The Housing Crash's Canary In A Coal Mine
Ever wonder what a housing crash might look like? Just visit Merced, California.
This LA Times article lays out the bloody facts.
Just 100 miles from Silicon Valley, Merced and other edge cities were booming, thanks to all the folks looking for affordable housing.
Last year, housing prices rose 31%.
This year, sales have dropped through the floor.
"The good times have already ended here, in the same way slamming into a wall reduces your speed. A house will fetch 20% less today than it did last summer, brokers say, assuming it finds a buyer at all."
During the boom, the number of registered real estate brokers shot up from 200 to 1,200. Now?
The only thing worse than the real estate market here is the market for real estate agents. They've been coming down to the Auto Toyz and Auto Store used-car lots looking for work.
"Everyone who applied recently, about eight people, they all were Realtors," said Nico Pineda, who until recently was hiring manager for both lots. "But things were slow for us, so we had to turn them down."
Merced is an extreme case. It's a relatively low-income area. There was enough open space for builders to add over 7,000 homes--in a city of 77,000. And the prices had skyrocketed in the past few years.
Nonetheless, Merced is typical of this boom in a number of ways. One of them is the proliferation of risky adjustable-rate loans.
Before the escalation began, 8 out of 10 home buyers in Merced County got a safe, fixed-rate loan, according to research firm DataQuick Information Systems. As the boom proceeded, interest rates fell, which should have increased the appeal of fixed-rate loans.
Instead, buyers switched to adjustables, which saved them money in the short term at the cost of a riskier future. By last summer, 80% of buyers in Merced got adjustable-rate loans.
This presents an opportunity for mortgage broker David Alan Love. He bought a list of 2,000 people who are late on their mortgage payments by at least 30 days, and he is sending them all a letter. "Home values are coming down," it says. "Call me NOW!!"
Another is rampant speculation. The saddest part of the story may be the tale of woe for this investor:
Liubo Hong, a Silicon Valley engineer, bought a four-bedroom on University Drive in February 2005 for $312,000. He's been trying to sell it since October for $389,500.
In the late '90s, Hong said, "I got caught up in the stock market. I got in near the peak. I wish I had gotten in earlier." He's trying to rectify that mistake with real estate. "The market may get better in the spring," the engineer said with hope in his voice. "Or next year. Or in three to five years."
The leaflet for Hong's home calls it "ideal for investors." But he's receiving only $925 a month in rent, less than his mortgage, and Merced is running low on fools.
Merced may be an extreme case, but every coal mine needs a canary. And the one in this cage just keeled over, dead as a doornail.