.5mil and there are a few for sale for $2mil. The more the banks own and the sooner they figure it out that they are not selling they will start dumping. They are starting to use auction companies and a house in the Tustin Hills area was foreclosed on for $1mil but was sold by the auction company for $775k. </p>

<p>This mess has just begun. As awgee said go check out Covenent Hills in Ladera. I know of a few ex-mortgage guys who haven't been making their payments since they no longer have a job. </p>
 
elmosam - Sorry, but I am unaware of so many high end phases about to be released. I do know that builders have to build, otherwise they aren't in business and their stockholders expect them to be in business.<p><p>

Also, please excuse my ignorance regarding TIC's market analysis. I have no access to TIC's market analysis or what it suggests to TIC, nor do I know how often TIC gets things wrong. Sorry, I am just uninformed about such things.<p><p>

But, I do know what I see, and what I see is a whole bunch of empty multi-million dollar homes and a whole bunch of vacant finished lots that someone spent alot of money on to grade and put in the underground and get permits for, and they must be making some awfully big interest payments on that expense.<p>

Developers and builders are much smarter than I, and I remember during the last re downturn all the finished lots that sat vacant, just growing weeds, for years. But then, maybe vacant finished lots are part of their market analysis? Like the vacant lots in Portola Springs. Did TICs market analysis include builder's decisions to pull out of Portola Springs and decide not to build there? Certainly it must, because TIC rarely gets things wrong.<p><p>

If those folks waiting in line for a home at Belle Cliff can't obtain an over one million dollar home, maybe you could send them over here to Coto. There are many, many over one million dollar homes on the market here, and the number is increasing and the prices are coming down. CalGal and I are watching as the folks who bought in 05 and 06 and are now selling, are actually taking a loss. Maybe they should consult with TICs market analysis? Or if you have a copy, maybe you could post some of it here. I am very curious and I think I can guess that many others here would be curious also.<p><p>

If you think the situation in Shady Canyon is different than I describe, you might want to drive through there and check it out for yourself.
 
awgee and graphix.....thanks so much for your comments. I have no inside info, just a lurker and I really do appreciate your perspective.
 
Here's my take. The head of my company's local division (sr. vice pres) just got relocated to here from the Bay Area at the beginning of the year. He has been agonizing over the housing market and has been coming to me for advice because he knows my interest in and knowledge of the topic. He knows we're crashing - I have made sure he has the facts and data. However, he has a chunk of change (how much, I didn't ask) being paid out to him by the company if he buys a house, and that free relocation money is about to expire. I have no idea how much, but it clearly is a significant amount. So he has been having to weigh the decision with this free money as part of the balance. I cannot imagine it is in the neighborhood of hundreds of thou, which would be what I personally would need it to be in order to risk a purchase at this time. But each person has their own risk tipping point. What I do know for certain is that whatever house he may end up buying, it will certainly be in the million/multi-million category. I suspect there are enough high-end execs in his situation that this might be a factor in the apparent relative strength of the million-plus market.
 
<p>ISM - My company just transferred a manager here from the east coast who is probably in the same boat. I know he is itching to get a place but his place back east sold for 20% off the peak. I think he may end up buying and saying bleep it I need a place. I know that it will be well above $1mil if he does.</p>

<p>elmosam - I am an owner and I see prices dropping in my area that has a median price of $1.3mil. Two homes across the way that are in a better location, larger and are somewhat upgraded compared to mine have been rotting for months at $1.1mil. There are two on my street that sold for $1.2mil plus at the peak. I may be a housing bear but the main reason why is history is repeating itself almost exactly the same as the 90s bust. Some things are better: jobs and some things are worse: foreclosures. If jobs get worse it is going to get ugly and despite what you read in the Register about jobs it really isn't that healthy right now. </p>
 
<p>To get first hand info from someone who probably knows as much or more about the high end home demand and market right now, read anything Bob Toll, the CEO of Toll Brothers, has to say.</p>
 
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