NYTimes: In the Central Valley, the Ruins of the Housing Bust

Submitted By Trader Mark
We continue to watch as more and more people's homes turn upside down; an interesting look at California - one of the epicenters of our current mess. Remember, if you believe housing prices still have a good 10% to fall, a substantially larger proportion of homes will be upside down this time next year. The median home price graph below looks like the NASDAQ chart in 2000-2002. And the foreclosure numbers look like fertilizer stocks chart circa 2006-2007. While there are many culprits, a financially illiterate populace is certainly one key issue. So they fleeced, over and over and over again - sometimes from their own doing; sometimes from outside constituents all too happy to take advantage of this face.

This piece however illustrates another plight - due to our lack of savings (which by the way makes the new era of credit requirements where people more typically actually need to put 10%
down a huge problem) people are "trapped" in their homes... unless they "walk away" (crashing their credit scores). Why? Because to get out of your home when you are underwater you need to now bring cash to the table. And who has cash when 0% down homes are the "new paradigm". Further the foreclosed homes on your block and 2 blocks down are creating some very nice prices - that if you are not willing to match; well why would anyone buy your home? It's a vicious cycle.

(click to enlarge)

... hardly anyone in Merced planned very far ahead. Not the city, which enthusiastically approved the creation of dozens of new neighborhoods without pausing to wonder if it could absorb the growth. Certainly not the developers. They built 4,397 new homes in those neighborhoods, some costing half a million dollars, without asking who in a city of only 80,000 could afford to buy them all.
... Obviously not the speculators turned landlords, who thought that they could get San Francisco rents in a working-class agricultural city ranked by the American Lung Association as having some of the worst air in the nation. And, sadly, not the local folk who moved up and took on more debt than they could afford. They believed — because who was telling them differently? — that the good times would be endless.
“Owning a home is the American dream." The belief that this dream could be achieved with no risk, no worry and no money down was at the center of the American romance with real estate in the early years of this decade, and not just in Merced.
How long will the economy have to pay the price for that illusion? The experience of Merced, which rose higher and fell faster than nearly anywhere else, suggests that recovery from the national real estate debacle will be painful and protracted.
In the three years since housing peaked here, the median sales price has fallen by 50 percent. There are thousands of foreclosures on the market. The asking prices on those properties are so low that competitive bidding, a hallmark of the boom, is back.
But almost no homeowner can afford to sell. If you cannot go as low as “the foreclosure price” — the cost of a comparable bank-owned house — real estate agents say you might as well not even bother listing your home.
And so most people do not: three out of four existing-home sales in Merced County are now foreclosures. The only group for whom selling makes sense, real estate agents here say, are the elderly entering assisted-living facilities, who often have decades of appreciation built into their home’s value.
As Merced goes, so might go much of the nation. With as many as 2.5 million homes in the United States entering foreclosure this year and, at best, sales of only five million existing houses, the foreclosure price is becoming the rule in many areas. In Los Angeles County, whose 10 million people make it the most populous county in the United States, a third of the sales are foreclosures.
Merced County had a record 523 foreclosures in July, quadruple the rate of a year earlier, according to DataQuick. The repossessions are accelerating as overleveraged owners see the value of their properties sink and can find no way out.
Other homeowners are taking their declining fortunes into their own hands. On a recent Sunday evening, an extended family of a dozen children, teenagers and adults is unloading a U-Haul into a house in a two-year-old subdivision called Summer Creek. The patriarch takes a break from wrestling with a refrigerator to explain he has abandoned his house a few miles away and is now renting this nearly-new five-bedroom. The result, he says happily, is a drop in his monthly housing bill to $1,200 from $3,400. (this is an economically logical thing to do) Somewhere a lender is recording yet another foreclosure. (but now we need to find a new buyer for the old home)
Businesses in Merced are struggling. Downtown buildings are festooned with “for lease” signs. Unemployment, consistently high here, rose to 12.1 percent in July. (but housing is only 4.5% of GDP - "they" promised me a year ago the problem would be contained and even if it was bad it barely mattered to the US economy? I said in a service economy it's all connected and a vicious cycle would ensue - but really what do I know?)
Starting in 2000, investors came over the mountains from San Francisco, up Interstate 5 from Los Angeles and out of the woodwork from many a surrounding hamlet. Over the next five years, prices in Merced rose 142 percent, a growth rate that ranked it in the top five communities in the country. Many in Merced blame out-of-town buyers, who at the peak made up more than a quarter of the local market, for their current woes.

Here is a great example as house as ATM - just look at these numbers

Mr. Seivert is going after a house that the owners bought 13 years ago for $86,000 and refinanced six times, taking advantage of rising values to get cash that, in part, they spent on the house. (home price 1995, $86K)
The owners, who owe $350,000, can no longer make their mortgage payments. (13 years later, home price irrelevant but they owe $350K)
Mr. Seivert is negotiating to buy the house for $170,000 and then rent it back to the couple, who have jobs in the area. They will pay $1,100 instead of their current $2,600 a month. (so now they are renters of their own home instead of owning it free and clear with no mortgage payment as they should be at this point - which will lead to the next crisis as this wave of people try to retire and won't be able to since they cannot afford it. Their parents generation went into retirement with home paid off. Not most of this wave of 40 and 50 year olds.)
“This could be a win-win,” the accountant says. “In four or five years, when their credit is better and the market has recovered, I’ll sell the house back to them.” (I assume with 5% down?)

Onward...

Next door is Sheng Lee, who bought at the top with a “pick a payment” loan, which allows borrowers to make less than their fully amortized payments, but only for a few years. [Aug 13: Options ARMs - Who Thought up these Time Bombs?] Since Mr. Lee, a high school aide, doesn’t have enough equity to refinance, he now needs a loan modification or a miracle. “I’ll try my best to pay my mortgage, but if not I’ll have no choice to leave like the other people,” he says.
During the good times, Merced built up a $17 million rainy-day fund. Now the city has a revenue shortfall. “We’ll bridge that gap by using the reserves,” says James Marshall, the city manager, “but over time the bridge ain’t long enough.”
Now developers are pulling out. Pacific Pride, a Central Valley developer, announced plans to build a 124-house neighborhood but gave up after paving streets and installing a wall as a partition from the railroad tracks. Graffiti runs the length of the wall. The site was declared a public nuisance by the city last winter.
At Gardenstone, part of the Bellevue Ranch development, the doors of the sales office are covered with plywood, as if a big storm were coming. A few blocks away is Riverstone, probably the bleakest Merced subdivision. A dozen houses were started here and then the construction workers went away. The wooden frames have been bleaching in the sun and sand for more than a year.
He was selling houses for $300,000. That means a buyer would have needed a household income of about $100,000 to comfortably make the payments. But Merced’s per capita income of $23,864 ranks among the lowest for metropolitan areas in the country. “None of us paid much attention,” Mr. Glieberman says.

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