Crisis on the Homefront

First of all, I want to apologize to everyone for not blogging the last couple of days. A crisis had erupted at work and we’re all scrambling to keep the company from collapsing.

Some of you know that I work for a real estate development firm. Unlike public giants such as KB Homes or Lennar, my company does not have the ability to bleed money for several months in a row. We own hundreds of acres of land throughout California that are basically worth nothing now. Zero. Zilch. Nada.

I have long predicted that many local developers will be forced to close shop due to this housing crisis and, hey, it looks like I got that forecast right (at least for my company).

Anyways, until things settle down here, I will not have the time to blog on a daily basis. 

-TheArcadian

29 thoughts on “Crisis on the Homefront”

  1. Arcadian, I am really sorry to hear that your company is closing. I have encountered several distressed developers in the past several months, which is probably the most I’ve ever encountered in my life time. Your candor is greatly appreciated by potential buyers like myself. I hope you will find a new job soon.

  2. It feels like another leg down is looming not far away. I believe we have not seen anything yet relative to what is coming to towns like Arcadia etc.

  3. Hey everyone,

    Thanks for the support. I am not entirely surprised of the company’s situation because, obviously, I’ve been documenting the escalating credit and housing crisis on a daily basis with you guys. Even the Wall Street analysts see no recovery within the next 2-3 quarters.

    I will of course keep the site up for new readers. We had plans to expand the content and features but my current job situation is putting everything to a temporary halt.

  4. Your insight and good sense has been so valuable and much appreciated!

    The good news is that you are not financially in over your head and you are able to weather this. More good news is that you are a smart cookie and you will find an even better firm to team with.

    If it’s any consolation, the legal field is also feeling economic woes, real estate and financial market related or not.

    Best wishes for bigger and better opportunies!

  5. Capbreeze,

    Thanks! I’m glad we didn’t buy that $500k condo I was eye-ing back in 2005. Now THAT would’ve been the end of me.

  6. There is $500 billion in Option ARM’s that will be resetting interest rates and/or reached 125% cap on loan to value ratio very soon.

    I believe that we will see some severe declines in housing values in next 12 months.

  7. Sorry to hear about the rough news, maybe you need to be pro-active and look for a new job.

    You mentioned that your company “owns hundreds of acres of land throughout California that are basically worth nothing now. Zero. Zilch. Nada.”

    How can it not have a value? It seems that most land here still costs money. Otherwise, I would buy a piece of property and build a home. But it’s the land costs that are high.

  8. We buy land in bulk. At the peak of the bubble, we were paying up to $75,000 per lot in rough areas like Lancaster and Victorville. Today, even a developer like KB Homes wouldn’t touch the same lot for $30k. Our ungraded (raw dirt) lots were appraised at under $10k each.

    This wouldn’t be a problem except for the fact that we owe nearly $40MM in construction loans while the collateral is currently worth a maximum of $8-10MM. Of course, it’s only worth the $8-10MM if someone is willing to buy it in the first place.

    This is the same scenario for infill projects (i.e. LA, OC, SGV). Real estate will still carry a premium here but it isn’t worth anything to the owner if they can’t sell it.

  9. TheArcadian , your site is one of the most enjoyable. You deal with situation w/o emotion and logically. You’ll land on your feet.

    I used to work for a major developer and watched the lies and games for years. I was younger but not influenced by the crooks in RE. I got out and have made lots by buying smart and exercising patience. Never fell in love with the 48 homes I’ve bought and sold over the years.

    You can make money in Re and be honest.

    Good luck.

  10. Sorry to hear the bad news. I wish you the best of luck for finding another good job. Thank you very much for your helpful bog.

  11. Once again, thank you for the support. I suppose my youth and lack of a mortgage or any debt helps in dealing with the situation.

    Tootsie, I know what you mean about the lies and games. As the bubble popped and subprime began exiting the market, the “higher ups” insisted that we do whatever was necessary to get unqualified buyers into our $400-700k homes. I’m talking about households making $40,000 or LESS per year.

    I stayed at the company not because I supported their actions but because it was a great learning experience. Like you said, it is very possible to make money in RE. But the trouble comes when everyone expect 100-200% annual returns on their money when 15-30% is already very reasonable and aggressive.

  12. it’s one of the few blogs i read regularly, hope all works out for you and hope to read the occasional entries if you have time. would be interesting to know how the higher ups at your firm do (did they take on too much personal debt or are they floating off with nice parachutes?) do you think you’ll be staying in the RE field or working in another field?

  13. I think the situation is getting under control since Obama elected and his new team will bring a bit light of sunshine. My forecast, the housing crisis will be over by the first quarter of 2009.

  14. The banks are still holding hundreds of REOs and nearly half the sales volume in several cities are foreclosure sales. I believe Florida has 5, FIVE!!, years worth of condo inventory on the market. “Hot spots” like Irvine is a complete waste. LA is still #2 in terms of un-affordability (next to SF).

    Oh yea, just one more thing: We’ve gone through only 50% of the garbage loans. Residential real estate, at least for most of California, will be dead until Wall Street sorts out its mess. Seeing as how the Big 3 are going down and our recession is just getting worse, we have 2-3 years to go.

  15. Sunshine is provided by the Sun, not Obama and his team. I know you are using the sun as an metaphor, but in reality it’s just wishful thinking. We are about 60-70% into a bear market that started in 2000. The housing market likely has 2-5 more years of pain to flush out the bad loans and a lot of good loans that will go into default as unemployment rises.

    Don’t be fooled into everything fixing itself in a year. It took about 8 years to create this mess, it won’t heal in 1-2 years. There will be a few upward trends (bounce) but the general direction is still down.

    We are going back to the basics, as in no more fancy loans to put people who can’t afford a home into one. Thus, prices will need to reflect what a buyer can actually afford. If the average home buyer in SoCal makes around 100K as a family income, then they can afford a home that is 3X-4X the income, thus 300K-400K. And they will need to put down about 100K. Right now a nice home is still 500-800K. Do the math, home values are WAY out of line, and with the recession incomes are falling.

    Don’t be fooled into buying overpriced homes. Lower HOME prices are a good thing, unless you were one of the people who bought during the bubble. Lower home values give you lower tax, lower payments, and more money to spend on other things. The only people who really benefit from higher home values are people who use homes to make money (investors) and realtors who get a bigger commission. But the average 30 year home buyers is HURT by higher prices. As everyone can clearly see from the current situation. These high home prices are causing A LOT of pain! Will it all end early next year? Not a chance.

  16. You ARE NOT ALONE: laid-off.com posted the following yesterday.

    Major Layoff Headlines :(

    Panasonic Closing 27 Plants -15,000

    Caterpillar Layoff Tally -22,000

    Boeing -10,000

    Pfizer Update: Closing 5 Plants -26,000

    Circuit City Closing Down -30,000

    Alcoa -13,500

    GE Capital Cutting up to 11,000

    Bank of America to cut up to 35,000

    Rio Tinto Mining Cutting 14,000 Worldwide

    Office Depot Will Close 112 Stores

    KB Toys Bankrupt Closing All 460 Stores

    Citigroup will have to cut 75,000 by 2009

    Financial Layoff Tally 290,000

  17. Don’t be fooled into everything fixing itself in a year. It took about 8 years to create this mess, it won’t heal in 1-2 years. There will be a few upward trends (bounce) but the general direction is still down.

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