In the Central Valley, the Ruins of the Housing Bust

By DAVID STREITFELD | NY Times
August 23, 2008

MERCED, Calif.

ELLIE WOOTEN, the likable mayor of this likable Central Valley city, is on her way to the office when her cellphone rings. A constituent wants her mortgage payments reduced, and is hoping that the mayor has some clout with her lender.

Although Merced has one of the highest foreclosure rates in the country, this borrower isn’t in such dire straits. She’s not even behind on her mortgage. But her oldest daughter is turning 18, which means an end to $500 a month in child support. She just wants a better deal.

The mayor hangs up and shrugs: “It’s a surprise her daughter is turning 18? You’d think she could have planned ahead.”

But 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,” says Jamie Schrole, a Merced real estate agent. “Everybody was just trying to live out their 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 highest percentage in the state, according to DataQuick Information Systems. 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.

Local markets will not truly begin to recover until their foreclosures are absorbed, but just as few in Merced saw reasons for caution at the height of the boom, hardly anyone is optimistic now. Bank repossessions are accelerating as overleveraged owners see the value of their properties sink. 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.

Beverly Red, the woman who called the mayor to get a better deal, says she started working months ago to renegotiate her loan into something she could better afford on her receptionist’s salary. No one takes her seriously, she says, because she is not behind on her payments, which, of course, is exactly what she is trying to avoid.

“This has been my home for 10 years,” says Ms. Red, a divorced mother of three. “It won’t be good for me, or my neighbors, or the bank, or Merced, if I lose it. Yet that’s where I’m headed. It’s very frustrating.”

THE boom here allowed some people to become rich overnight and gave many more the idea that they could do it, too. Ms. Schrole, a single mother of four, succumbed to temptation too late: she bought a home as an investment, sold her own home, bought a much more expensive one, and lost both. “I was stupid,” she says. “I didn’t get in until things started to tank.”

Ms. Schrole is in bankruptcy. 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. Somewhere a lender is recording yet another foreclosure.

Businesses in Merced are struggling. Downtown buildings are festooned with “for lease” signs. Unemployment, consistently high here, rose to 12.1 percent in July.

Among those trying to adapt to this miserable new time is the mayor. Mrs. Wooten, 74, has been selling real estate for three decades. In the old days, she worked for people selling their boom-inflated homes and moving into something better. Now she mostly represents banks, selling their foreclosures. She has 27 at the moment.

In her windowless city office, she takes a call from a man in Seattle who is interested in a 1947 home in bad repair in a bad neighborhood, but which has a large yard for his dogs.

In November 2005, the house sold for $126,000. The bank, which took it back last spring, is asking $59,000. The Seattle man offers $40,000.

The mayor says the lender is not desperate enough to take that big a haircut. “Not going to happen,” she says. “Not this year.” She laughs. “Call me in January and I’ll let you know.” Mrs. Wooten is wearing a red shirt that says, “Merced: Invest in California’s Future.” Which is pretty much how all the trouble began.

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, according to the Office of Federal Housing Enterprise Oversight.

One thing above all drew the investors: the prospect of a University of California campus on the edge of Merced, the first new campus in the state system in 40 years. They envisioned something resembling Davis, another Central Valley university town.

The University of California, Davis, however, has more than 30,000 students and is within easy reach of San Francisco and Sacramento. U.C. Merced, which opened in 2005, has fewer than 2,000 students and isn’t near much except Modesto. Instead of students or professors renting their houses, speculators say, they had welfare recipients or no one.

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.

Now there are investors again. Mark Seivert, an accountant who lives in the neighboring town of Atwater, didn’t buy anything during the boom. Anyone, he says, “could have figured out that too much inventory and not enough bodies was a recipe for disaster.”

This summer, the numbers are sweet. He is working on a deal for a short sale, in which a lender agrees to let a house go for less than it is owed in return for getting the property off its books immediately.

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. It has a pool with a small waterfall, a TV room in the converted garage, a deluxe outdoor barbecue setup and a kitchen with all the latest gadgets.

The owners, who owe $350,000, can no longer make their mortgage payments. 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.

“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.”

Longtime renters are also seizing the moment. Sally Johnson just bought a house that had been foreclosed at the edge of Bellevue Ranch, a huge master-planned community north of town. She paid $164,900, half the price the previous owners paid two years ago.

The market is “probably going to go lower,” says Ms. Johnson, who works at a local jewelry store. But time is on her side: She got a 30-year fixed-rate loan. The landscapers will be by shortly to breathe new life into her golden lawn.

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. 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.

Mr. Lee harbors no bitterness that his new neighbor got a slightly smaller house for half the price. “It’s her luck. Why would I be mad at her?” he asks. He brought her fried rice and noodles as a house-warming gift.

Another neighbor, Van Lewis, fits somewhere in between Mr. Lee and Ms. Johnson. He also bought two years ago, but says he is in a position to ride out the slump. “You have to plan for the long term,” he says. “If you don’t, the short term can kill you.” In any case, he adds, he has “too much stuff” to ever go back to an apartment.

Opposite their houses is an immense scrubby field. Until recently, it was overgrown, and Mr. Lewis says he has seen evidence of fires started by youths or vagrants. “There were supposed to be stores and a fire station over there,” he says with more resignation than anger. “We could all march down to city hall and picket, but what’s really going to happen with that?”

Things could be worse. Crime is up only marginally. There has been no major upswing in homelessness; the theory around city hall is that foreclosed families are either renting or have left the area.

Yet things may well become worse soon. 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.”

FLIPPERS and speculators who had nothing invested in Merced beyond money were the first to abandon the community.

Many real estate agents and loan brokers, their customers gone, soon followed. So did commuters who thought they could spend four hours a day making round trips to the San Francisco Bay Area. And the spinners, young men and women hired by the developers to stand at intersections and literally point the way to the new developments, disappeared.

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. Messages left on a voice-mailbox belonging to Pacific Pride were not returned.

Moraga, built by Lakemont Homes of Roseville, Calif., was designed to include 500 luxury homes that ranged in size up to 3,500 square feet, boasting such amenities as butler pantries, double ovens, master suites with walk-in closets, five-foot-long soaking tubs and three-car garages.

The subdivision centerpiece, completed first, is an expansive and pleasant park, with two baseball fields, basketball courts, a picnic area and children’s playground. All that’s missing are many houses. Only about 24 were built. One was just listed as a foreclosure for $219,000, a deep discount to the already discounted price of $310,000 for that model. The Lakemont agent says that there have been no sales for a long time.

At least Lakemont is still keeping up appearances. 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.

Both Gardenstone and Riverstone are the work of Crosswinds Communities, a developer based in Novi, Mich., that is owned and run by Bernie Glieberman. Reached at his office, Mr. Glieberman is asked if he and his fellow developers perhaps got a bit —

“No question,” he interrupts enthusiastically. “I would never deny we all got greedy. Everyone was setting records. Nobody was there to take away the punch bowl.”

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.

Yet he says the real problem was not over-eager developers but underhanded buyers — which is to say investors.

“We didn’t know we were selling to speculators,” the builder says. “They swore they were going to live in the houses.” He says he found out otherwise only after the plunge began and people started trying to get refunds on deposits of as much as $60,000.

Some said that they had lost their jobs, others that there were illnesses in their families. And some said they should get a refund because, as investors instead of owner-occupants, they should never have been allowed to buy the house in the first place. By then, it didn’t matter. Crosswinds didn’t refund any deposits.

Mr. Glieberman says that he intends to come back and finish those houses, that he is confident Merced will turn around.

For that to happen, banks will have to become more willing to lend. At the moment, however, they’re growing ever more reluctant.

Consider the experience of a couple moving to Merced last month from a nearby town. Their mortgage broker set up a Federal Housing Administration loan for them, which meant that it would be guaranteed by the federal government.

To finance the loan, the broker went to the HSBC Mortgage Corporation. At the last minute, HSBC said no, giving reasons that had nothing to do with the couple’s finances or their new house.

“Property is unacceptable due to high foreclosure rate and volatility of subject market,” HSBC informed the couple via fax. Apparently, even a government guarantee wasn’t enough.

Such emphatic declarations bode ill for a recovery, says Robert Gnaizda, general counsel of the Greenlining Institute, a housing advocacy group. “If a few institutions take the position that prices in the Central Valley are still excessive and they need to wait to finance houses there, you’ll have the total collapse of the market.”

A spokeswoman for HSBC says it has financed 36 mortgages in Merced County this year but declined to comment on the fax.

THE real estate boom, while it lasted, made Merced prosperous. Now the question is what can make it thrive once more, presumably on a more sustainable basis.

The university is an asset that will take time to develop. This is excellent farm country, but these days agriculture is not an occupation that creates a broad middle class.

Wal-Mart Stores is proposing to build a distribution center in Merced, but there is a movement against it among residents who say that trucks shuttling around the complex will worsen the breathing problems of the city’s children. Merced County has one of the highest percentages of asthmatic children in the state, according to a 2001 state health survey. Many children carry inhalers to help them breathe.

In the midst of all the wreckage caused by the real estate boom and bust, some think that they have found a way forward: build more houses, thousands and thousands of them.

On the western edge of Merced County, near the Diablo Range that separates the Central Valley from the Pacific Coast, is a stretch of empty land that a coalition of landowners has wanted to build on for years. The plan calls for the eventual construction of a city of 16,000 houses called the Villages of Laguna San Luis.

In many ways, the idea makes sense. The pass over the mountains is winding and slow, but if a proposed high-speed train is ever built, the Villages could end up being a bedroom community for San Jose. By 2025, California is projected to grow to 44 million people from the current 37 million. They will need somewhere to live.

This summer, the Villages came up for a vote with the Merced County Planning Commission. Cindy Lashbrook, a commissioner who is a fruit-and-nut farmer, says the project was basically well thought out. But all the cars that came with all those new houses would cause even more pollution. And in a state suffering from drought, where would the water come from?

“We have to stop thinking that more growth is always the answer,” Ms. Lashbrook says. “We have more housing than we need. We need jobs.”

She voted against the project, which faltered on a 2-to-2 split, with one commissioner absent. That meant supporters could bring it up again before the full commission, which they did. They won the second round, 4 to 1.

Rudy Buendia, the commissioner who dissented along with Ms. Lashbrook on the first vote, was in favor the second time around. Reached on his cellphone, Mr. Buendia said he was out hanging drywall on a construction project and did not have time to talk.