Wednesday, September 11, 2013

There's Something About Irvine, California

I'm a sucker for old California. The 49ers, the old west, the seas to shining sea Manifest Destiny of it all, the mission settlements that influence architecture, the opportunity, the aerospace sector, the mythological California Girls, and the smell of victory that blessed mid-20th century California. It is gone now. The gold is gone, the Spanish influence is now Mexican, it is extremely expensive to live there, aerospace left, the California Girls ain't what they used to be, and their is a stench that wafts from the left coast. San Francisco might be fantastic with all of its homeless bums, but there is a gem down the coast. Irvine, California is a fantastic city. It is not quite a city as we envision the slow accumulation of businesses and families. Irvine is a planned city. Irvine is not a company town, but a town for the maximization of a company's value.

Irvine was started out of the creation of the Irvine Company. There was a Mr. Irvine. He was a grand estate owning land developer. His goal was to develop his land to maximize value, his family's worth, in a controlled manner. Politics did not, nor the quest for political power, build the city. The original holdings were Irvine, Laguna Beach, Orange, Tustin, and Newport Beach. Please check out the NY Times census maps for those locations as well as the 2012 election results for Orange County (51%-45% Romney over Obama). This is the fabled "OC". In the sinking mudhole that is California, the OC is a shining light.

It got there and resisted the decline of California due to its design. The city is set up in structured villages with business friendly policies to, once again, maximize land asset value. Irvine's housing market has held up better than most in the downturn and ripped higher on the recovery. The secret is that the asset inflation of land amps the wealth of the Irvine Company due to its extensive land holdings that it purchased decades ago on the cheap. Per the Irvine Housing Blog:

Woodbury is one of the Irvine Companies newest communities. It is listed as 4,270 units. As this Village is constructed on a 1 mile square, it sits on 640 acres for a density of 6.67 dwelling units per acre (DU/AC).

Based on the equation above, we can estimate the total land value of the residential portion of the Woodbury Village:

$650,000 Sales Price

Fixed Costs
2,000 Average Square Footage
$85.00 Average Cost Per SF
$170,000 Average "Box" Cost
$40,000 Average Per lot Infrastructure Cost
$210,000 Average Fixed Construction Costs

Variable Costs
* 12% Profit
* 5% Marketing
* 3% Overhead
* 5% Finance
* 3% Other
28% Variable Costs Percentage

$182,000 Variable Costs Dollars
$392,000 Total Costs (Fixed Costs + Variable Costs)

$258,000 Land Residual (Finished Lot Value)
4,270 Number of Lots
$1,101,660,000 Finished Lot Land Value

$1.1 Billion dollars worth of land -- that is Billion with a "B." If the Irvine Company can build out this village for an average home sales price of $650,000, that is how much they stand to make (their land cost is almost zero).

Their land cost is almost zero because they acquired the land decades ago for what equates to less than $2,000 an acre (IHB cites that later in the comments). Don't both with the math; it's a huge return on initial investment. The post explains how a drop in home prices by 50% actually drops land value by 90%, which sounds crazy but the math works. Our FIRE economy is sliding more money to the Irvine Company. In this case, Mr. Donald Bren has hoovered the wealth to the tune of $13.0 billion as he owns this private firm. Bren also developed Mission Viejo, which is a decent place in California. Due to the way home and land values are calculated, the value of Mr. Bren's wealth is linked to good schools, safe communities, and more citizens who will continue those trends leading to more development.

Besides Mr. Bren, there are other beneficiaries who ride along with the Irvine Company for material and social gain. Take a look at those NY Times census maps again and ponder how Irvine and the beaches are so white and Asian despite the state being 38% Hispanic and 6% black. With home values steadily rising in that area, every community member enjoys 'good schools', plentiful jobs, massive home equity wealth and per the FBI, the lowest violent crime rate for American cities over 100,000 inhabitants. In a state where people flee for other US states, this city grows and pulls in the ambitious.

The Irvine Company's unique source of wealth, strictly land value, guided it towards a strategy of maximizing the long term value of that finite asset. This asset could be sold in shares (lots) to anyone willing to pay the entry fee and free to exit at anytime. The area's value is partly built on location but partly built on the quality of people it attracts. A large cut of the profits goes to the primary owner but is shared by all through the shares (their homes). While it is not a perfect fit, compared to many large cities over 100,000 citizens, Irvine sounds like a rough sketch of a Moldbuggian neocameral state.


PRCD said...

I knew several people from Irvine growing up. Kids from the town grow up in such a sheltered environment with their rich parents giving them everything that they are basically worthless as adults. "Good" areas in SoCal like Irvine are now places of Manhattanite striverdom. Tom Wolfe's next book should be about south OC.

Meanwhile, the kids who grew up in the remaining middle class and/or blue collar white areas in SoCal tend to just leave. The place of my birth used to be a bedroom community for defense engineers but has now been swallowed up by Mexico.


Anonymous said...

I live here in Irvine and the mass Asian influx is actually depressing. My kids are white and a very, very small minority in the school district. There is nothing wrong with "diversity", but when your kid is less than 5% in your own damn country it's a problem. Note I am not talking Asian-Amerians. I am talking foreign-born and H1B or new immigrant Chinese, Korean and so on with no ties to the country, the culture or it's success.

If I knew about this ahead of time I would have avoided irvine.

Son of Brock Landers said...

Irvine Housing Blog reports that Chinese nationals have dumped tons of money into real estate and moved there. Our pathetic national immigration policies allow this shit to happen. The elite are happy to sell us all out to maintain their immense wealth. Exactly how many yachts can one person buy?