Why do homebuilders have such high margins?

NEW -> Contingent Buyer Assistance Program
Red,





"For ex: if you are basing only on statistical, even in 2001 or 2002 you would not even consider buying, and would have missed the train and have to wait for a long time until the next bottom."





Funny that you should say that. I last seriously considered buying a house in September 2001 when I was living in San Diego. The market there was about a year ahead of Orange County, and in my opinion at the time was overvalued by about 20%. I almost did it, but I remember thinking there was a good chance I was buying near the top and I might go underwater. So much for my crystal ball. The market more than doubled in the following 4 years. Of course, the implosion is already well underway in San Diego, and it is no where near bottom there. When they get back to the 2001 price I turned down, the increase in rents over the last 5 years will probably bottom the market near that level.





I remember watching TV at the time and there were stories about affordability becoming a problem. This is 2001. Who knew the sub-prime lenders would turn on the money spigots and throw out their lending standards? Not me. Of course, even if I had, I don't know if I would have participated in such an obvious Ponzi scheme. I would like to buy a property and live in it, not flip it a few years later.
 
<p>Red --- I have a good story related to your 2001 example. In October 2001 I was relocated from LA up to the Silicon Valley. In getting to know my new team up there, I had a discussion with one individual regarding whether or not my new wife and I (we were DINKS at the time) would be buying a place. She related to me that she and her husband had just purchased a new townhouse in Redwood Shores for $435,000. My response (and I remember it well) was "You are f'ing crazy --- I would NEVER pay $435K for a townhouse, I could have bought two townhouses for that price in LA --- we will just rent for the two years we are up in the Bay Area".</p>

<p>Well, lo and behold --- My gut was REALLY wrong. The two years turned into 4.5 years --- and I totally missed the market while I was renting in the Bay Area. And that girl with the $435K townhouse? She sold it last spring for $730K --- and pocketed almost a $300K down payment for her new $900K house in San Ramon (for those of you that are familiar, San Ramon is just like Irvine, but better). </p>

<p>Brilliant gut instinct on my part.</p>
 
<p>CK: <em>"Brilliant gut instinct on my part."</em></p>

<p>This is a dangerous example to learn from and to try to make up for it in this declining market. Yes, you missed the boat in 2001 - 2005, but one cannot expect to make up for it by being foolhardy now.</p>

<p>In a manner of speaking (even though the underlying markets are very different), this will be akin to buying on "dips" after NASDAQ turned south in March 2000. People who bought long between March 10, 2000 (all time high 5048) - September 27, 2001 (when it hit real bottom at 1460 or so) lost their shirts, and probably did not see much of those losses recover until 2004 or later.</p>

<p>Seasoned market participants (call them bubble-sitters if you will ) who had seen both sides of the market (significant ups and downs, a la 1987) never bought into the "it's-different-this-time" sentiment rampant at the time in 2000- 2001 and sat it out.</p>

<p>Meanwhile, there were stories of stock market successes back then, (much like the one you quoted with the townhouse flipping) all over the media about how people made out like bandits during the run up and joined the swelling ranks of the noveau riche at the time. It took a long time for reality to set it for the rank and file masses that the bubble had just passed them by, and that they would probably do better if they actually focused on their real jobs rather than trying to pursue get-rich-quick schemes via the stock market bubble.</p>
 
<em>"pocketed almost a $300K down payment for her new $900K house in San Ramon"





</em>CK,<em>





</em>But now she has doubled down. What happens if the San Ramon house drops 33% in value? She is back at zero. What if it drops more? She is screwed. I would argue that your gut instinct was right in the long term as crucialtaunt's example points out.





There is nothing but air holding up these prices. There is no intrinsic value in real estate. The fundamental valuation of comparative rents suggests housing is 50% or more overvalued.<em>


</em>
 
<p>Crucialtaunt and Irvine renter --</p>

<p>Excellent points from both. My gut instinct at the time was that NO townhouse was worth $435K, so I would never dream of paying that much for something with a connected wall. I guess to say that my gut instinct was wrong, I would have to now be able to honestly say that I think a townhouse IS indeed worth $435K. And your know what, I still don't buy the theory that any townhouse is worth nearly half a mil --- although I have come to accept it in this crazy market.</p>

<p>Thanks for your thoughts. I suddenly feel a little better about my fence sitting 5 years ago. </p>
 
Wow, a lot of people lacking a sense of humor here. Just messing with you Red - no genuine malice intended.





I've lived in Irvine for 23 years - I grew up here. My family was looking to upgrade the house a couple times - in 1995 around the Turtle Rock Area, in 2003 around Quail Hill. Obviously, we should have pulled the trigger in 1995 - but we just got burned by a housing investment in Laguna Nigel (Thank you late 80s - early 90s), so we didn't. Chalk up our reticence to our less than pleasant experience from that property.





You could make the argument that it was also mistake not to pull a trigger in 2003 for Quail Hill - but still those are just glorified McMansions - McMansions that are asking for close to 2 million now and finding no buyers. Well, probably could still pocket around 400K if you got in on the ground floor '02-'03. 1.4mill for those things will still sell in today's market. Woodbury is still selling new developments in that low to mid mill range. Oh the humanity.





My parents again finds themselves in the market for a new house - I've acted as point man in this search. I'm a housing neophyte - but I've absorbed much of the experiences that my parents went through the late 80s - present, and I'm grateful for this forum for clarifying a lot of local market trend questions that I had. I know I'll have a lot of dumb questions soon that will prompt some snickers. =)





I've looked around the VOC where my friend just purchased a McMansion - and frankly, I've been very underwhelmed. From these forums, and research on the Stan Pac website, I don't even think I'll even give Serra in PS a look. I've looked at older houses in Tustin and Irvine with a realtor friend, but the asking prices are just utterly hilarious. 300-400k too much. Maybe even more. I have to struggle not to laugh out loud when their agent hands me the price listing.





FYI, my parents still own a home in Northwood, but my mother was unfortunately diagnosed with a terminal illness a couple of years ago. We are looking for a house with a full bath downstairs integrated with a bedroom for her as our current house only has a half bath with the downstairs bedroom.





I was looking at new developments at San Juan Capo and Ladera Ranch - fit our needs and definitely more bang for your buck than Irvine/Tustin - but just too far away.





Crucialtaunt, I work in the tech industry - I can GUARANTEE you that most people who went long in NASDAQ around the time you specified have not recovered their losses yet. I'm not speaking for myself though. =)
 
muffdaddy,





I'm very sorry to hear about your mother. I do know some nice 3/3 townhomes around this area:


http://www.zillow.com/search/Search.htm?addrstrthood=ardmore&citystatezip=irvine%2C%20CA





The 3 bed 3 bath model has 2/2 upstairs and 1/1 downstairs. The downstairs bath is fairly large in size with walk-in shower, though the bedroom downstairs is a bit small. They have attached 2 car garage and a nice small side yard. The monthly HOA is fairly low and I think they don't have mello roose, which should help you with reducing monthly payments.





My buddy & couple of coworkers bought homes in that complex about 7-8 years ago. I used to go swimming with them at the pool. Only complaint I have is lack of better guest parking, since the street parking tend to get filled up pretty quick. You might be able to find some units for sale or rent there. Asking price should be in the low $600k's.



 
AHA! this is plan 3 of Sheridan Place (or Meriwether in Columbus Grove). Love this model! The floorplan should be on the website. The living room is two stories high and ditto on the lower bed/bath.





i seen recent transactions for 600-650. i can afford like half of that but that's another story, anyway i definitely thumbs up that floorplan as well.
 
Also for downstairs bathrooms try Plan H or I in Westpark Tiempo. They might be too small for you though (1080 for H and 1250 for I)
 
Also try Brindisi in Irvine (Travila in Tustin Ranch). there is a 3/3 model detached 1300 sq ft I'm guessing going for around 600-650. there is a full downstairs bed/bath





sorry, the plans are all rushing back into my brain at sporadic moments
 
Thank you for your sentiments momopi.





My parents (well... more my dad) are more looking for a Single Family House - and not just that - a really big one. 3 car garage, 3000-4000+ sq ft., etc, the WHOLE shebang. If it were up to me, I would perhaps consider a townhouse as a temporary option - but it isn't. I guess my father just wants to make up for the previous million dollar plus houses that we missed out on the past 10 or so years. The same million dollar houses that are going for close to 2 million now.





I'm sure I won't get a lot of pity for saying this, but my father's price range for the big house can be up to 2 million. Then again, if he pays up to 2 million, he wants it to look like a 2 million dollar house. In reality, that's probably not going to happen in this area (unless the prices drop 25-30% in the next couple of years). I don't think my mother can wait that long. The thing is, my mother is quite stubborn in not wasting any money - so the prospect of us laying down 1.4 mill for some McMansion in Tustin or Irvine is also unlikely. Maybe possible, but unlikely.





I was advocating perhaps building full bath downstairs in our current house - but that would cause MAJOR inconvenience with my mother.
 
holy crap! sorry my research extends up to 700k. i know NOTHING about anything past that.





good luck with that though, you're gonna find a huge one!
 
Thanks fk123, there are plenty of huge houses - just none that fall within a reasonable price range now =).





E.g. One previous owned house in Tustin that i saw, 2900-ish sq ft, asking is 1.22 million. Um, yeah. I want what they are smoking. In my opinion, the only "bargains" that you can find within this price range is going to be from builders or I guess foreclosures....





Good luck with your housing hunt. Irvine is definitely a great place to raise your kids, the only thing you have to worry about is having your kids become too "sheltered."
 
muffdaddy:





Have you considered Anaheim hills? My ex GF had a house there and I think you get more bang for the buck vs. Irvine.





<strong><strong></strong></strong>
 
Looked at Anaheim Hills per your suggestion momopi - wikipedia had an interesting to say about the area -





<a href="http://en.wikipedia.org/wiki/Landslide" title="Landslide">Landslides</a> and <a href="http://en.wikipedia.org/wiki/Wildfire" title="Wildfire">wildfires</a> are frequent occurrences in Anaheim Hills. <a href="http://en.wikipedia.org/wiki/Santa_Ana_Winds" title="Santa Ana Winds">Santa Ana Winds</a> are a major factor in fueling the wildfires in the area. <a href="http://archives.cnn.com/2002/US/02/10/california.fire/index.html" class="external autonumber" title="http://archives.cnn.com/2002/US/02/10/california.fire/index.html" rel="nofollow">[1]</a> <a href="http://abclocal.go.com/kabc/story?section=local&id=3880221" class="external autonumber" title="http://abclocal.go.com/kabc/story?section=local&id=3880221" rel="nofollow">[2]</a>. A landslide in January 1993, destroyed over 30 luxury homes and impacted over 200 others.





Heh, now I remember why the area sounded familar to me - all over the local news when the yearly Santa Ana fires hit.
 
i wanted to buy in AH years ago. one weekend during the fires i drove 91 east. It looked like I was driving through hell. kinda cool and creepy at the same time (especially with the smell of ash)
 
there are fires in the Anaheim Hills all the time. Just besides the 91, and the ash blows all over OC and LA county. Nice views, but not when the smoke is choking your lungs out !!
 
<p>I just want to add some info about homebuilders and the high turnout of people at the grand openings and phase releases. The homebuilder I used to work for would send out the same invitation as the people on their interest list to everyone in that worked in the building. Of course only a few people would actually show up and most that did were required to. Now that started to change when things slowed down. In order to make it appear that there was a lot of interest the marketing department went around to get volunteers from each department (mortgage, design center, purchasing, land ac, customer service, etc.) until they had the number of people they needed to show up. One event that I went to over half that were there worked for the builder. Now I do not know if this is true with all builders but it seemed very common and many in the industry have shuffled around from builder to builder. Irvinerenter was this the case with the builder you used to work for?</p>

<p>Muffdaddy - Good luck in finding a SFR single story that your dad would be happy with. Especially in Tustin as that market seems to be immune (right now) from the slow down. I watch that area closely and have a close friend who owns in Tustin and we both can't believe the homes that are selling there. I have seen some decent deals in Villa Park but your best friend who owes you better be a contractor. It seems that some pockets haven't been affected by the slow down or the people in these pockets are not selling yet. I wonder if the spring will bring some price drops to these areas. I hope they do for you so you can find a place that is worth the money. </p>
 
You must log in or register to reply here.
Back
Top