Supersized Trouble for Unsold McMansions

During the rise and peak of the boom, many homes were remodeled or completely torn down and rebuilt. Lending standards were loose and many people were able to take advantage of the cheap money available. Free-flowing credit allowed home equity withdrawals, refinancing and the means to build one McMansion after another. Widespread McMansion development was especially prominent in San Gabriel Valley cities like Temple City, Monrovia, San Gabriel and Arcadia.

As the credit crunch gets crunchier and flow of cash slows to just a trickle, the market is unable to sustain the rampant development of new homes. Even if investors were willing to take the risk, they can only do so much without the ability to borrow money. Leverage was extremely useful during the boom and it is equally as potent during the downturn. That being said, I still see many new homes in construction right now. What’s going on here?

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Once an investor buys property, their money is tied up. From the original close of escrow to the next close of escrow, they are responsible for all the mortgage payments, property taxes, insurance, HOA fees and any other applicable expenses. That was easy to stomach during the boom because prices were going up, but the carrying costs can easily burn a hole in their pocket when prices are falling.

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Depending on the city and floorplan, it can take anywhere from 3 months to a year or more to successfully apply for a permit to build a new home. If property lines need to be redrawn or re-zoned, it can really start to complicate things and extend the timeline. Only when the permit is granted can construction begin. City inspections can hinder the progress of the project even if everything is made to code simply because of scheduling. There are also other potential setbacks such as weather delays and construction mishaps.

The investor is shelling out thousands and thousands a month to keep things moving. Once construction begins, there’s no turning back. Many of the properties in construction right now were probably purchased during the spring and summer of 2007 before significantly downturns of the RE market were widely reported by the mass media. I suspect these permits didn’t get approved until Q3/Q4 and that’s why we’re still seeing McMansions being built.

If the old structure is still standing they can try to sell it, but once it’s been bulldozed to nothing but an empty lot, the investors have no choice but to continue on with rebuild in hopes of selling a new construction home for profit. It may not be the profit they were expecting, but at least enough to come out ahead or break even.

Empty Equity Burning McMansions
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Lately, I’ve seen plenty of homes in construction, but also many completed homes just sitting on the market. Almost all of these are million dollar McMansions. By default, real estate is not liquid and the higher the price point, the harder it is to sell because the buyer pool is just that much smaller. I’m starting to see quite a few empty, equity burning McMansions sitting on the market and I wouldn’t be surprised to see many more of them in the coming months as more homes are finished with few buyers to absorb them.

When the supply goes up, the prices must come down. When new construction home prices come down, resale home prices will be under a crushing weight. It’s a vicious cycle.

3 thoughts on “Supersized Trouble for Unsold McMansions”

  1. I have been living in Arcadia for 12 years and have seen incredible demographic shifts along with the quadrupling of home prices. This area needs prices to significantly drop so that families with kids come back. These big McMansions are displacing families (most of the McMansions are Chinese (questionable) money in safe American land investments). These people have few children but……I love the fact that they are paying extremely high property taxes for my four kids to go to some of the best public schools in the state. Each one of these $2.0 M homes is paying from $15k/year and up in property taxes. It is great!!!! Buy more of these McMansions!!!

    I hope that these fools continue to build their huge homes because with the economy retracting and the prices beginning to plummet and prices dropping it is getting very funny. Please use a (big) down payment so we can really enjoy your horrific situation as your mortgage goes upside down over the next four years.

    The latest trend in Arcadia area is the high number of new townhouse projects but they are just not selling.
    http://www.redfin.com/stingray/do/printable-listing?listing-id=1506150
    This three unit TH has been sitting on the market (9 months) with big signs begging for buyers. Do you notice they don’t have a camera to put a picture up? Because the TH is “UGGGGGLIE”. I do not have the original listing but at $589k per door the builder/bank must be sweating bullets.

    A developer is building another TH up Baldwin by Lemon and that place looks like a 1950’s style boarding house. No one will buy these places because people with money will not buy a $600k apartment. The smart money will wait until they can get a decent home without shared walls for $450k which I believe will happen by mid-2009. I would not be at all surprised to see these units in less than ten years be low priced (<$2,000) rentals after they drop in value and go back to the bank and then picked up by an investor for 50 cents on the dollar.

    Thanks for the blog. It is very enjoyable to read.

  2. CSC – The time for correction has come, but it will take a few years to sort out. You are correct regarding the increase of townhomes and detached condos in the area. I see many of these in both Temple City and Arcadia. They are the least desirable and will take the hit sooner and harder than the SFRs.

    I too have noticed the townhome property across from Big Lots for months and it doesn’t look like it’s going anywhere anytime soon. There’s also a similar unit on Santa Anita, just north of Freer that’s experiencing the same problem.

    I’m glad to have more locals on the board and happy you enjoy the blog. Are you one of those soccer coaches I see at Live Oak Park on the weekends? :)

  3. Live Oak is Temple City soccer. I live in Arcadia and coach there. Civil Engineer by trade.

    I noticed that after my post yesterday the “ugly” TH found a camera.

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