Wednesday, July 2, 2008

Are we going to be a Ghost Town?

A financial analyst fresh from a tour of construction sites in the Inland Empire is warning Wall Street of a "ghost town" where finished homes sit vacant and additional homes are still under construction.

"At several properties, there were a significant number of fully built homes sitting vacant along with a large number of additional homes still under construction," Sandler O'Neill & Partners analyst Aaron Deer wrote today after touring developments in Corona and Ontario. "At one master plan community, the entire development appeared to be vacant -- with the exception of crews working on new construction, it was a ghost town."

Median home prices in both communities have dropped sharply over the last year, declining 33.6% in Corona and 30.3% in Ontario, according to DataQuick Information Systems. In Corona, the median sales price fell nearly $200,000 from May 2007 to May 2008, dropping from $565,000 to $375,000.

More from Deer's note: "The homes all appeared to be empty, and there were no prospective buyers anywhere to be found. Surprisingly, the sales office was open ... but the woman working there had questionable English fluency. When asked how many homes had been sold in the past month she simply responded, 'Uh huh. Thank you. Yes!' and handed us some additional literature on the property."

More: "Perhaps the most interesting aspect to the development was what it revealed about the nature of the housing boom: that at the peak even the most undesirable and remote locations were worthy of expensive, high-end homes."
My comments;
While I don't agree the IE will become a ghost town I do expect some of the new unfinished devlopments to end with a ghost town feel. The Preserve in Chino, Riverwalk Vista in Riverside and to a lesser extent Lake Hills, Sycamore Creek and parts of Eastvale. If the tracts are built out or mostly built out then they should have less of a ghost town feel. I would be very, very worried about buying in new tracts especially that Riverwalk Vista.
I've noticed quite a few builders are now selling the models on tracts that are no where near built out. They have not said that they are going to stop building, but when they sell the models it's a pretty good indication ( And by selling the models I mean selling them, pulling down the fancy fences, tearing out the sales offices etc.).
There is a simple solution to finished homes sitting vacant and I'm sure they builders or the banks know what it is and will use it. There are prospective buyers, just not at the silly prices most builders are still asking. Most builders are still trying to get at least $100k more than comparable REOs are listed for. Lake hills has dozens of REOs in the mid $400s yet the builders are trying to get $500k to $700k for new homes. Victoria Grove is busting at the seams with REOs, most in the mid $300s, yet the last builder is asking high $400s to $500s for the last few homes. The thing I find amazing is that they actually still manage to sell one or two. Where are they finding these people??
They won't sit vacant for long once they cut the price enough. Many builders/banks in NorCal, Florida and other place are already auctioning new homes are steep discounts. Poor wall street will lose a ton of money for sure but there aren't going to be tracts of finished vacant homes, at least not for very long anyway. (This may not hold true for far flung places like Adelanto, Barstow or some hell hole east of Pheonix. There is a possibility of entire tracts of homes remaining vacant.)


Oldtimer said...

The IE has offered the same bargain since at least the early 1980s - more home for your money, but a long commute for most workers.

Clearly the job base in the IE has grown since the 1980s, but it is still not organic. The constantly rush-hour choked 91, 60, 10 and now 210 tell me that a huge portion of 909ers still commute to LA and Orange County to earn a living.

What is changing is that in addition to the time commitment of commuting to a distant job, high gas prices are added to the equation. This won't have much impact on those that drive Civics or Corollas to their jobs, but those that need pickups and SUVs are going to want to find digs closer to work.

I don't know if higher gas prices are a permanent change or simply the most recent speculative investment medium. But if higher gas prices are here to stay, I expect IE homes will have to get cheaper relative to urban counties to keep growing.

The good news is that they are well on their way.

I'm Not POTUS said...

Don't let the guilt of being prudent and right until now cloud your judgment of the future.

Organic jobs in the IE are based on 2 things, housing and shipping/redistributing the junk from china we put in the homes.

All financial markets will tank globally and when the dust settles it will cost even more to ship stuff from Asia to the US. It will be cheaper and easier for them to stop making salad shooters for Walmart and start making practical things for the Asian markets.

Millions of square feet of warehouse space will go empty in the IE. Each year more and more.

30% of the labor force exists only to provide us with junk and services that have never been necessary for previous generations.

The IE ghost tracts will be turned into federally managed Okkie camps (ala Garpes of Wrath Camps) Section 8 writ large.

Europeans get by with less than 3 Sq. Ft. of retail floor space for each person living there. Here in the US we get 20 big spacious sq.ft. to shop per person.

This is just one statistic of things that we have too much of for our needs.

Thats 3 sq.ft. when times were good. In the bad times ahead you can argue that we will only manage 2 sq.ft. per American at best.

That means 90% of our retail buildings will be ghosts. You can argue that transportation limitations of American dependence on cars make that impractical and we can never get that small, but wouldn't that mean you are the same guy who said real estate never goes down?
In the future we will have bus routes that just say COSTCO/TARGET for a route. They will just ferry people back and forth to a limited number of stores.

What good reason would someone have to ship 20 pairs of jeans for months and thousand of miles to 20 different stores in the US, in the hopes that 1 of them ends up on your giant hips. If I was making jeans in Shanghai, I would send at most 2 pairs to the US wait a few months to get paid and send 18 pairs in days to eager Asians flush with cash.

Someone stop me when I stop making sense.

dgelz said...

Potus, its not that you don't make sense, its that you're a little whacked out. Congratulations, your extreme pessimism and doomsday mentality made my day. I can't wait until we experience the feudal dark ages again. Yaaaayyyyy! Being a peasant has its advantages, I guess.

Keita said...

Do you think the quality of the new homes being built right now will be less than ideal? If they're not even bothering to hire a qualified person to work the sales office, I'm curious about how many corners they're cutting just to throw these places up as quickly and cheaply as possible.

golfer_X said...

The quality of new homes can range from great to terrible. It's always been that way and probably always will be. Even two tracts by the same builder can be very different in quality. Heck even different phases within the same tract can vary depending on the subcontractors that built them. I do have several friends in the construction biz. They have always told me to stay away from KB. But KB traditionally has a high customer satisfaction when you look at the reports.

There is probably a higher chance of them cutting corners these days than there was a year or two ago. They have cut the prices so you know they are going to try and cut the costs. That might mean less insulation, thinner drywall, cheaper cabinets and fixtures etc.

I would always recommend that you get an inspection done for any home you are looking to buy. Even new homes. Unless you are familiar with how a house should be built it's well worth the $500 to get an inspection on that new home. I like to look at the homes that are under construction if possible. Ask to see a finished home that has not been moved into yet. I did that in one tract, the house was full of empty beer cans. I even saw one in the medicine cabinet. They look very different from the models!