Chapter 23

I had been looking to find my next building site for the past two years. So far, nothing I'd found had really appealed to me. Everything good had been too expensive, and the things I'd found that weren't too costly, they'd been far less than inspirational to me.

I'd been so pleased with the La Habra project, and now I didn't want to take a step backward, by settling for anything less than what I was now building. I felt I needed another special tract of land. For the last six months, I'd been searching for an undeveloped forty acre parcel of land situated somewhere inside an incorporated city.

I had found some hilly acreage over on the far eastern edge of northern Orange County, in an unincorporated part of Anaheim that wasn't contiguous with anything more than a narrow non residential corridor at the extreme Eastern edge of the city. There were several parcels to be had at affordable prices, but each would require a tremendous amount of grading in order to make them ready to be built upon. The expense for all this earth moving would be prohibitive for a small builder like me.

There were already large tracts of land in the hands of large developers just to the west of the parcels I had been looking at. I knew it would be a few more years before the path of progress reached any of the property I was looking at. It would take other developers coming in and creating the necessary infrastructure before any of these smaller parcels could be profitably developed.

In the end, thinking of it as a longer term investment, I purchased a long and narrow forty acre parcel that was 660 feet deep by 2,640 feet long. There was already an improved county road abutting a portion of the length of the land.

I had the engineering firm come out and take a look at the land, after I'd already opened up escrow on it. His estimate for what it would cost to grade the land to make it usable was even higher than I'd first thought. I'd gotten the land for $68,000.00, but I wasn't willing to spend nearly half a million more, paying them for moving all that dirt around. If all the utilities were in place near the property lines, it would have been different, but that was still several years away from happening.

I was now getting to the point where I was running out of time again. I needed land to build on, or else I was going to lose my crews. I started buying up some single finished lots in some of the more expensive previously developed areas. It looked like I was going to go back to building single homes as speculation houses.

What was also discouraging to me was the prices I was ending up being forced to pay for these lots. The least expensive of the nine purchases I made had been six thousand dollars. One parcel with two ready to build lots had cost me nineteen thousand. I now had another twelve new building sites, with enough work to keep all my crews busy for at least seven months.

I hadn't solved my problem, but I had bought myself enough time to give me some breathing space.

With the La Habra project ending up so financially successful, I had thought all my business problems permanently solved. Had I been willing to shrink the company, back down to where I was again operating with only two crews, this would have been true. Unfortunately, for better or worse, I was committed, in my mind at least, to keeping my father, Kevin, and all six crews employed. To manage this, I realized I would have to continue taking some risks.

It was 1973, and thousands of new people were moving into California every month. They all required places to live. Even with this being true, there were some indications that certain sectors of the market were overbuilding. This was certainly occurring in Los Angeles County, where there were many reports of vacancies in newly built apartment complexes. Even in Fullerton, some signs had gone up advertising one month of free rent for new tenants signing one year leases.

There was an awful lot of new building going on, but in Orange County housing prices were still on the rise. I now was beginning to get a sense that the housing market might be approaching, if not saturation, at least a balance between supply and demand needs.

Existing home listings weren't all selling in a matter of days, or in a few short weeks at most. There were several cases where asking prices were being lowered for homes in some residential neighborhoods. Overall though, new home sales were still going strong.

I spent the next three years building spec houses all over Orange County. I was making a fair profit, but I wasn't setting the world on fire. I kept a close watch on other small tract builders, watching them competing hard, while trying to expand and gain more market share. By 1976, it was obvious to everyone that the housing juggernaut was beginning to slow.

Conversely, single family home prices were still going up. Since 1973, prices for single family residences had increased by at least ten per cent per year. All other living costs were going up as well. Inflation had been more in the news than usual, and people were starting to talk about replacement costs for housing being high.

Many of the smaller builders had stopped building new houses, electing instead to begin building add on and room extensions to older existing homes. It was becoming a whole new industry, called room additions. Permits for room additions were rising at a very fast pace.

What I saw happening made a lot of sense to me. Banks were lending vast amounts of money to people with little or no prior experience as developers. The commercial sector for industrial and warehouse buildings was definitely overbuilt already, and many new projects were in varying stages of planning or completion. Why were people going ahead with their plans, making what was now a minor existing problem, even bigger? Greed was the only answer I could think of.

It took another four years of massive overbuilding, as well as poorly conceived project funding, before all the wheels of the building trades ground to a jarring halt. Prices on nearly everything residential stayed on an upward trajectory. Office and other types of commercial buildings, all around LA and Orange County remained vacant and unused.

In San Diego County, people were buying up repossessed condominium units for little more than half of their earlier asking price, and bank seller's were sweetening the deal by paying all the closing costs, and paying a thousand or two for some of the new buyer's moving costs.

Inflation was the hottest topic in the news. The prime rate for bank lending was sky rocketing. By 1980, people were paying 13%, or more, in interest rates to finance new cars. Foreclosures on defaulted loans had never been higher. Personal and business bankruptcies were also both at new highs.

Houses, being commodities, still retained all of their purchasing power, at least in Orange County. By the end of 1980, the median house price in my area had climbed above $100,000.00. As long as families kept their paychecks coming in, things might be a bit tight, but they didn't really get too caught up in the tragedy of this economic downturn. Lose that paycheck though, and your life could be dramatically altered in a matter of days.

Cost of living adjustments were also in the news. Grocery stores were changing their prices daily. Some reports said inflation was as high as two per cent a month.

In 1978, California voters had passed Proposition 13, an initiative that reduced assessed value of all real property back to the 1975 levels, and prohibited future annual property tax increases to no more than 1% of the full cash value of the property, but in no event more than a 2% increase over the prior year's property taxes.

In the housing market of 1980, high interest rates were keeping people from being able to qualify for many of the traditional mortgage loans. Real estate people had a new buzz phrase, 'creative financing'. What they really meant by the word 'creative', was that seller's had to take back either a first or second mortgage on their old homes, at less than current market interest rates, and issue what was termed a wrap around note and deed of trust.

What this essentially meant, was that the property was being sold on a contract of sale, rather than with the buyer getting his own mortgage from a bank or savings and loan. The seller kept his existing mortgage in place, at its lower interest rate, while the seller took the buyer's house payment. The idea was that the buyer would refinance the home, when interest rates were lower than his contract interest rate, and that the seller would then use those funds to pay off his own mortgage, giving clear title to the new financing institution.

Banks and other lenders brought suit against these practices, claiming that they hadn't been party to this new loan, and that their mortgage contract was only with the owners at the time the original loan had been made. They demanded that this violation of the mortgage terms allow them to make a full payoff demand, in lieu of actual loan foreclosure. For the courts, and the politicians, this was becoming a real dilemma.

By 1980, I was down to only building eighteen homes a year. I was only able to get relatively expensive building materials and lots now, but was unable to build houses cheaply enough to show an annual profit by selling them, not given the prices I would have needed to reduce them to in order to find qualified and willing buyers.

I decided that I needed to lease out all the houses I was building. I believed I would have very little difficulty with renting out my new houses, because there were many families with good enough current income to pay higher rent, but still couldn't qualify to buy a house as nice as the designs I was building, because of the high interest on financing rates. These people could afford to pay the rents I'd need to charge them though.

I was building designs that would have only sold for forty thousand dollars, just seven years before, that were now costing me about forty five to fifty thousand dollars to build. In order to try to get financing for future building, I had gone to see Daniel Kaplan. His father had passed away in 1975, at ninety one years old. Dorothy, Sonia, and I had attended the funeral service.

When I first explained my problem to Daniel, and what I wanted to do, his advice to me was to shut things down until interest rates were lowered enough to justify doing more building. I explained to him about why that wasn't an acceptable option for me.

"Jim, I gave you my best advice. As long as Jimmy Carter is in office, nothing good is going to be happening with either inflation, or these high interest rates. Most businesses won't be able to afford to borrow at the rates we're already seeing. Without the ability to borrow, there will be no new hiring, its really as simple as that. Businesses that are already saddled with too much debt to support, are going to go under, which means that thousands of people will continue losing their jobs. Eventually, all the excesses and the weakness of marginal companies will get winnowed out of the marketplace. Unless inflation is brought under control though, we'll end up in another depression, once the economy implodes.