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Rancho Ortega Blog discusses matters of public interest in South Orange County, including the communities of San Juan Capistrano, Ladera Ranch and Rancho Mission Viejo.

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Calling a Bottom in Ladera Ranch Home Prices

Every homeowner in Ladera Ranch understands the magnitude of the real estate bubble’s collapse.  Many of Ladera’s neighborhoods were built during the real estate frenzy of the early and  mid-2000s and many more Ladera residents bought into the community during that time, often using risky and speculative financing.  As a result, when the mortgage market dried up and real estate imploded, Ladera Ranch crashed early and hard.  It has been a long, painful road back for Ladera Ranch but it is possible that the worst is over.

Take this Redfin chart reflecting Ladera Ranch home prices (single family only, condos excluded) during the last two years.  The chart shows listing prices (price per square foot), sold prices (price per square foot), inventory and completed transactions in zip code 92694 between August 2010 and August 2012.

Single Family Home Prices and Sales in 92694 (chart courtesy of Redfin)

Inventory peaked in December 2010 and has been steadily declining ever since.  The number of transactions, however, have held true to seasonal patterns and is currently well above recent lows.  These two factors taken together are an indication that the “forced sales” have pretty much been exhausted, leaving us with a reasonably healthy real estate market in Ladera Ranch.  For sure, we will continue to see foreclosures and short sales emerge from shadow inventory for quite some time.  But a majority of those who are selling now are, for the most part, doing so voluntarily.  Inventory is low and that means well-priced homes in good condition are attracting multiple offers.  Anecdotally (we are not in the real estate industry), we’ve heard that to be true.  Nevertheless, homes are selling and transactions are closing.  All good signs for Ladera.

Because sellers can list their homes for whatever price they want, we don’t put a lot of faith in the asking price statistic, but we did note two things:

First, during 2010 and the first half of 2011, average listing prices were lower than the actual average sales prices.  Some of this could be a mix of what sold versus what didn’t, but we think it also reflected the dominance of REOs and short sales in the market.  Banks and short sellers can list below market and allow buyers to bid the price up to a higher level.  Short sellers have no skin in the game, so they didn’t mind the low listing prices.  And banks can be unemotional (and sometimes uninformed) about listing prices, often relying on the advice of local realtors who may be more interested in a quick sale, then the highest sale.   In the last six months, average listing prices have tended to be above average sales price, indicating a normal market where equity sellers start high and try to maximize the sales price of the house.

Second, whenever one talks about market psychology in a bubble/bust economy, one must reference the progressive stages of market psychology that participants experience — from enthusiasm to greed to denial to fear to capitulation to despair — before emerging from the shadows full of hope again.  We’ve created a graphic to illustrate the phenomenon below:

If you are unfamiliar with these stages of market bubble/bust psychology, here is a great graphic from OC Housing News that charts the stages against the most recent real estate cycle, and which serves as the basis for our graphic above.  We didn’t reproduce OCHN’s chart because we don’t think the author intended for other blogs to use it, but we think the concept conveys perfectly what Ladera Ranch has collectively experienced.

So where are we now?  Well, nothing embodies market psychology more accurately than the listing price of home sellers — what do you think your home is worth today?  If you look at the chart, and in particular the listing price per square foot, we think you can make out the progression from fear (late 2010) to the bear rally (first half of 2011) to capitulation (late 2011/early 2012) to a hopeful recovery.  We would argue that with sales prices as low as $200 per square foot, Ladera Ranch real estate dipped below its fundamental value, as the market psychology chart predicts.

Finally, we look at the average sales price.  It is important to use the price per square foot statistic, because a small sample size can be skewed by one or two high dollar properties.  Note for example that the average list price in July 2012 was nearly $1 million, while the average sold price in the same month was just over $600k.  On the other hand, price per square foot equalizes for these variables — particularly in a community like Ladera Ranch with common amenities, an essentially equal tax and HOA structure and a largely homogenous housing stock.  Again, we see the market psychology reflected in the numbers.  The chart begins with a sharp, chaotic price decline in progress from August 2010 through the end of 2011.  And there it is — the market hits a floor.  From December 2011 until the start of the summer selling season in 2012, one would have been hard-pressed to find a pulse in Ladera Ranch real estate.  Prices were low, inventory was dropping, transactions collapsed and seller psychology capitulated in the form of the lowest average listing prices in a decade.  Homes that sold during this period often sold below rental parity, and some of the larger homes in Covenant Hills actually sold for less than replacement cost.  This, friends, is what a bottom looks like.

Just when hope was lost and the community was gripped by despair, summer 2012 arrived.  First to get up off the floor was transaction volume — all the fence-sitting buyers realized that prices were too good to refuse and they hopped off the fence.  Of course, payment affordability and low interest rates helped.  But buyers started buying, and sales volumes began a slow, steady ascent that continues today.  List prices and sales prices climbed together slowly for a few months, but eventually, sellers noticed that the market was improving and asking prices adjusted upward accordingly.  Look at that blue spike!  Sellers are now listing their homes for, on average, more than they have in the previous two years — and just months removed from the depths of despair.  But here’s where we feel confident enough to call a bottom.  Buyers agreed!

Everyone knows that financing is tight and there are serious concerns about a second (or “double-dip”) recession.  Thus, it would not have been unusual or unexpected for buyers to reject the higher asking prices and hold the average sales price steady at post-bubble lows.  On the contrary, after a slight lag, buyers voted with their wallets and the sales prices have taken off nearly as abruptly as asking prices, currently sitting at $257 per square foot.  It is as if we are in the midst of a bidding war for Ladera Ranch.

Is there a chance that the current rally is the “bear rally” predicted by the chart, and that the market is delivering one cruel, fatal blow to Ladera Ranch real estate?  It’s possible.  We may certainly experience some seasonal weakness as the summer buying season comes to an end and the winter doldrums approach.  And if we fall into another recession, all bets are off.  If the world slides back into recession, Orange County real estate could plumb new depths in the years ahead.  But we are cautiously optimistic that this is it.  The combination of healthy sales volumes, rising prices, seller optimism and the fact that home prices have already tested the floor of fundamental value leads us to call a bottom in Ladera Ranch real estate and declare that the future looks bright for Ladera Ranch homeowners.

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