A "new era" in real estate

Image above ran with the LA Times story

If there is one thing we hope to show you by reading this blog (apart from all the interesting things going on in and around South OC) it is this: History tends to repeat itself, and almost nothing is without precedent.

See what you make of this story that was published in the LA Times in June of 1930 - right on the precipice of the last national real estate meltdown that was to go on for years after this story ran. Its themes are being repeated time and time again even today.

We're not saying we expect what we're experiencing today to mirror the type of hardship seen during the Great Depression, but we want to show you that even entering one of our nation's toughest times (if not the toughest time), some still believed that a real estate rebound was right around the corner, and that a "new era" in real estate was at hand that could shield property investment from the ills plaguing the stock market.

We've added brief commentary to pinpoint parallel themes between this story and ones showing up today. They are in italics inside parentheses.

Developments indicate new realty era
What is the outlook for real estate here? Careful analysis of all the factors and records of past similar periods tell plain story

What is the real estate outlook? ... In general, conservative observers regard the indications in soundly-based localities as favorable and cite the following as reasons for their belief: (Location, location, location...the high end is more immune!)

(1) Stabilized and higher prices customarily follow quiet or depressed periods, making this a good buyers market (Buy low, sell high...it's a great time to buy!)

(2) The increase of land-absorptive power through population increase (we're running out of land in good locations)

(3) The increasing importance of realty paper in the national financial structure (real estate is a vital part of any savvy investor's portfolio)

(4) Business and industrial developments which tend to favor real estate (If real estate is good enough for them, it should be good enough for you too)

A broad underlying fact emphasized by the recent stock market declines is that land-ownership has brought financial independence to more persons in this country than has any other form of investment. (OK, did they steal this line from the NAR and its "real estate is the key to long-term wealth" campaign? Hmm...maybe it was the other way around)

PRICE AND VALUE
The present is called a buyer's market not because realty values have sagged to new low levels, as in the case of many stocks, but because there has been a leveling-out period which is considered a logical approach to another era of ascending values... (Real estate always goes up. Buy now or you will be priced out again)

(The story continues on to describe previous real estate rises and falls across the country, and that population growth will provide continued demand for properties. The point is that, in the past, when real estate stalls or drops, it is usually quick to rebound. Below are snippets from the last section of the article.)

WHAT IT MEANS
...the market in land runs in cycles, not of time so much as of economic conditions, and that there is a very definite relation between the business curve and that of real estate values. Periods of depression in business generally, expressed by a drop in the prices of stocks and other securities, have almost invariably been followed by an improvement in the real estate market...

Various explanations have been advanced by economists to account for this phenomenon, the one most favored being that, when other forms of investment appear shaky, idle money goes into real estate as offering a safe and solid place for it to grow. (They said it pretty clearly: Real estate is a "safe" investment) Realty values, where the location is well chosen, are apt to be fairly stable and subject in a much smaller degree to the influence of temporary economic conditions which send stocks bobbing up and down like so many corks. (Again: location, location, location, and the high end is immune. It's also an interesting coincidence that they described stocks as "bobbing up and down," considering just how bad things would get)

...the country's business has suffered a depression resulting from the period of inflation and speculation which ended in the stock market crash last fall. (Speculation? Inflated values? Sound familiar?) Unlike some past occasions of the kind, this depression has not been accompanied by an acute money stringency - in fact, money for permanent investment has been more plentiful and has commanded a lower rate... (Interest rates are low and credit is available...reasons not to wait to buy)

While it is too early yet for the cumulative effect of several factors to be felt in the realty market, it is conservative to say that conditions are unusually favorable for investors in real estate, not only for appreciation in the value of their present holdings but for well-considered additions thereto. (Bold is our emphasis. Think about that for a minute...the author was extolling the virtues of real estate investment right at the beginning of a severe economic depression that would last until WW II.)

We wonder what became of the writer, Charles C. Cohan - what would he have to say about today's conditions? Would he be as bullish about real estate now as he was then, after experiencing the Great Depression firsthand?

It's back: "Pent-up demand"

The National Association of Realtors announced today that existing home sales jumped up in February to a seasonally adjusted annual rate of 5.03 million units.

But, the real news is the figure is 23.8% below February 2007's level, and the national median fell 8.2% to $195,900 - the steepest year-over-year drop on record.

While this mostly a national story, here is what the report said about the West region:

"Existing-home sales in the West slipped 1.1 percent to an annual rate of 920,000 in February, and are 29.2 percent below a year ago. The median price in the West was $290,400, down 13.4 percent from February 2007."

Those are some significant declines - 29% in sales volume, 13.4% drop in median. Notice that these numbers don't include new homes. You may have noticed that new home stats aren't any better.

There is also the standard quote from NAR chief economist Lawrence Yun. The bold is our emphasis:

“We’re not expecting a notable gain in existing-home sales until the second half of this year, but the improvement is another sign that the market is stabilizing,” he said. “Buyers taking advantage of higher loan limits for both FHA and conventional mortgages will unleash some pent-up demand. As inventories are drawn down, prices in many markets should go positive later this year.”

Ah yes, the old "pent-up demand" card. This tactic is constantly being employed by the NAR and others to explain why home sales have touched record lows and median prices are falling at a national scale not seen since the Great Depression.

The theory of "pent-up demand" assumes there are scores of hungry, salivating buyers looking to jump headlong into the real estate market, but are constrained for some reason. In the early 90s, it was the Gulf War, as evidenced by this May 1991 article in the OC Register that was overly optimistic (and way, way too early) in calling a turnaround. Today, it's the availability of credit.

Remember, a bottom was not reached for another four years after this story was written. We've included our comments on key messages employed in this news story - they are in parentheses. Take note of the types of messages, and notice how they are still in play today:

Sales of OC homes up 17.6% in April - Housing market on the rebound
The Orange County Register - May 29, 1991

"Statistics finally are catching up with rumors of a rebounding housing market in Orange County.

"Sales of existing homes in April showed the first year-to-year increase of the housing recession, the California Association of Realtors reported Tuesday. Lower interest rates and lower home prices drove the surge. ... (Interest rates are low! Prices are low!)

"The sales numbers support the industry's contention that the resale housing market bottomed out in January. ... (We're the real estate experts and we called the bottom. Look - we're right!)

"Price increases generally follow sales increases, said John A. Tuccillo, chief economist for the National Association of Realtors. (Did you notice this exact same tidbit appeared at the end of the Yun quote? This is what happened on the way down - lower sales levels led to lower medians)

'Buyer's market conditions are not as prevalent as they were six months ago. Now, with more takers for the offers, prices have started heading up in nearly all ranges.' (Buy now or you risk mistiming the market)

"Leslie Appleton-Young, economist for the Realtors association, expects sales to fall back.

'April's sales activity was stronger than expected and was intensified by the temporary boost in pent-up housing demand created by the gulf war; however, given the uncertainty over the national economy, housing sales may level off to a more sustainable level in coming months,' she said. (There's that pent-up demand again! Though, this time, Appleton-Young was a bit conservative about forecasting the future) ...

"Just as Orange County outperformed much of the state in April, California did better than the rest of the West and the nation as a whole. " (It's different here)

"In the West, home resales in April were still 3.4 percent below a year earlier." (This was the last paragraph in the story)

Two other OC Register stories directly mentioned pent-up real estate demand in 1991 alone:

"'I think there's a lot of pent-up demand out there for houses,' (RE agent) See said.

"At least some of that pent-up demand was built up during November and the first two weeks of December. Though the county's million-dollar home sales were more geographically dispersed during that period, there were fewer homes sold for less money overall than throughout much of the year."
...

"There's a tremendous pent-up demand for affordable housing," (consultant) Johnson said.

Remember...the actual bottom was still another four years away, despite these experts making it sound like buyers were ready to come out of the woodwork long before then.

Our take is that pent-up demand isn't nearly as much a factor in swaying the market as many real estate professionals lead you to believe.

Back to basics

South OC is largely a bedroom community within a bedroom community, but that doesn't mean you can't find some off-the-beaten-path properties in the nearby canyon areas if you're looking for a little solitude, or the chance to be more in tune with nature.

Tip: If you ever head out to Trabuco Canyon, be sure to make a reservation to eat at this neat steak house - a place Nixon chowed down at. Oh, and don't wear a tie (people who have been there and have seen the hanging ties know what I'm talking about).

Here are some properties for sale that bust out of the tract house mold and let you live the simple life...if you dare.

17451 South Olive Hill Rd, Orange, 92676
Price: $299,900
Size: 1 bed, 1 bath, 700 sq ft
MLS: S500917 (208 days on Redfin)
Area: Modjeska Canyon
Purchase price: $225,000
Description: Charming Cottage in Modjeska Canyon!Plenty of room for two. Recent Remodel includes New plush Shaw carpeting, nu kitch & bath tile floor, int & ext paint and ceiling fans. New stove. Washer/Dryer included. Spacious bedroom with office area & Lg walk in closet. Cozy knotty pine interior. Flagstone front patio. Covered porch. 2 car parking. Lg storage shed. More storage under home. Views of Saddleback Mountains. Near National Forest, historic Modjeska House, Tucker Wildlife Sanctuary, hiking & biking trails.
Comment: This property was last purchased back in 2003. A sale at the current asking price would net $56,906 after 6% sales costs and before deducting the cost of renovation (was the "nu kitch" part of it?).

14914 Mountain View, Orange, 92676
Price: $399,000
Size: 1 bed, 1 bath, 673 sq ft
MLS: P616338 (59 days on Redfin)
Area: Silverado Canyon
Description: Beautifully remodeled and restored cabin with updated plumbing, electrical, septic, roof, paint, kitchen, bathroom and flooring. Floorplan has one bedroom plus second sleeping section with sliding wall for a second bed area. Spacious wooded lot has mature oaks and peaceful views. Near National Forest with miles of hiking and biking trails.
Comment: As you prepare to enter this place, don't forget to wave to the deer head over a nearby window. Classic.

28242 Bytha Way, Orange, 92676
Price: $450,000
Size: 2 beds, 1.75 baths, 800 sq ft
MLS: P553540 (430 days on Redfin)
Area: Silverado Canyon
Description: Convenience, privacy and possibilities this recently painted 2 bedroom 1.75 bath home offers all three. Conveniently located close to the cafe, store and post office. Privacy in the totally fenced oversized lot and possibilites with the potential to expand, keep a horse, store an RV or just relax and enjoy the ambience of Silverado Canyon with the riding and hiking trails.
Comment: We're not sure how much this property last sold for, but were surprised to see this place dates back all the way to 1928. We wouldn't be surprised if the stove in one of the photos were original to the house.

28022 Williams Canyon, Orange, 92676
Price: $3,450,000
Size: 4 beds, 6 baths, 5,400 sq ft
MLS: S523680 (5 days on Redfin)
Area: Silverado Canyon
Purchase price: $1,480,000
Description: Williams Springs Estates, Tuscan model home custom single story, cross your very own bridge to your 4 acre estate. Nestled in this canyon a testament to the builders foresight and planning the fire left this canyon intact and the rest of our 6 homes to be built will be built with the same state of the art safety. Design your own and we build or we will design for you. Six 4 acre parcels 2 with plans ready to build.
Comment: For the well-to-do outdoorsy person or captain of industry who could care less about any sort of commute - those are for losers, after all.

OC RE timeline: boom, bust, boom, bust

Jon Lansner of the OC Register put this together for Sunday's paper. The headline is "Price movements in O.C. homes, 1988-2008." Our (brief) comments at the end also are in italics. Enjoy:

"Here’s a timeline looking at key dates since 1988 involving the volatile movements in the Orange County median pricing by DataQuick’s math (overall for all residences, single-family homes, condos and new homes):

THE PEAK OF THE PREVIOUS BOOM …
January ’90: New-home price peaks at $256,000
August ’90: Single-family resale price peaks at $244,750
June ’91: Overall median price peaks at $220,000
February ’92: Condo price peaks at $155,000

… THEN THE PAIN OF THE EARLY ’90S SLUMP …
February ’93: New-home price bottoms at $183,000 for a peak-to-valley drop of 28.5% in 37 months.
January ’96: Single-family resale price bottoms at $191,500 for a peak-to-valley drop of 21.8% in 65 months.
January ’96: Overall median price bottoms at $184,000 for a peak-to-valley drop of 16.4% in 55 months.
March ’96: Condo price bottoms at $114,750 for a peak-to-valley drop of 26.0% in 49 months.

… TO A REBOUND AND THIS LATEST BOOM …
August ’97: New-home price passes old peak at $265,000 for a valley-to-new-peak time of 54 months, or 91 months between peaks. (Or how long it took to “break even.”)
May ’98: Overall median price passes old peak at $221,500 for a valley-to-new-peak time of 28 months, or 83 months between peaks.
June ’98: Single-family resale price passes old peak at $255,000 for a valley-to-new-peak time of 29 months, or 94 months between peaks.
January ’99: Condo price passes old peak at $158,750 for a valley-to-new-peak time of 34 months, or 83 months between peaks.

… AND ITS EVENTUAL PEAK …
February ’05: New-home price hits current peak at $864,000 for a valley-to-peak gain of 372% in 144 months.
March ’06: Condo hits current peak at $470,000 for a valley-to-peak gain of 309.6% in 120 months.
June ’07: Single-family resale hits current peak at $734,000 for a valley-to-peak gain of 283.3% in 137 months.
June ’07: Overall median hits current peak at $645,000 for a valley-to-peak gain of 250.5% in 137 months.

FINALLY, THE ENSUING REVERSAL
Through January ’08:
Overall median price of $520,000 is off 19.4% from the peak of 7 months ago. Single-family resale price of $583,250 is off 20.5% from the peak of 7 months ago. Condo price of $375,000 is off 20.2% from the peak of 22 months ago. New-home price of $506,000 is off 41.4% from the peak of 35 months ago."

Peak-to-trough drop, overall median, in previous bear market:16.4% over 55 months

Current drop in overall median, 7 months and counting: 19.4%

History lesson over.

Foreclosures mounting in OC

The OC Register dished out some more useful data today. This time, it's tracking foreclosure numbers for the past six months, ending in late January, compared to the same time period last year.

As a whole, Orange County foreclosures were up 321% for condos and 274% for single family homes. Clink on the link above to see the entire county, or look below for a summary of the South OC numbers.

Largest % gain in foreclosure total, year over year (condos) - by ZIP code
Dana Point (92629), 450%
Mission Viejo (92691), 443%
Laguna Hills (92653), 360%

Largest % gain, year over year (single family homes)
Lake Forest (92630), 1,080%
San Clemente (92673), 1,000%
Ladera Ranch (92694), 900%

Smallest % gain, year over year (condos)
Laguna Beach (92651), -100%
Laguna Woods (92637), -25%
San Clemente (92672), 100%

Smallest % gain, year over year (SFRs)
Laguna Beach (92651), 20%
Foothill Ranch (92610), 25%
Trabuco/Coto (92679), 111%

Most total foreclosures (condo + SFR)
Lake Forest (92630), 105
Aliso Viejo (92656), 82
Laguna Niguel (92677), 81

Least total foreclosures
Laguna Woods (92637), 3
Laguna Beach (92651), 6
Dana Point (92624), 7

(More) ads of our times

Let's play...Match Game

OK, so this isn't really like the real Match Game. Here, we're matching stories from the real estate downturn of the 90s with eerily similar ones that have come out recently. All of the old stories are from the OC Register archives. Enjoy...

Today's story: OC real estate/finance jobs at 33-month low
Date: Jan. 21, 2008
"Orange County’s real estate and related finance businesses lost 14,200 jobs in the year ended last month, putting employment in this niche at 245,000 workers, the lowest level since March 2005." ...

Yesterday's story: OC real estate slump putting thousands of sellers out of jobs
Date: Jan. 15, 1991
"As many as 5,000 people have dropped out of the home-selling business in Orange County during the past year, according to reports from local real estate associations and the state trade group's employment estimate for 1991." ...

The connection: Professionals in real estate-related jobs are either leaving or being forced out of the industry.

Today's story: Lennar loses $1.25B in Q4
Date: Jan. 25, 2008
"Orlando's third largest production homebuilder posted a $1.25 billion fourth quarter loss, as its home deliveries and new home orders fell by half." ...

Yesterday's story: J.M. Peters reports loss of $7 million
Date: Dec. 22, 1990
"Home builder J.M. Peters Co. on Friday issued its weakest quarterly report since becoming a public company in 1986, reflecting a downturn in home sales and added costs from trying to sell its existing inventory." ...

The connection: Homebuilders are suffering big time as demand from buyers wanes.

Today's story: Humbled Homesellers
Date: Jan. 20,2008
..."It's a story about bad timing and bad luck – a tale of woe that many 2007 home sellers are telling after enduring the slowest housing market in at least two decades."

Yesterday's story: Hopeful home sellers sweeten the bait for buyers
Date: Aug. 11, 1990
"Orange County homeowners haven't taken to riding hippos or elephants but, like some used-car dealers, they might gladly saddle up if they thought it would help sell their houses.

"This summer, with homes in some parts of the county staying on the market longer than at any time since the early 1980s, sellers are turning on charm and creativity to move their homes." ...

The connection: Builders aren't the only ones who are desperate. Sellers are, too.

Today's story: Foreigners love U.S. real estate
Date: Jan. 28, 2008
"Many Americans are anxious about the real estate market. But foreign investors see U.S. apartments, hotels, shopping centers, warehouses and offices as good investments, according to a new survey."

Yesterday's story: Europeans prefer Southern California
Date: June 14, 1990
"California is the No. 1 state for real estate-related activities, according to executives of European firms in the United States. Los Angeles is the No. 1 city, they said."

The connection: The foreigners are coming to bail us all out of our real estate problems!

Today's story: Report Reveals 8 Signs of a Real Estate Recovery
Date: Jan. 22, 2008
"Encouraging signs that a meaningful recovery in the overall U.S. housing market could begin later this year are found in HouseHunt’s fourth quarter, 2007, “Current Market Reports” survey of member-agents and in year-end statistical data compiled by the National Association of Realtors (NAR)."

Yesterday's story: Housing report hints at end of OC slump
Date: March 28, 1991
"The county's new-home market caught fire during the first 2 1/2 months of this year, as sales shot up while inventory went down.

"If both trends continue, real estate analysts said the county's housing slump could be over by the end of this year."

The connection: It's never too early to call a bottom, right? By the way, the bottom of the last slump didn't come until about 1995 - four years after this story was published.

Today's story: Credit crunch really starts to hit home
Date: Aug. 18, 2007
"As more lenders collapse, the skittish survivors are continually raising their rates and changing the rules for getting a loan as they scramble to stay alive.

"The upheaval has made it nearly impossible to secure financing for scores of borrowers who would have easily qualified for mortgages just a few months ago, creating a lending drought likely to deepen the housing slump."

Yesterday's story: Credit crunch now hitting homebuyers
Date: March 26, 1991
"The 'credit crunch,' long decried by real- estate developers, is now moving toward homebuyers, threatening to disrupt the economy.

"...underwriting standards are tightening steadily and mortgage- interest rates are rising relative to other rates, Jolson wrote in a recent report."

The connection: You thought this summer's credit crunch was a brand new phenomenon? Think again.

Ads of our times

Here is a sampling of real estate ads from recent O.C. Registers:

Eye on "Eyeball '07"

In case you're following real estate here in Orange County, you've probably also been reading Jon Lansner's blog over at the Orange County Register and reading his "Eyeball '08" - a set of opinions about how the market will fare in 2008.

Since he also did this feature last year, we're checking up on some of the posts to see how things panned out. Below is a sampling of interesting tidbits - including some big misses and surprising hits - from Eyeball '07. To kick things off, first is Lansner's column from the December 31 newspaper that sums up some of the expert sentiment.


Will '07 housing surprise us all?
"...Almost every knowledgeable person in and around the industry whom I've talked with seems to agree on the coming year's outcome: Orange County home values will simply slip - but not tumble - in 2007. Even somewhat outside observers draw largely similar conclusions." ...

"O.C. housing circa 1997-2005 was clearly an asset that may have gotten a little too hot. In 2006, we saw the first signs of the market correcting itself: the end of double-digit appreciation, growing choices for buyers and a growing number of owners missing mortgage payments.

It's not rocket science to guess 'more of the same' for '07." ...

"Momentum and shopper psyche are weak. Some owners are in trouble, too, placing added pressure on the market. It feels like it would not take much to turn 2006's skittish housing market into a full-fledged 2007 fire sale."

Now, here's how a variety of his guests answered the question "What’s your outlook for the local housing market for 2007?" plus some interesting responses to others.

Note: For the 22 business days ending Dec. 14, 2007 (most recently reported data), the DataQuick median was down 7% from last year.

Lender/investor Bruce Norris of The Norris Group
Outlook: Orange County prices down 5 percent. ...

What might be the housing surprise we’ll be talking about a year from now?
Bruce: The greatest year-over-price year decline since the Great Depression, nationally.

Anil Puri of CSUF business school
Outlook: 3 percent to 5 percent drop in median price, monthly data, year-over year.

Reader comment on that post: "Anecdotal 10% drop doesn’t equal a 10% drop in mean. I would suggest you take advantage of those individual 10-15% drops (they’re bargains!) rather than complaining that the entire market hasn’t come down that much.

The sale is ending soon."

Consultant Walter Hahn
Outlook: A slow drift downward in terms of sales to a bottom in second half 2007. Slow recovery thereafter. Price change in 2007 of zero percent, plus or minus, based on Dataquick data.

How would you describe the risks for a huge drop?
Walter: 2 percent probability.

Talk show host Mike Roberts
Outlook:Most likely, stay close to what it has ended at this year. I see little in the way of further price declines or any real measurable appreciation. The wild card is whether or not sellers believe that the market is indeed falling and start a wave of panic selling. As you know, very little inventory is actually selling. Many people have dropped their prices up to 10 percent without getting an offer. Many of them have just taken the property off the market to wait for another day. However, if a few buyers start to actually buy some of these properties, they could set into motion a whole wave of selling. Most of those that would panic sell are investors trying to cut their losses. Unfortunately, it will still create a new set of comparable sales that everyone else will have to live with.

Pimco portfolio manager Saumil Parikh
Will loans be harder to get in 2007?
Saumil: We believe the subprime mortgage market will re-price credit risk during 2007, thereby making it more expensive and onerous for first-time homebuyers to enter the market.

What might be the housing surprise we’ll be talking about a year from now?
Saumil: The surprise will likely be that activity will not rebound meaningfully upon realization of lower mortgage rates....

Bill Plattos, executive VP at First Team Real Estate
Outlook: I think along with (ex-Fed boss Alan) Greenspan that we have hit bottom. But it does not mean we will now start back up next year at the previous pace. Rather, prices and sales will coast through 2007. We really have not seen the prices fall, such as they did from 1990 to ‘95. Nor do I expect that to happen. I think the latest (2007 price) forecasts that I have seen sound reasonable at flat to maybe minus 2 percent. I also believe that it could go up a few points, especially in pockets, because everyone is starting to become more secure where the market is going and that there is still a lot of normal pent-up demand.

What events might change your outlook, pro or con?
Bill: I do not see anything that would shake things up in O.C. I believe we will work ourselves out of Iraq as we know it now and that inflation fears are overblown.

Charles Rother of American Strategic Capital
Outlook: Orange County home prices are likely to decline 5 percent in 2007. To sell their homes, homeowners may need to price their homes 10 percent or more below the highest price ever paid for a similar property on their street.

How would you describe the risks for a huge drop?
Charles: For 2007, there is a 26 percent probability that Orange County home prices will decline more than 7 percent, and an 11 percent probability that prices will drop more than 10 percent.

UCLA economists
Outlook: "From 1990 to 1995, the median sales price of an O.C. home fell 9 percent. We don’t see anything like a 4.5 percentage point jump in unemployment in the next year or two in O.C., so I think that 9 percent drop over five years is the worst case scenario — worse than anything we’re likely to see given the current economy. Without any recession-sized job loss in O.C., we expect more of what we’ve already seen in 2006: flat prices and falling sales. ... Nationally, I expect low levels of sales of both existing and new homes, aggressive pricing of new homes (e.g., a 10 percent decline in price), but very little erosion (2-5 percent) of sales prices of existing homes."

Real estate broker Gary Watts
Outlook: Both sales and prices will be up from 2006. Sales should rise to our 10-
year average of 40,100, which puts sales up 10 percent, and prices should rise 7 percent for homes and the 4 percent-5 percent range for condos.

So inventory will be … ?
Gary: Our housing supply (inventory) should average three to four months this year. (That’s homes for sale divided by the sales pace.)
Note: Inventory now in January 2008 is double what it was last year - 14 months worth

Veronica Hicks of Condos Etc.
Condo market outlook: I still believe there is some instability in the condo market, particularly for first-time homebuyers....

CAR VP and chief economist Leslie Appleton-Young
Outlook: Sales statewide will be down about 24 percent in 2006 and another 7 percent in 2007. Orange County will see slightly larger declines because the run-up in sales activity was initially stronger than the state as a whole and the median home price in Orange County at $699,200 is well about the statewide median of $555,290. Affordability issues also will work to constrain sales activity in 2007. We are projecting a 2 percent decline in the statewide median price (this) year as the market continues to normalize. Orange County prices may be slightly softer because the inventory of unsold homes for sale is higher in Orange County than in many other parts of the state.

Let's play: "Now...or Then"

It's the weekend, so let's have a little fun. Do you know the Price is Right game "Now...or Then?" In case you don't, the premise is quite simple. The contestant has to decide whether the price provided on certain products is current, or whether it's from a specific date in the past.

We'll do something similar, but with a different twist. Some of the statements below are recent, while others were made in the LA Times in the spring of 1991 - early on in the last real estate downturn. Read each quote and decide for yourself: now...or then?

1. “It is going to be a gradual process of bringing the inventory (of unsold homes) down, but things look quite good for a rebound to begin.”
   
   
2. Brokers say reduced housing prices and low mortgage rates appear to have finally stabilized the real estate market. “The worst is very much over," said Clarence Bales, manager of Century 21 Central Coast Realty…"At the low end…people are attracted by prices that are still soft and by low interest rates," (Fred) Priebe said.
   
   
3. "I think, but it's just a gut -- there's no data that can prove this to you -- that things will turn around (next year), that prices will stop falling, inventory will start decumulating and prices will come back. But that's a gut.”
   
   
4. "I'm not seeing the market fall apart. Are we having a correction? Absolutely”…"I don't think this will go on much longer.”
   
   
5. Speculative home buying is risky in our current market. If you're not planning to hold on to your new acquisition for five years or more, invest your money elsewhere. But, if you're renting and you're tired of paying ever-increasing rent, getting little if any tax break and you have a good income with excellent prospects for continued employment, then I recommend that you consider buying now.
   
   
6. …Local housing prices just got higher than most buyers could afford or were willing to pay. This happened as investors, builders, landowners, lenders, government regulators and existing homeowners with huge amounts of equity tried to cash in on the boom. The bust then fed on itself, forcing builders to stop construction, sellers to lower prices and lenders to carefully scrutinize loans. These events will help bring supply and demand back into balance, leading again to an improvement in the market.
   

How did you do? Let's find out...
1 - THEN, Leslie Appleton-Young, chief economist for CAR, March 26, 1991. From the same article: "The modest drop in sales of existing homes from January was the smallest decline in sales locally since August. That showing has some real estate officials saying the slump that has devastated the industry has hit bottom and the worst is over."
2 - THEN, April 22, 1991. Funny note: The "low" interest rates they're talking about were 9.5%
3 - NOW, Karl Case on MSN Money. Case also said: "It (the downturn) could go into 2009."
4 - NOW, Long Beach broker Dick Gaylord, who will become the 2008 NAR president, in the OC Register
5 - THEN, Dian Hymer, March 24, 1991. I feel sorry for people who took her advice and bought then but couldn't hold the property long enough, considering prices took another six years or so to rebound.
6 - THEN, John O’Dell Q&A called "What Led to Lag and When Will It End?"March 17, 1991

Boom and bust

Foreclosed homes typically sell at steep discounts, having a significant negative impact on neighboring properties.

The above is a quote from the letter FDIC chairperson Sheila Bair wrote to CNBC real estate reporter Diana Olick about a possible loan modification program to save more than 1 million at-risk subprime borrowers.

The implication of Bair's statement was foreclosures hurt neighborhoods. We're not going to debate that point - in fact, we will examine what falling property values can do in an upcoming post. But let's look a little deeper at how we got here, with scores of projected foreclosures looming over many unsuspecting (?) neighborhoods. Follow me on this one...

The recent housing boom (born from factors like easy access to credit, rampant speculation and excessive buyer optimism) created a housing market that exceeded all rational economic bounds. As houses shot up in value - while at the same time disconnected from fundamentals - properties commanded higher and higher prices, until things finally gave out; we are now seeing prices tumble. When prices fall and equity evaporates, that part of the free money spigot (massive, multiple lines of home equity credit) is turned off.

When there is no easy access to more cash, no way to quickly get out by selling for enough of a profit to cover the debt (not enough willing buyers with access to the proper financing to go around), and no realistic way many owners can fulfill the terms of their loans, foreclosures start happening. Like mad. As in more quickly than the '90s.

Therefore, what once was known as the housing boom has now begun to backfire on the very neighborhoods it tantalized with its gilded dreams of real estate glory. Foreclosures are just the last step on the road to financial ruin. The inevitable fall was crafted back when prices were ballooning further and further into the stratosphere.

Foreclosures have begun to hurt neighborhoods, cities and even regions - and threaten to do much worse in the coming months and years if there is no viable path to abatement. But, if you dig to the roots of the problem, the now-gone housing boom itself is the darker, underlying culprit.

It is what laid the groundwork for the magnitude of the current and impending housing downturn, of which foreclosures play a significant part.

Had the bubble not occurred, to the degree it did, then it is very possible we would not be in the precarious economic position we are in now. Foreclosure levels, then, would also be much lower. Fewer families and neighborhoods would be stung.

So, David Lereah, Are You Too Regretting the Real Estate Boom?

This builder is really reaching

Here is an ad from today's new house section in the OC Register. If it appears too small on your screen, click the image for the full version.
File this one under insulting. The approach taken by this ad is so obvious, it's virtually transparent. They're not going after anyone who's really informed about the housing market, because they would laugh this off based on a mountain of concrete facts. Anyone who sees this ad and says "the pictures of signs in the newspaper told me to buy a house now, so I listened" should have their head examined.

This ad is instead targeting a sidelines buyer, perhaps one who really, really wants to get into the market for a variety of emotional reasons including peer and/or cultural pressures, but is holding back until they see some magic light that tells them it's finally time to jump in.

In reality, there doesn't have to be anything like a "magic light" - just an ongoing analysis of the numbers to determine when buying makes financial sense based on someone's individual situation. Notice how, in this case, emotion plays little into the decision of when is a good time to buy. These people who think first before reacting are not the target audience of this ad campaign.

Instead, the purpose of this type of ad is to try and hook in the remaining gullible fools who may have heard a bit about house prices not performing like they used to (as if 20% appreciation is some normal standard), but are willing to put emotions before their brains.

There's also some irony here. If we really should "not be mislead (they couldn't even spell this word right, as a commentor pointed out) by all the information out there on the housing market" as the advertisement claims, why then should we listen to the ad itself when it's telling us that there's "never been a better time" to buy one of your homes?

Here's some more of the ad:

We can see prices have been slashed by nearly a quarter in Corona Hills, and 19% in Montclair. In Irvine, they've come down by $50k. Even if you did believe the builder into thinking that this is the perfect time to buy, what happens if they drop the prices even lower? Wouldn't that be a more perfect time to buy? I thought it was always a great time to buy or even sell a house! Wait, where have I heard that before...

O.C. makes national news!

Not for the best reasons, though. The Washington Post did a very good story on our local saga with the headline "The O.C. Mortgage Bust." Some excerpts:

"'When I started working there (Homefield Financial) in 2003, I was embarrassed because I was driving a Cadillac and the young office clerks were all driving Mercedes and BMWs," said (mortgage manager Tony) Ventimiglio, 49. "There were a lot of people who knew nothing about mortgages. They were simply in the right place at the right time.'

"The good times are over for the get-rich-quick industry that grew up in Orange County and thrived in the first half of the decade.

"When the housing market soured, those lenders and dozens of others nationwide shut down or scaled back, leaving workers like Ventimiglio in the lurch and contributing to an abrupt drop in mortgage-related jobs.

"...part of Irvine's appeal was cheap and plentiful office space compared with Los Angeles, and an Orange County address that was posh enough to support the high-flying image these lenders cultivated...

"...Kelly Markham...earned $200,000 in commission in 2005 as a loan officer at an Irvine mortgage brokerage. When commissions dried up, she began looking for another job to support her six-month-old baby and hang on to her $600,000 home.

"'I've signed up for work at a temp agency, but all I've gotten is five hours of work in the past four weeks stuffing envelopes in some office,' said Markham, 34, as she perused Starbucks job listings online one recent afternoon. "