Orange County Real Estate Update – Window of Opportunity Approaching

This summary section is my prediction for the best window of opportunity for home buying for those who have been waiting patiently on the sidelines renting. This is not a suggestion for cash-flow investment properties, it is only an opinion based on the costs of continuing to rent versus the subjective benefits of owning a house considering the current and future market and economic conditions.

SUMMARY
  • Home prices have already fallen over 35%, so the largest declines have already happened.
  • Home prices will fall another 15% to 20%, but will be spread out over several years, not worth waiting and renting for.
  • The bulk of foreclosed home owners will be kept out of the market for another year or two, but will then qualify for an FHA loan and become competition for home buyers.
  • Interest rates will be flat or rise, but slowly at first for a year or two.
  • The 2010 summer selling season was so bad, the subsequent significant home price drops in surrounding areas will be putting even more downward pressure on the rest of Orange County this year.
  • Continued foreclosures, unemployment and economic malaise will continue to add foreclosed inventory.
  • Home sales will be slow or down.
  • New home construction will be down except for The Great Park and the occasional new development.
  • 5,000 homes in The Great Park in 2012 will put even more downward pressure on prices in O.C. and Irvine.
  • Potential buyer competition from current homeowners who would like to sell or move-up is constrained as they can not leave their current house since they owe more than the house is worth.
  • The rising prices of the bubble drove O.C. prices up, then outlying areas in O.C., like Ladera Ranch and Rancho Santa Margarita, then over the mountain to Corona, Murrieta and beyond. The reverse has been happening as the beyond has come down significantly, putting pressure on the O.C. outlying areas to drop which is now putting more pressure on central O.C. to drop. The more central O.C. drops, the more the outlying areas have to drop to compensate, and the cycle repeats.
  • As more short-sales are approved, they will set more and more of the comps in any given area, further fueling the downward price declines.

Considering all of these factors, the window of opportunity seems to be starting between the end of the 2011 spring/summer selling season and before the spring/summer selling season of 2012. In the short-term, interest rates will not rise fast enough to make a significant difference, competition from other buyers is temporarily limited, inventories are bloated, home prices will continue to fall but not by much each year because it will be spread out, more inventory will come on the market and banks will become more reasonable in short sales. Some of these short-term benefits will end or work steadily against you over time making it less and less attractive to rent over time.

Considering the cost of renting, higher interest rates, more competition and the years of down or flat pricing it seems reasonable for those who have been renting to start the process of finding what kind of home you want, where and what you are willing and able to pay targeting the window as your purchase time.

THE IRVINE UNICORN

For those of you considering Irvine…Irvine will continue to be an anomaly, a false market. Irvine housing prices are like Unicorns, you never expect to see them. For whatever reason there has been significant interest in Irvine, particularly with Asian buyers. Sales of new Irvine Company homes have been brisk all year. These buyers have been putting down anywhere from $200,000 all the way up to the entire purchase price of $650,000 or more in cash for many of the latest Irvine Company properties. Due to the “all-cash” or “mostly-cash” purchases the Irvine Company has been able to continue building new homes at an accelerated pace while other cities have stopped or limited construction and Irvine has kept their home prices much higher than surrounding similarly styled homes in other cities.

Personally, I think Irvine is a brilliantly planned and executed city. I like renting here, but I would never buy here. First, the home prices are too high compared to similar properties everywhere else in Orange County. They may have some of the best schools, but since I’m not a fan of public schools anyway I will most likely make every effort to send my kids to private school which would be much easier with the money I saved in buying the same house I could in Irvine somewhere else for cheaper.

Irvine property taxes are too high. Most new properties in Irvine have a Mello-Roos tax and either one, or two, association fees depending on if you are buying a house or a condo, respectively. I just looked at a tiny 1,200 foot condo today for fun in Woodbury where the total taxes and fees were in excess of $9,000 a year on a $545,000 property. I would rather save all of those expenses and use that money towards paying off my mortgage or sending my kid to private school. So in summary, Irvine is nice but I guess I don’t need to say I live in Irvine so badly that I want to drop half a million in cash on a condo.

Also for consideration are the 5,000 homes that Five Points (Lennar) is going to build at the Orange County Great Park. As of this month, Five Points submitted plans to the city of Irvine so construction should start soon. You can visit the website here. Lennar paid $1 Billion to Irvine for the property in 2005, almost at the height of the housing price bubble and subsequently suffered serious financial problems. Without doing more research, I only read that Five Points is a spin-off of Lennar and they are now responsible for the project. What that means to you and me is that 5,000 new homes planned for 2012 and 2013 are going to put some significant downward pressure on Irvine Company properties. There is a belief out in cyberspace that this is why the Irvine Company continued to build at break-neck speeds through 2010. They want as many suckers as possible to buy high in Woodbury and surrounding neighborhoods before those 5,000 homes hit the market.

Either way, there are only so many chock-full-o’-cash buyers walking around and with 5,000 brand new homes being built next door in a years time as well as all of the comparable downward price pressures from areas like Talega Hills, Ladera Ranch and Rancho Santa Margarita, it’s pretty clear that Irvine will not be able to maintain their current price levels. They will stay higher longer and might maintain a small “Irvine Unicorn” premium, but there will be plenty of competition around soon enough.



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