Sweet Orange

Part Two of a three-part series: A Little Story About Our Economy
Part One: The Depression, Keynes, and Manipulating the Money Supply
Part Two: More on Manipulating the Money Supply
Part Three: Solutions?

According to the money supply manipulation theory, the Fed can change the amount of money that is in circulation by various means, for example, lowering or increasing the interest rate on money. More money in circulation would mean more money for businesses to invest and, therefore, an upswing in the economy. Good news for businesses and employees. Many people were happy with this system. Even Bill Clinton incorporated aspects of this Reagan-era economic model into his economic plan when he was president.

That brings us to our very recent past. At the end of last year, the Fed cut the interest rate to zero. Can’t get lower than that. However, while some are saying that the economy is starting to recover and we should stay the course, others are saying that it is not. Now some are questioning the viability of the money supply manipulation model as an answer to our economic ups and downs, and it too is becoming passé.

So what is the answer to our economic dilemma? More thoughts on that tomorrow.

GRAPH COURTESY WIKIPEDIA

Once upon a time, in the 1930s (and part of the 1940s to be more exact), we had a depression. In fact, it was so bad that it wasn’t just called a depression; it was called “The Depression.” Along came this guy named Keynes who said I can fix that: Just have the government spend a lot of money; this will create jobs. With more jobs, people will once again have money to spend. The economy will recover.

Then enters President Franklin Roosevelt who said something along the line: Sounds good to me. So the government spent lots of money, but not as much as Keynes had thought was enough to solve the problem. Then along comes World War II, and the US government spent even more money. And, in fact, The Depression was no more. The Keynes spend-your-way-out-of-the-problem solution seemed to work!

So some thought this is a handy tool for preventing ups and downs in the market. When times are bad we can just spend a bit to tweak the economy back up. When times are good, we can cut back on spending (easier said than done).

This worked more or less until the 1970s when this thing called stagflation happened. Usually when employment is high, inflation is high and vice-versa. Not so with stagflation where we get the worst of both worlds. In the 1970s, the government spent, but unemployment and inflation both keep going up—an unusual and unpleasant combination.

The Keynesian model for handling a down economy didn’t seem to work anymore. This decades-old, preferred model for handling economic downturns became passé, and a  model that involves manipulating the money supply emerged. This model, in a modified form, came into full bloom during the Reagan administration and was the new preferred economic model for about three decades.

Tomorrow: more on manipulation of the money supply

This is Part One of a three-part series: A Little Story about our Economy
Part One: The Depression, Keynes, and Manipulating the Money Supply
Part Two: More on Manipulating the Money Supply
Part Three: Solutions?

A recent post highlighted the number of homes (by percentage) with price reductions in a representative sample of Orange County cities.  A look at the amount of the reductions reinforces what the number of reductions were telling us: The homes at the high-end of the market are seeing both a larger number of homes with price reductions as well as a larger percentage off the asking price.

Take a look at the Redfin reduction-by-price charts, and you will see what I mean.

ORANGE COUNTY CITIES WITH THE HIGHEST REDUCTION BY PRICE—PERCENTAGE OFF MOST RECENT LIST PRICE AND THE ORIGINAL PRICE

ORANGE COUNTY CITIES WITH THE LOWEST REDUCTION BY PRICE—PERCENTAGE OFF MOST RECENT LIST PRICE

More price reduction numbers are available on the Redfin Excel spreadsheet.

According to Redfin, in May, Shady Canyon, Irvine’s most expensive area, had 55 detached homes on the market.  The median list price was $4,700,000 or $740 per square foot.

Only one home sold in March; the sales price was $4,500,000. The median number of days it currently takes to sell a Shady Canyon home is 249.*

Seventy-two percent of the Shady Canyon homes that were sold or taken off the market between March 25th and June 23rd had price reductions. These homes had a median of two price reductions. The median percentage off the price was 16.9%.

Here are some additional Redfin stats for Shady Canyon:

April 3, 2009

• Median list price: $4,972K/$742 per SF
• Median sold price: $4,325K/NA per SF*
• Median days on market: 110*
• Number of homes on the market: 58

February 28, 2009

• Median  list price: $5,,000,000/$762 per SF
• Median sold price: $3,750K/NA per SF*
• Median days on market: 156*
• Number of homes on the market: 55

January 31, 2009

• Median  list price: $5,695K/$770 per SF
• Median  sold price: $4,914K/NA per SF*
• Median days on market: 154*
• Number of homes on the market: 39

December 30, 2008

• Median list price: $5,495K/$764 per SF
• Median sold price: $2,912K/NA per SF*
• Median days on market: 172*
• Number of homes on the market: 38

If you would like more information on housing in this area, see the Redfin Shady Canyon Real Estate page.

*Based on homes sold or taken off the market in the previous 90 days

GRAPH OF SHADY CANYON MEDIAN LIST PRICE COURTESY REDFIN

Related post: Housing Prices Declining in Shady Canyon, Irvine’s Most Expensive Neighborhood

“Daedalus fashioned two pairs of wings out of wax and feathers for himself and his son. Before they took off from the island, Daedalus warned his son not to fly too close to the sun, nor too close to the sea. Overcome by the giddiness that flying lent him, Icarus soared through the sky curiously, but in the process he came too close to the sun, which melted the wax. Icarus kept flapping his wings but soon realized that he had no feathers left and that he was only flapping his bare arms.”—the story of Icarus as told in Wikipedia

Summer started this week. On June 20th at 10:45 pm, we left the new-beginnings season of spring and entered the long-days, abundant-light, and easy-living season of summer. On the first day of summer, also known as summer solstice or midsummer’s day, we can enjoy the longest day of the year when we have more sunlight hours than on any of the other 364 days of the year.

Each day after this first day of summer, we will have fewer minutes of sunlight than we had the previous day. This will continue until we reach the first day of winter (winter solstice, usually December 21). The first day of winter is the shortest and, therefore, darkest day of the year. So even in the full light of that first summer’s day, we were entering “The true beginning of our end” (William Shakespeare, A Midsummer’s Night Dream).

For a while, we thought that we had found the formula for an endless summer. At least we did when it came to our economy. But everything has it’s time and place. Summer has no depth of meaning without the fall, winter and spring. Each of these seasons has their own worth that must be respected. And like Icarus flying to close to the sun, we found that any attempt at achieving an endless summer must be paid for eventually.

So our endless summer is gone, but that is OK. Summer is here, and that is enough. Enjoy!

THEATRICAL RELEASE POSTER IMAGE COURTESY WIKIPEDIA

Last week I wrote about housing price reductions at the national level and the Trulia survey that showed that the outlook for the high-end of the national real estate market was not good. Today I’ll keep it closer to home by taking a look at some Orange County price reductions numbers. These stats, provided by Redfin and based on the March 19 to June 17 median numbers, show the number of price reductions (by percentage) in certain Orange County cities. I used a sample of Orange County’s 34 cities that I hope is representative of Orange County as a whole, and I listed these cities from high to low.

• Coto de Caza 58%
• Dana Point 56%
• Laguna Beach 52%
• Villa Park 54%
• Ladera Ranch 50%
• Mission Viejo 46%
• Aliso Viejo 46%
• Tustin 44%
• Lake Forest 43%
• Irvine 42%
• Orange 41%%
• Fullerton 39%
• Costa Mesa 38%
• Brea 37%
• Santa Ana 36%
• Anaheim 34%

In general, the high-priced Orange County areas have more price reductions than the lower-priced areas. For example, take a look at the three Orange County cities with the highest percentage of price reductions: Coto de Caza, Laguna Beach, and Dana Point.

In Coto de Caza of The Real Housewives of Orange County fame,  58% of the homes are listed with price reductions. Next are the high-priced beach towns of Dana Point and Laguna Beach.

At the bottom of the list are two cities with a large number of low-priced homes: Santa Ana and Anaheim. Santa Ana, in particular, has received a lot of criticism in the recent past for its high number of distressed properties. Looks like the tables are turning.

For a look at more Redfin numbers, download the Redfin Excel spreadsheet.

For more information on possible problems for the high-end of the Orange County real estate market, see “Are the High-End O.C. Homes About to Take a Dive?“

A June 5th news release from Trulia provides some information on housing price reductions at the national level.  According to the Trulia survey of the most populous US cities (my rough check shows that these are cities with populations of 300,000 plus), the following large US cities had the largest percentage of price-reduced properties on the market:

• Jacksonville, FL - 36%
• Tucson, AZ - 32%
• Boston, MA - 32%  (Redfin’s number is 37.2%*)
• Los Angeles, CA - 32% (Redfin’s number is 42.1%*)
• Columbus, OH - 31%
• Dallas, TX - 31%
• Honolulu, HI - 31%
• Minneapolis, MN - 31%
• Austin, TX - 30%
• Washington, DC - 30% (Redfin’s number is 47.1%*)
• Baltimore, MD - 30% (Redfin’s number is 46.1%*)
• Las Vegas, NV - 30%

The Trulia survey also provided some information on high-priced home at the national level:

“24 percent of homes with a selling price greater than $2 million are seeing price reductions compared to 23.6 percent of homes on the market for the less than $2 million. While the percentage of homes seeing discounts are almost identical, discounts on luxury homes are significantly more with 14.3 percent being slashed off the original listing price compared to only 9.7 percent of homes under the $2 million dollar price tag.”

This information for the high end of the national real estate market coincides with information for the high end of the Orange County real estate market. But that’s it for this week. I will write about that on Monday.

Note: For information on reducing housing prices, see “When is the Tme Ripe to Reduce the Price?”

The Orange County Great Park board of directors recently approved the Design Studio’s 36-month construction plan. This plan calls for construction of features in the Sports, Lake, and Farm/Bosque Districts. More on that in a future post.

For now, here are some upcoming Great Park events:

International-known and innovative Cirque du Soleil will set up their big top and start a limited performance early next year (January 8 through January 30, 2010). However, some ticket sales start this week. Ticket information can be found at the Cirque du Soleil website.

The free dance and concert series will return this summer. More on that as more details become available.  For now, a look at the inaugural Great Park summer series, which was last year, will give an idea of what to expect. Last year’s events included free Friday-night dances and Saturday-night concerts. In addition, food prepared by Avanti Cafe of Costa Mesa was available for purchase at the Hangar Cafe (an MCAS hangar converted for Park use). Last year’s events were attended by about 50,000, young and old from various locations. (Update: The schedule for this series is now available. SW 7-11-09)

The free tethered balloon rides, which provide a view of Orange County from an elevation of 250 to 400 feet, are continuing.  Day and evening rides are available. The flights are contingent on wind and weather conditions, so call ahead or visit the Great Park website for flight availability. (For one person’s thoughts on the balloon ride, click here. I know that there are contrary options out there. So if you like, leave your comment.)

PHOTOS COURTESY CIRQUE DU SOLEIL AND THE ORANGE COUNTY GREAT PARK CORPORATION

Tomorrow I will write about upcoming events at the Orange County Great Park. In preparation for that, here is a reminder of what the Great Park is all about:

The Orange County Great Park is located on land that was once part of the El Toro Marine Air Station. Before that, it was Irvine Ranch bean fields and grazing land, and, before that, Mexican and Spanish grazing land. The Juanenos (Acagchemen) and Gabrielino Indians also had a presence on this land.

The City of Irvine is developing this publicly owned land, which is approximately the size of New York’s Central Park, as one of the first great metropolitan parks of the 21st century. The City’s vision is to provide a recreational, cultural and social gathering spot for Orange County residents as well as others who are near to or far from Orange County. As Central Park, Balboa Park and Golden Gate Park are great metropolitan parks built in previous eras, the vision for the Orange County Great Park is that it will be a great metropolitan park built in this era.

The private land that surrounds the public Great Park land and is called the Great Park Neighborhoods was also part of the former El Toro Marine Air Station. Current plans for the Great Park Neighborhoods include the building of homes as well as commercial, educational and recreational features. The private Great Park land combined with the public Great Park land is over six square miles.

GRAPHIC COURTESY THE ORANGE COUNTY GREAT PARK CORPORATION

Note to homebuilders: Small homes sell! Why? Because they are affordable.

Now that we don’t have a housing bubble that will inflate prices, home prices will need to return to something that approaches income parity. During the bubble years, when many homeowners bought more home than their income justified, the income-to-home-price matchup was something that disappeared. Instead homeowners relied on continuous refinancing, made possible by constantly increasing home values, to keep payments at a level they could manage.

Since smaller homes were not as profitable as large homes, homebuilders were eager to oblige the homebuyers by building ever-larger homes. This was particularly true in Orange County. The post-boom result is that Orange County is short on small, and therefore more affordable, homes.

As we know now, home prices are no longer increasing; they are decreasing.  The home building business model of the past can not be sustained. As economist Chris Thornberg, a principal at Beacon Economics, has said, the housing market will not recover until home prices match incomes. (For a look at what that means in Orange County and how much more O.C. home prices will need to drop, see one of Jon Lansner’s posts.)

An Associated Press article backs up this smaller-home theory.

“KB Homes slashed its first-quarter losses by 75% as first-time homebuyers flocked to the builders’ smaller and more affordable homes…”

The article went on to say:

“First-time buyers accounted for 70% of its first quarter sales, up from 53% in the first quarter of 2008, and they represent ‘the most attractive segment of the market, as they do not have to sell a home before purchasing,’ said Jeff Mezger, chief executive.”

Other homebuilders might benefit by following this example from KB Homes. Potential homebuyers might also benefit from a housing market that has homes that they can actually afford. And Orange County businesses might benefit if the available housing stock can accommodate workers at all levels of the job ladder. This is something that Orange County businesses have been championing for some years.