The Housing Bubble

The Sacramento Bee reports from California. “Gracie and Louis Prado moved to Yuba County’s new commuter subdivisions later than most people, arriving just 16 months ago from Elk Grove. But they came for the same reason thousands did since 2002: more elbow room and a big house for less money. Yet the trade the Prados made for a bargain home just south of the county seat of Marysville, a long commute to work in Sacramento, is now chewing on their incomes.”

“‘We just didn’t think gas would go to $4 a gallon,’ says Louis Prado, who commutes 104 miles daily from the east Linda neighborhood of Edgewater in a V-8-powered pickup truck to his job in Rancho Cordova.”

“Real estate experts are…now starting to ask larger questions about the impact of expensive oil on such far-flung neighborhoods whose futures were tied to a metropolis many miles away: Could they become a suburban equivalent of ghost towns?”

“Lack of buyer interest is obvious in parts of Edgewater and Plumas Lake. In both neighborhoods, some model home complexes stand empty inside undeveloped subdivisions. Many finished homes have signs in front windows advertising them as available.”

“Thousands of lots, readied for development during the housing boom with sidewalks, streets, utility lines and street signs, have become fields of weeds.”

“At the current sales pace, real estate experts say, it will take 13 years to develop and sell all the new homes planned in Yuba County and its neighbor, Sutter County.”

“‘That is horrifying. That’s like seeing a mouse under the table,’ says Dean Wehrli, a Sacramento-based home-building industry consultant, addressing a home-builders meeting last week. ‘My take is that marketplace is going to be hurting for a while.’”

The San Francisco Chronicle. “In a bleak real estate market, some Bay Area residents are finding a bright spot. People who thought they could never afford a home here are buying foreclosed houses at huge discounts, sometimes more than half off the stratospheric heights they reached just a couple of years ago.”

“Admittedly, the discounts can come with caveats - iffy neighborhoods, maintenance issues - but some prices are so low they would have seemed ludicrous a year ago. Of course, the former prices were ridiculous too.”

“Buying a first home ‘is not impossible anymore,’ said Leslie Appleton-Young, chief economist at the Realtors group. ‘Median home prices have come down. The bulk of the declines are at the moderate and low end. (That) brings in people who could not have gotten in a couple of years ago.’”

“Aimee Golant and her husband are looking for a San Francisco house with a garage for under $425,000. ‘We talked to a lot of Realtors and some just laughed in our face,’ Golant said. ‘But then they started sending us listings.’”

“It turns out that their budget isn’t absurd. ‘We’ve seen half a dozen houses in our price range,’ Golant said. They were small and in marginal areas, so the couple will keep looking - but they think prices will continue to decline.”

“Scott McComas is buying a foreclosed three-bedroom Concord townhome. He paid $167,000 - less than half the $355,000 the previous owner still owed on the loan. ‘I saw that and my jaw dropped to the floor,’ he said. ‘I’m getting this for over 50 percent off; that is just amazing.’”

“Raised by a single mom, Tanya Orozco always wanted to thank her mother by getting her a home of their own. Last month that dream became a reality when Orozco and her mother bought a foreclosed four-bedroom home in East Palo Alto for $390,000. The home had previously sold for $700,000.”

“Now Orozco lives there with her mom and aunt, who both work as nannies, and her boyfriend, a student, who just got a part-time job at Home Depot, ‘which is perfect because of all the painting and projects we need to do,’ she said.”

“The monthly payment for mortgage, taxes and insurance is about $500 more than the $2,000 the foursome previously paid to rent a Menlo Park home.”

“‘It’s a nice house in a family-oriented neighborhood,’ Orozco said. ‘It’s obviously not as nice as Menlo Park, but we feel safe. We all have our own space, and it’s our space we can do whatever we want with - we can paint, do all those little things we couldn’t do as renters.’”

The Mercury News. “Renters Julie Herning and her husband, Oliver, have been trying to buy a home near San Jose’s Japantown since February. With a slow housing market, and with enough money for a healthy down payment, they figured they finally had a shot at owning a piece of property.”

“What they didn’t expect was the competition - so fierce that they’ve been outbid on four houses priced at around $500,000.”

“‘It’s kind of crazy,’ said Julie Herning. ‘One person I called said I would have been the 13th offer on the property.’”

“Bidding wars have remained common in high-priced places where stellar school districts are the big draw. But in an area such as Santa Clara County - with more than 900 houses for sale for $450,000 or less - many home buyers assumed that the market was soft, and are shocked to find themselves outbid on foreclosed, bank-owned properties in this price range.”

“‘The REO market is cooking-hot right now,’ said Jason Chan Lee of Intero Real Estate.”

“Banks eager to unload their REO inventory - which forms a large chunk of the cheapest houses for sale in the county - have been lowering listing prices. It’s become common to find bank-owned homes in South San Jose priced at roughly $400,000 that last sold in 2005 or 2006 for $600,000 or
more, for example.”

“The competitive landscape has discouraged the Hernings, who thought they’d have an easy time buying because ‘all you hear about is ‘Oh, the market is terrible,’ Herning said. ‘We had no idea we’d still be sitting here going, ‘What’s going on? Are we going to find a house?’”

“Some agents who specialize in REOs said about half the buyers now scouring the market for deals on bank-owned properties are people who want to live in the homes, while the other half are seeking investment property to rent out.”

“But even at today’s REO prices, some investors are waiting to buy because they can’t get enough monthly rental income to cover their mortgage and expenses.”

“True, said agent Peter Carey, but the ones buying now are ‘gambling on better times’ in the future, he said, hoping to buy property in the $400,000s that will eventually gain value.”

The LA Times. “The market may be down, but sales of bank-owned properties are picking up, with multiple offers being made in many cases as lenders drop their prices to move foreclosed homes off the books.”

“Earl Bonawitz, general manager for Century 21 Wright in Temecula, said his company handles 120 to 150 bank-owned properties at any given time and has watched REO prices drop.”

“‘It costs a bank about $5,000 a month to hold a property,’ he said. ‘A $650,000 to $700,000 appraisal a year ago in some areas is now worth about $350,000. It took a while for the banks to adjust their mentality to that. Right now, anything under $300,000 is a hot price.’”

“Kirby Palmer, who owns a home in Claremont, decided to buy an REO house in northern Rialto in January to flip as part of his retirement strategy. He said because he’s self-employed it was too costly to get conventional financing; lenders were asking for 20% down with interest rates of 8.5% to 9%.”

“So he went to what is known as a hard-money lender. The lender required a 10% down payment, as well as six months’ worth of mortgage payments and the construction costs upfront at 13% interest for a six-month loan.”

“Palmer rehabbed much of the house himself and was paid back the construction costs by the lender as the work progressed. All told, he put up $64,000 on a $238,000 house.”

“The property had been stripped of all copper wiring and the air-conditioning unit. ‘I went in the first day with my sons and had to kick out a squatter,’ Palmer said. He put it back on the market at $349,000 in March but has had no offers yet.’

“‘If it doesn’t sell, I can rent it out and wait for the market to bounce back,’ he said. ‘It’s not a huge risk.’”

“‘The big question is whether we’re in a recession,’ said John Karevoll, an analyst with DataQuick. ‘If we are, we’re in for some more downturn. If we’re not in a recession, it’s likely that prices have found their bottom and that most of the declines are behind us.’”

The Bakersfield Californian. “As the housing crisis intensifies, so do homeowners association headaches. Association boards these days are grappling with how to handle unsightly foreclosures and collect monthly dues - critical for maintaining common areas and padding reserves - when so many residents are feeling squeezed by the economy.”

“In simpler times, homeowners associations had a powerful enforcement tool at hand: the lien. An indebted homeowner who wanted to sell or refinance would have to first clear the lien, said Ted Whittington, a Bakersfield attorney who represents about 40 local homeowners associations.”

“But a foreclosure wipes away an association lien, meaning a lawsuit is often the only way to collect back payments, Whittington said.”

“Catching an owner’s attention through a lawsuit costs money, said Michael Strahan, a board member for the Seven Oaks West South of Chamber Homeowners Association.”

Gated developments, such as Seven Oaks at Grand Island, typically levy hefty monthly dues to operate gates, pay a security company and, in some cases, maintain private streets.

“‘This could go on for years if a homeowner really wants to be belligerent,’ Strahan said. ‘You put a lien against a house for 600 bucks. Big deal. It costs $500 to put the lien down.’”

“Some pinched California homeowners associations are considering shutting down clubhouses or decreasing the frequency of services such as street sweeping, said Andrew Schlegel, VP for an Aliso Viejo-based management company with association clients in Bakersfield. Others raised dues.”

“Southwest Bakersfield’s Sagepointe Patio Homeowners Association, composed of owners in a 134-home neighborhood, has struggled with foreclosures and vacant homes.”

“‘When the boom was going on here, we had a lot of investors come in, out-of-town people,’ association VPGene Foubert said. ‘They used (their homes) for rentals and didn’t pay any dues. I’d say this last year has been worse than it’s ever been before.’”

The Press Enterprise. “Lake Elsinore resident Cheri Sullivan refused to sell her home in the Rosetta Canyon neighborhood at a loss during a time when the housing market has dramatically cooled. So Sullivan got creative. Sullivan is giving away her five-bedroom, four-bathroom home to the lucky winner of a $200-per-entry essay contest.”

“‘You just have to think outside of the box in trying times,’ Sullivan said. ‘A lot of my neighbors are walking out of their homes and taking the loss, but I didn’t want to do that.’”

“Sullivan’s plan is to field 7,000 essays at $200 each; the money will be placed in a trust account. Three of Sullivan’s friends — an attorney, a restaurant manager and a yoga instructor — will judge the essays. The winner will receive the home.”

“The essays can be no more than 500 words and will be judged on “thought, creativity and sincerity,” Sullivan said. ‘They have to convey a desire to own and keep the home,’ she said.”

“Sullivan stands to earn $1.4 million, enough to pay off the mortgages, taxes on her earnings and judges’ fees and have enough left over to buy a smaller house and ‘be comfortable,’ she said.”

“Sullivan moved to Lake Elsinore from San Diego’s Hillcrest neighborhood in June 2006. She bought her house at what real estate agents said was the peak of the housing market. Then, the market went south — way south in Sullivan’s neighborhood.”

“Home prices in Rosetta Canyon, an upscale community in northeast Lake Elsinore, have fallen nearly 30 percent since the market’s height, said Marsha Swanson, a local Coldwell Banker branch manager.”

“‘There were some people paying $400,000 and $500,000 at the peak,’ Swanson said. ‘The bank-owned properties are being sold for around $300,000 now, so it’s a pretty drastic drop.’”

“Sullivan said she started thinking about selling earlier this year, but thought twice because the experience of some neighbors who were selling their houses for half of the price they paid. Her real estate agent told her it would likely be eight to 10 years before her house was worth what she bought it for.”

“‘I’m 57, I don’t have that time to wait,’ said Sullivan, who has two mortgages on the home.”