Orange County: It's not like what you see on TV
Orange County: It's not like what you see on TV
The reality of a real-estate industry in the tank, job losses, foreclosed homes and empty office space is a far cry from the glitz and fantasy of popular TV shows set in the California county.
By Christopher Palmeri, BusinessWeek
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The sun still sets magnificently on the cliffs of Laguna Beach. The Angels are slugging away on another could-be-the-champs baseball season. Over in Disneyland — the self-proclaimed Happiest Place on Earth — a new attraction debuts in June. The Innovations Dream House will show off high-tech gadgetry from Microsoft and Hewlett-Packard while allowing guests to interact with the fictional Elias family as it prepares to attend a soccer tournament in China. (Microsoft is the publisher of MSN Real Estate.)
If they weren't make-believe, the Eliases would probably be postponing that trip and worrying about their jobs. They might even be fighting foreclosure on their Dream House. That's life in Orange County these days as the subprime disaster comes home to roost.
A 1,000-square-mile swath of well-heeled suburbia just south of Los Angeles, the "O.C." was the main headquarters for dozens of mortgage companies that have now gone bust, among them Ameriquest, once the nation's largest subprime lender, and New Century, once among the top 10. As a result, the region is one of the hardest-hit by the collapse of the housing market. Big builders such as Lennar are putting new construction on hold. The Orange County Register calculates that 43 local mortgage outfits laid off about 7,200 workers last year.
Orange County still looks like a sunny, can-do place, with an $8 billion-a-year tourism industry and shopping malls the size of small cities. It is home to 3 million people, whose $58,000 median annual household income is $10,000 higher than that of the U.S. as a whole. There are shiny new office towers and subdivisions filled with Spanish-style homes. But like native son Richard Nixon (born in Yorba Linda, wintered in San Clemente), the O.C. has a dark persona that seems to rear its head every so often. In 1994, the county became the largest municipality in the country to declare bankruptcy, done in by bad investments in dicey securities. Now it's the subprime mortgage fiasco.
Boom town gone bust
"The culture here is very real-estate- and finance-focused," says Michael Capaldi, a principal at Newport Beach-based developer Renaissance Pacific Properties. "When real estate is good, it feels like a boom town."
Even now, big cities such as Irvine and Anaheim are a far cry from more beleaguered locales such Cleveland and Detroit. While the county's 3,300 foreclosure filings in March were three times what they were a year ago, on a percentage basis Orange County is doing better than neighboring regions. In nearby Riverside and San Bernardino counties, 8% and 6% of homes are in the foreclosure process, versus just 2.4% in Orange County, according to research by market tracker Default Research. Moreover, the median sale price of a home, while down 14% to just under $600,000, is holding up better than the statewide fall of 26%.
But there are other signs that the county's economy is worsening. Retail sales and vehicle-registration fees are running 10% below what they were in the prior fiscal year. Frank Kim, Orange County's budget director, says he's expecting much lower revenue next year from property taxes as homeowners ask to get their dwellings reassessed at lower market values. As a result he's keeping the county's projected budget flat at $6 billion, after years of 5% to 6% increases.
The county is also doing better jobwise than the rest of the state and the nation. Its unemployment rate, 4.3%, is nearly two percentage points under California's average and one point below the average U.S. rate. But Orange County is heavily dependent on homebuilding industries, and about 6,200 jobs in construction and finance were lost through the third quarter of 2007, wiping out employment gains in government and business services, says Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University in Orange, Calif. Job creation in the county is expected to lag behind the rest of the U.S. for the rest of this year.
"Orange County is in recession," says Adibi. "It began with the mortgage industry, spilled over into construction, and now it's more broad-based."
Leader of the subprime pack
The roots of the mortgage meltdown lie with entrepreneur Roland Arnall, a real-estate developer who founded Long Beach Savings in 1979. When the traditional real-estate and banking businesses slumped in the 1990s, Long Beach Savings began offering home loans to borrowers with less than stellar credit. Long Beach Savings was ultimately sold to Washington Mutual, becoming the basis of that company's subprime business. By then Arnall had also founded Ameriquest.
The formula was relatively simple: Lend money to folks whom traditional banks wouldn't touch, package those loans and sell them on Wall Street. Take your profit and do it again.
Many of the alumni of Arnall's companies went on to found other mortgage outfits, mostly in Orange County. "It kind of fed on itself," recalls Jon Daurio, who worked for Arnall and co-founded Encore Capital (later sold to Bear Stearns), and who now runs a distressed-debt fund called Kondaur Capital. "As you had more people who were successful, it brought more people in to try it."
Today many of those businesses are gone. New Century went belly up. In March, H&R Block announced it was selling its Option One Mortgage unit, based in Irvine, to distressed-assets investor Wilbur Ross. Washington Mutual announced on April 8 that would shut down much of its mortgage operation. Ameriquest sold what was left of its business to Citigroup last year after negotiating a $325 million settlement with attorneys general across the country over charges of predatory lending. Arnall died of cancer in March at age 68.
Tale of empty offices
The real-estate businesses that are left are struggling. Homebuilder Standard Pacific, based in Irvine, recently replaced its chief executive and got 45 days of breathing room from its bankers as it negotiated new financing.
Florida-based builder Lennar recently suspended sales on two large projects, Central Park West in Irvine and A-Town in Anaheim, that were to involve about 4,000 homes. In March, developer Urban West withdrew plans for 450 condominiums in Anaheim that had been opposed by neighboring Disneyland. Mark Boud, whose Irvine-based firm Real Estate Economics tracks residential construction in the county, estimates that the volume of new homes permitted for construction will fall to 4,700 this year from 8,000 in 2006.
The office market has also been slammed. Jeff Osborn, who leases commercial property at CB Richard Ellis, figures the amount of office space occupied by mortgage companies in the county has fallen from 8.5 million square feet to less than 2 million. The office vacancy rate overall has more than doubled, to 14.7%. "It has obviously been a big hit to our market," Osborn says. Los Angeles-based real-estate trust Maguire Properties bought a portfolio of Orange County office buildings last year at the peak of the market and has since seen its stock fall 60%. The company put itself up for sale late last year but couldn't find any takers.
Filling those buildings will be tough, since new jobs are hard to come by. Bill Spitalnick, an appraiser who worked at both Ameriquest and Fremont, says he sent out résumés to every lender he could think of in Orange County and never even got a call back. He says most of the people he knew in the business aren't working and are, like him, living for the most part off their savings. He now spends much of his time writing letters to the editors of local publications. "It's going to get worse before it gets better," Spitalnick says. "It just started out small, and now it's affecting the whole world."
Scott Simon, who heads housing industry analysis at Newport Beach-based money management firm Pimco, recently sold his home with a view of the ocean in nearby Laguna Niguel. He was surprised that the property got several offers and went for close to his asking price, to a European buyer. "Good properties are still trading at pretty good prices," he says. "You come apart from the worst first."
Looking to Washington
Still, Simon says he's renting for now. It's cheaper than owning, and he thinks lower prices lie ahead, particularly if government support for the housing market wanes. Housing, he says, is "the single most important thing in the economy right now."
Former home-industry workers who have managed to find new jobs often have had to rethink their profession. The nonprofit Fair Housing Council of Orange County, which normally mediates disputes between tenants and landlords, recently hired a former real-estate agent to negotiate with lenders to keep troubled borrowers in their homes.
In Anaheim, Mayor Curt Pringle had consultant Richard Florida speak to local officials on how to attract a new "creative class" of jobs to the city. He also hired J.D. Power & Associates (like BusinessWeek, a division of The McGraw-Hill Companies) to evaluate the performance of municipal services to help the city attract new businesses and residents.
Lucy Dunn, chief executive of the Orange County Business Council, a sort of Chamber of Commerce, was in Washington recently to drum up funding for housing, infrastructure and education initiatives in the county. Dunn says she is fighting stereotypes, fostered in part by television shows such as "The O.C." and "The Real Housewives of Orange County." In fact, the county is now more than 30% Hispanic, and some of the areas hardest-hit by the housing downturn are in less wealthy Orange County cities located inland, such as Santa Ana and Fullerton.
"There's a misperception that we're a bunch of white, rich beach lovers," she says. "The reality of our demographics and economy belies the myth."
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