A tidal wave of new apartment completions in ‘09 is expected to hit the O.C. market with 1,800 more units than there will be demand for, predicts M/PF YieldStar.
A total of 2,200 new units will come on the market next year with demand for only 400, says the Texas-based analytics firm in its ‘09 forecast. The company blames a worsening local economy and loss of jobs for the reduced demand. O.C.’s unemployment rate hit 5.7% in July, a 13-year high.
“Also, while a notable block of new product is scheduled for completion in the near term, most of this product is very expensive and simply out of reach for much of the renter populace,” says the company.
Renters seeking apartments will likely gravitate to more affordable communities outside O.C., “leaving apartment demand somewhat limited in Orange County.”
With weakening demand, the company expects the vacancy rate at the county’s largest complexes to rise to 5% by June ‘09 up from 4.2% this June.
For the final 2Q report and 2009 forecast, CLICK HERE.
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- O.C. 8th lowest in vacant apartments
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idiocy
Hundreds of these new units are in Anaheim and began their life as condos in the Platinum Triangle. Some were switched to apartments just as the foundation was being poured in late ‘07, and more were switched to apartments in the middle of construction with several floors up in the air in early to mid ‘08.
There are several hundred more units in the Platinum Triangle that are still officially going to be condos, but construction on them has stopped completely. The Anavia condos on State College began life as a KB Home project. But about six months ago they slowed construction, and in late spring they stopped construction entirely. (The red tiles piled on the roof have been sitting there since Easter, and they haven’t moved. They’ll need to something with them in a few months before the rain arrives.) The Anavia project looks to be about 85% done, but it’s just been sitting there for months in limbo, and now the Anavia page on the KB Home website has disappeared.
If I were to guess, KB Home is trying to pawn off this Anavia complex to a luxury apartment developer, much like DR Horton did with their 2100 complex two blocks north. But as this story says, the market for luxury condos turned apartments is shrinking just as thousands of new units begin to come online in late ‘08 and into ‘09. But then that’s just me, a guy on his laptop, and the OC Register hasn’t said a word about any of this.
(Not to mention the similar fate of the much higher profile Skyline twin towers down near John Wayne.)
And again, all of these thousands of units are still in the “Platinum Triangle” where Lennar and the City of Anaheim still haven’t done one thing to spruce up the ugly sidewalks and noisy streets of Katella and State College. Since Lennar has abandoned their massive A-Town project, all of the beautification and gentrification of this neighborhood has never even begun. These huge condo/apartment complexes are just plopped down into a gritty and noisy post-industrial neighborhood in central Anaheim.
Nice post Troy.
August 29, 2008
Let’s Get Real about Real Estate
Once again, real estate market watchers have pounced on a shred of seemingly positive news to proclaim that the long sought “bottom” is in sight. The routine is becoming extremely stale, but somehow the media never seems to tire of it. This time the “good” news was that the percentage declines in national home prices (according to Case Shiller) in July where not as large as they were in June. Although the report contained many other negative data points, including increased inventories and a spike in foreclosure sales, it was the slowing declines that got spotlight. Talk about grasping at straws. The truth is that real estate has been grossly overvalued for years, and the adjustment process back to realistic pricing has only just begun. The problem is few among us seem to appreciate the magnitude of this adjustment and its implication for an economy dependent on inflated assets values.
By most accounts, the decade long housing boom began in 1996 and finally went poof in mid-2006. In January 1996, the Case Shiller 10 city composite home price index stood at 76. By June 2006 it had tripled to 226, by far the largest increase in U.S. history. Since then, the index has pulled back by 20% to 180. For those who believed that home prices could never retreat nationally, this 20% correction is more than enough. In reality, it’s just the down payment.
When real estate prices were expected to rise in perpetuity, the price of a house had two components, one representing shelter and the other investment. The shelter component was the actual utility and desirability of the house and the investment component was the expected future appreciation. My guess is that at the peak of the real estate mania, a $500,000 house might have been comprised of $250,000 for the shelter component and $250,000 for the investment component.
In effect, the appreciation potential, and the ability of the homeowner to tap into it though refinancing and home equity loans, offset the real costs of home ownership, such as mortgage payments, taxes, insurance, and maintenance. So the main reason a buyer would commit to a mortgage that would soak up 50% of his disposable income was that he expected to recover most of that outlay through future appreciation. Absent the expectation of that windfall, buyers would not have been willing to pay such staggering prices for houses or commit to burdensome mortgage payments.
Lenders were caught in the same delusion. Since they too believed prices could only rise, lending standards were thrown out the window. If the collateral (the house) were to always rise in value, what difference would it make if the buyer made the payments? In effect, instead of relying on the borrower’s ability to pay to mitigate its risk, lenders merely relied on the house’s ability to appreciate.
However, now that real estate prices are falling, lenders are beginning to rely solely on the borrower’s ability to pay. As this trend continues, lending standards will tighten and mortgages will be brought back into line with the incomes of borrowers. In addition, down payments will be larger to reflect the greater likelihood of losses should loans end up in foreclosure. When prices were rising the foreclosure risk was negligible. However, now that foreclosures are soaring and recovery rates are less than 50 cents on the dollar, those risks are enormous.
So with falling real estate prices, mortgages are much less appealing to both borrowers and lenders. The only solution is for home prices to fall to where they are cheap enough for buyers to afford the mortgage payments (both interest and principal) without relying on appreciation, teaser rates, or negative amortization, and save enough for a down payment that would protect a lender in the event of default. In addition, the collapse of the mortgage securitization market means houses must be cheap enough for our limited pool of domestic savings to supply the funding, as we will likely lose access to much of the foreign funding that fueled the bubble.
Of course we need to be honest about the winners and losers of this credit crunch. Just because mortgage money becomes scarce and lending standards tighten does not mean people will not be able to buy houses –it simply means they will pay a lot less for them and that fewer new houses will be built. Therefore it is sellers, builders and those holding or insuring existing mortgages who lose, while buyers win big. That is because despite higher interest rates and larger down payments, they end up borrowing a lot less money. In the end they will become true homeowners rather than indentured servants. If home ownership is truly is the American dream that so many realtors profess, then the ongoing collapse in home prices will be a dream come true.
Thanks Liar Loan.
The Platinum Triangle story is really just the tip of the iceburg for OC. The real story of highrise condo horror is happening further south, at the Skyline and Astoria towers, plus the mid-rise Central Park West development. Combined, these three projects have literally thousands of units of luxury condos ready to go on the market.
But there is no market.
It was last Fall that the OC Register did a very soft hitting piece on the fate of these high rise developments, as the sales centers for all of these places were quietly closed. Back in late ‘07 the developers said the sales centers would reopen in the spring, closer to the completion dates and “when the market recovered from the August credit crunch”. Now it’s August again, none of the sales centers reopened last spring, we are heading towards winter, and thousands of these units are just sitting there empty.
It’s the high rise towers that will be the most obvious this winter. They are just empty. Like those ugly highrise hotels Kim Jong builds in Pyongyang, North Korea. No one to buy them, no one to live there, no one to care.
I’m hoping the OC Register does a follow up on this luxury condo story this fall, although I’m not hoping for much because the paper seems to not want to talk about it. They were real cheerleaders for these places in ‘04 to ‘07, but now they pretend these empty skyscrapers don’t even exist.
And yet we drive by them on the freeways every day. Just sitting there. Empty.
at least it keeps the mexicans out.
The Skyline/Astoria towers will be vacant for the next 2 years unless prices drop dramatically. Interest + HOA payments at present are outrageous - they assume everybody is single and pulling in $200,000. Good luck with that target audience.
The newspapers get the advertisement revenue from the developers and brokers and not from home buyers. Is that not a good reason that they don’t publish the fact that the real estate market is going south. If they do, they stop getting that revenue.
YOUR BLOGGER: Are you saying the media is covering up home losses?
Awesome posts you guys.
I drive by there all the time and shake my head. I do business in the Wells Fargo building off State College. They built tall enough to ruin the views of the offices in the Wells Fargo building and then just stopped. I mentioned this some time ago. What are they gonna do with all these places? Rents will definitely be lowered for all before this is over with.
What I can’t imagine are those towers in Irvine where the hoa is 1000. Again, Melody shakes her head.
It didn’t just happen here. One’s that I’ve seen personally - Vegas, San Diego, Sacramento. You don’t hear much on the news how these places are truly doing.
What about those lofts work/live in Santa Ana? I go by there as well and I never see the work part open. Don’t they need to sell their wares? The concept was a good one, I just don’t see it working.
yeah blogger were saying the newspapers - and tv -
are glossing over the real state of the market… absolutely
positively… without a doubt- if the truth were told
it would be the equivalent of screaming fire in
a very large, packed auditorium
rants: Wall St. is not glossing over it at all. The market will not return to northern movement until the RE sector returns to normal health, along with the financial sector. Those two solely are keeping the market suppressed. Those dolt traders at least learned that much at the a$$hat carnival of buying every mortgage known to man regardless of risk factors.
rants: Wall St. is not glossing over it at all. The market will not return to northern movement until the RE sector returns to normal health, along with the financial sector. Those two solely are keeping the market suppressed. Those dolt traders at least learned that much at the a-hat carnival of buying every mortgage known to man regardless of risk factors.
Mulli - I do think the media is “hiding” a lot of information. I feel damage control is their number one priorty. Otherwise, people would be walking away much faster. Times WILL get good again, just not now.
I think the corporations are hiding the information…like a parent hiding info from a child. The media would trounce on the info if they got their grubby mitts on it…that is what they do…the story at all costs. Period.
Bear Stearns prime example. Where was everybody? Oh, the rating agencies? When they say “the system was drunk”, I cringe.
OK…going to a USC party with my Texas gear on…this should be fun. Enjoy your weekend.
I drove by the Skyline Towers the other night and it was pitch black, there is NOBODY living there. Not a soul in sight anywhere in the complex. Did they really expect to sell $800,000 condos with a view of MacArthur Blvd?