California Home Sales Revive, But Not Without Intense Pain

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OCTOBER 22, 2008

California Home Sales Revive, But Not Without Intense Pain
By MICHAEL CORKERY and JONATHAN KARP
The Wall St. Journal

LOS BANOS, Calif. -- In this California city, one of the hardest hit in the national housing crash, there's good news: Homes are starting to sell again.

Investors and first-time home buyers are snapping up foreclosed houses here, with the number of local sales up almost fivefold from this time last year. While the volume of existing-home sales across the U.S. fell 10.7% in August from the previous year, according to the National Association of Realtors, there are signs that the most damaged of markets are starting to heal themselves. Across hard-hit California, sales volumes rose 65% in September compared with a year ago, said MDA DataQuick, a San Diego-based real-estate information service.

The bad news is that the latest round of sales is unleashing another round of pain in cities such as Los Banos, a commuter community in California's Central Valley. With home prices already down 66% from their peak here, most homeowners owe more on their mortgages than their houses are worth. Successive deals bring new low prices, leaving remaining owners with little incentive to keep current on outsized mortgages. Some stop paying, pocketing the money while they wait for their lenders to kick them out. A few lose their homes only to stay on as renters, paying hundreds of dollars less a month. Every fifth house in this onetime real-estate boomtown is in some state of the foreclosure process.

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Economists and politicians offer two main prescriptions. Many say the government should buy these homeowners' expensive mortgages and reduce the loan amounts to reflect current values, a taxpayer-funded effort to put a floor under the housing market. Others say such intervention would reward those who bought homes they couldn't afford, and prolong the inevitable pain of a necessary housing contraction. These people say the market should continue its own path toward equilibrium. Neither option would be pretty, judging by homeowners' experience here.

Los Banos, a city of about 36,000 people, lies in Merced County near the center of the Central Valley, a fertile expanse that has long drawn opportunity seekers -- Basque sheep farmers, dairy farmers from Portugal, migrants fleeing the Dust Bowl states during the Great Depression. Many of their descendants live here still. This decade, Los Banos drew commuters from Silicon Valley, 80 miles to the northwest, and the construction workers who built their houses. Its housing market took off as builders, lenders and the government helped more people realize the dream of homeownership. Dairy farms and fields of tomatoes gave way to cookie-cutter houses on the likes of Bentley Drive, Chianti Court and Riesling Street. Subprime lenders poured in, making cheap loans with few questions asked. Builders offered to pick up the tab for their customers' closing costs. Home prices soared. In 2005, one local builder was selling three-bedroom homes for $300,000 -- more than three times what it asked for a similar design in 2000.

Many lenders catered to buyers with shoddy credit, who qualified for "affordability" loans with low payments that typically ramped up over time. In 2006, 45% of the home mortgages and refinance loans in Los Banos were high-rate loans, most of which would be considered subprime, compared with a national average of 29%, according to a Wall Street Journal analysis of federal mortgage data. The town's top lenders included Countrywide Financial, New Century Financial and divisions of Golden West Financial and Washington Mutual -- all former highfliers in the mortgage business whose holdings later turned toxic.

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Indeed, the housing boom brought jobs to many local residents and attracted new businesses, with Starbucks and Target going up on the same street as a slaughterhouse and the local office of the Hay Growers Association. But the market turned in 2007, and now the Merced metropolitan area leads the U.S. in many indexes of misery. By the third quarter of this year, 12.3% of home loans were delinquent in Merced County, the highest in the nation, according to Equifax and Moody's Economy.com. Merced has also seen some of the country's sharpest home-price declines. It has the highest share of owners who owe more on their houses than they're currently worth.

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http://online.wsj.com/article/SB122462963345656289.html (subscription)