Tierra West Appraisal Blog

Regarding the 02/19/2010 Valley Chronicle Editorial: “Cut in fees help builders, not residents”: From the editorial, it would appear that those evil and greedy developers are at it again; trying to make a profit. Yes the real estate market is in a severe slump and home equity has virtually evaporated with most home transactions in our Valley now tied to short sales, lender REO’s, foreclosures and bankruptcies. With falling home prices, development and home construction has come to a virtual halt since the market price of a new home is now less than what it costs to build – let alone make any profit. Also, when development, impact and mitigation fees run $35,000 or more per home even before a shovel hits the dirt, it is no wonder new home construction does not pencil. Who do you think really pays these fees (err, taxes) in the end? Yes that is right, the homeowner - you and me! What makes more “economic sense” – stimulating hundreds of jobs that come with new home construction or watching the unemployment and welfare lines extend around the block? A temporary or even permanent reduction in the $9,812 per home County Transportation Uniform Mitigation Fee (TUMF) and other development fees will not lead to a breakdown in society or other inferred maladies noted within the editorial that states development fees “pay for such things as the street lights and sewer service that new building requires”. Actually, this infrastructure in paid for and installed by the developer when the tract is developed and homes are built; or possibly deferred in part to the homeowners through increased property taxes if a CFD is formed. The statement made in the editorial that: “If they (developers) cannot afford to build and pay the cost of their impact, then they should not build” is extremely myopic – it is not the developer who lives in those new homes! It appears that the NIMBY syndrome is back in town. California also has one the highest “development and impact fee” schedules in the country and the TUMF fees are dispersed throughout the County to improve regional transportation corridors and will not likely end up being spent in your neighborhood (see County Ordinance 824 and Amendments). Developers are not the bad guys – they are just attempting to provide we the people with a safe, attractive and affordable place to live; maybe even make a profit along the way and create a few jobs in the process. What’s wrong with that? With our County unemployment rate now exceeding 14%, we need to encourage our legislators and representative to get California back to work and stop spending money we don’t have. It seems all my friends and family have been cutting back recently because of the economy, why not government spending? It is truly amazing how creative and efficient government can become when the money/tax spigot is turned down a notch or two.

Unless you have been on an island somewhere, far away from the news media and financial gossip that goes with it, the Home Mortgage "Crisis" has been flooding the papers. With talk of Federal assistance and new laws/regulations for banks, mortgage brokers and the like, the real estate finance industry is likely in for some significant changes. While licensing of mortgage brokers is long over due, I remain somewhat skeptical as to how our government will ultimately "protect" the consumer and the financial markets from unethical behavior and fraud; they have yet to be successful in legislating morality. I mean really now, when my dog Big Kahuna gets credit card offers in the mail and can apply for a new home loan without income verification, things have been way out of control. Its always the old yo-yo effect; loose credit, tight credit, loose credit, tight credit . . .  you get the idea. What's so unusual is that along with the lowering of interest rates, it has now become more difficult to obtain financing (credit) for consumer loans due the the number of defaults. This has created a paradox in the auto sales industry which has been struggling with poor sales performance resulting in layoffs. This really is a weird market. 

The Inland Empire (including the Hemet-San Jacinto Valley) has recently made national news regarding the number of home foreclosures and bank REO's due to the sub-prime lending crisis. My question is it really a crisis, or not? I suppose if you are loosing your home it is indeed a crisis, but when you look at the big picture it looks to me more like a well over-due market correction that was simply inevitable. I mean really now, when home values double in 3 years or less, something is going to give! To think otherwise is simply foolishness. I for one, am willing to give up 20% of my home equity in 2007 for a net gain of 70 to 80% between 2003 and 2006. In the end, based upon historical performance through multiple cycles, real estate seems to gravitate to a 10% average annual yield; it must be a natural law or something. So, based on that seemingly simplistic yet recurring figure, our crummy home sale market will likey continue for at least several more years - Bush bailout or not. In fact, the inevitable adjustment may just be delayed a little longer. So, tighten your belts, the ride is not likely over yet. It will be interesting to see if we have learned anything from all this. I think during 2005 even my dog Kahuna was getting refinance advertisements in the mail (at least a new VISA card every other week).

Contract rents for new retail space has nearly doubled over the last several years within the Hemet-San Jacinto Valley. For nearly a decade before that however, NNN retail rents in anchored centers were essentially flat and hovered at around $1.00 to $1.50/SF NNN with $0.25/SF CAM's. With the influx of new housing and growing demand, contract rents for new retail centers based on our recent survey, have revealed new leases being executed in the $2.00 to $2.50/SF NNN range with $0.35/SF CAM's. Even higher rents were reported for new retail space with lessor TI allowance and build-outs. Lease terms have typically been 3 to 5+ years.

While the Hemet-San Jacinto Valley was past due for a sizeable rent increase, lease rates appear to have stabilized with only nominal increases reported over the last 6+ months. While occupancy levels still appear above 95% in most centers, new space is taking longer now to lease up according to most brokers and property managers surveyed.

What will be the Valley's next wave? We have plenty of mid-range restaurants now such as Cocos', Polly's Pie, Marie Calendar, Sizzler, Mimis Cafe (under const.), Denny's, Applebee's, Chilies, etc. but we still need a Black Angus, Outback, Friday's,  Red Lobster or even a Johnny Carinos. Come on you site selectors, run over those demographics again and look closely at the Valley's median age and disposable income levels. This is not the same little dusty town you once read about 10 or 15 years ago in the WSJ (I still remember that myopic article). We need and want prime USDA steak and fresh sea food! Besides, most of us are getting tired of going over to Temecula for fine dining; not to mention the traffic now on Winchester Road.