The City of Irvine, California ~ Our Personal Perspective — Part Two — the ’90′s

Robin Fenchel December 8, 2012

Good Real Estate Times Come to an End

The 1990’s ushered in a realty check in the real estate market.
Real estate times were booming during the mid ’80’s when new home builders were expanding and building out new neighborhoods in Irvine–turning away from the ’70’s ranch style homes and building and duplicating  Italian style peach/pink colored exterior homes with red tiled roofs in new Irvine communities as well as in many of the surrounding cities. Interest rates had come back down making home purchases more affordable, especially with the deregulation of the Savings and Loan institutions which allowed for riskier loans to be made (sounds vaguely familiar to our most recent meltdown, doesn’t it?).

The Savings and Loan Crisis of the early ’90’s

When the real estate bubble burst in the 90’s, over 1,000 Savings and Loan institutions went bankrupt, home equity plummeted, ushering in the first wave of “under water” borrowers, loss mitigation departments, and Short Sales and REO’s (real estate or bank owned properties) became a part of a Realtor(r)’s lexicon.
From January 1, 1986, through year-end 1995, the number of federally insured
thrift institutions in the United States declined from 3,234 to 1,645, or by
approximately 50 percent, according to  an article written by Timothy Curry and

 The Implications of Mello-Roos

New disclosures for Buyers and Sellers were added to the California Real Estate Purchase Contract making buyers of properties located in Mello-Roos Community Facilities Districts aware of the extra costs past along  to homeowners in these newer communities. These new disclosures were in response to many homeowners not knowing the outstanding tax liability they would be responsible for when they first purchased a newly built property from a builder. Many people were caught up in owing large assessments of which they weren’t aware (they were buried in the myriad pages of the builder’s purchase agreements)  for services that were promised but were halted when these builders went belly up.
To clarify this point, when a builder files for a new development , taxes are based on the land not the improvements (the individual homes). Therefore, the first tax bill that the homeowner receives only reflects a small amount that is actually owed in taxes and special assessments.  The homeowner later receives a Supplemental Tax Bill which then reflects the land plus the improvements (their home) which equates to thousands of dollars more than the homeowner was initially made aware of.  This “surprised” many early homeowner’s who bought into these newer Community Facility Districts.  Later this “tax” was incorporated into a disclosure that was presented to Buyers of  homes under which a Mello-Roos tax was levied.

Just When You Thought Things Couldn’t Get Worse:  The Orange County Bankruptcy of 1994

Many homeowners were slow to realize the implication of what was happening in the real estate market at the time.  The housing market started to sputter and spin into a downward spiral.  However, this  spiral truly crystallized when Orange County was forced to declare bankruptcy in 1994.

Bob Citron , was the longtime Treasurer-Tax Collector of Orange County, when it declared Chapter 9 bankruptcy on December 6, 1994. Citron was the only Democrat to hold office in heavily Republican Orange County at the time. This was brought on by Citron’s investment strategies, which seemed to be an effort to earn high incomes for the county without raising taxes. As controller of the various Orange County funds, Citron had taken a highly leveraged position using repurchase agreements (repos) and floating note rates (FRNs). The loss incurred by the usage of these financial instruments reached the amount of $2 billion and was caused by being too highly leveraged for rising interest rates. In other words, if federal interest rates had not risen, the massive trading position would have been a substantially profitable position; if interest rates did rise, the trading position would result in substantial losses. In fact, rates rose

The Implications of the  Fall of the Berlin Wall and the Outsourcing of Manufacturing

The fall of the Berlin Wall and the  break-up of the Soviet Union, saw the decline of our aerospace industry, as well as the outsourcing of much of our manufacturing industry to the Asian markets where goods and services could be purchased at a fraction of the price it cost to make in the United States. This added to the economic recession during this period of time.

The Housing Market Bottomed Out in 1996

We saw the fallout of the real estate market reach its nadir around the last quarter of 1996. We had had the S & L Crisis, the  Orange County bankruptcy,  the outsourcing of manufacturing, the decline of the aerospace industry, the fires that swept through Laguna Beach and Irvine, and finally the incessant rains caused by El Nino.  The only thing Irvine lacked was the locust plague!

The Turn Around and Upward Bound

Ultimately,  the housing market rebounded.  This was first reflected at the beginning of 1997 as some investors quietly returned to the depressed housing market and continued through the end of the decade. The impetus for the refueling of the housing market was the ensuing internet craze.  The late 1990’s saw the exponential growth of the Internet and with it on-line games. Also there was the rise of  dot com companies that were snatched up by Wall Street investors as fast as they could be developed. Price/earnings ratios went out the door, and, in turn, every twenty-something could put together a dot.com and become an overnight success and with it  go public and cash in becoming overnight billionaires. I personally saw this irrationality consume a great many of my clients, who quit their jobs and became day traders. There was even a day trading company that opened up in the University Center during these heady days.

The Dot Com Bubble and the Inevitable Dot Com Bust

From 1996 to 2000, the NASDAQ stock index exploded from 600 to 5,000 points. “Dot-com” companies run by people who were barely out of college were going public and raising hundreds of millions of dollars of capital. Many of these companies lacked clear business plans and even more had no earnings whatsoever to speak of. For example, Pets.com, which had intended to become an online pet products retailer, was losing money before it went public and raised billions of dollars. Numerous dot-com companies wasted millions of dollars on frivolous parties to celebrate their IPOs. There are even stories of dot-com employees who walked around their offices barefoot and played foosball and video games during the work day. At the peak of the dot-com bubble in 1999, it was said that a new millionaire was created every 60 seconds in Silicon Valley.

How the Dot Com Bubble Popped

By early 2000, reality started to sink in. Investors soon realized that the dot-com dream had devolved into a classic speculative bubble. Within months, the NASDAQ stock index crashed from 5,000 to 2,000. Hundreds of stocks such as Pet.com, which once had multibillion dollar market capitalizations, were off the map as quickly as they appeared. Panic selling ensued as the stock market’s value plunged by trillions of dollars.

Thus ended the roaring ’90’s, as we dug ourselves out of the housing recession, we wound up plunging into a dot com  debacle.

Stay tuned….The City of Irvine, California ~ Our Personal Perspective – Part Three — the Turn of the Next  Century…coming soon…

In cased you missed Part One, here it is:  The City of Irvine, California ~ Our Personal Perspective – Part One – the ’80’s

 

 

 

 

 

 

 

 

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