James Quinn – “US property dream has turned into a nightmare”


US property dream has turned into a nightmare

James Quinn | August 5, 2008

Just five minutes walk from the lush green lawns that surround the city hall is a street on which each of the five houses lies empty.

With boarded-up windows on two of the houses and no windows on the rest, the buildings would appear to be at odds with street signs which purport the area to be part of the “Historic Magnolia District”.

A crumbling sign on the first house boasts it is “For Rent” but, given that it doesn’t even have a door, it seems unlikely the owner, if there is one, will be getting too many inquiries.

From one of the other houses the sound of dogs barking becomes louder and, as the apparently ownerless hounds appear at the open door, I make a hasty retreat.

Welcome to Stockton, California, the foreclosure capital of the United States. Here, in this city some 80 miles to the east of San Francisco, one in every 25 homes is in the process of being repossessed by mortgage lenders, more than any other city in America.

The “city”, which is more like a small town by British standards, is bearing the sharp end of the US foreclosure crisis – fuelled by cheap debt, lax credit standards and a view that house prices would only ever rise.

Despite its largely desolate, unattractive and at-times dangerous downtown district, Stockton became popular with commuters pushed out of San Francisco’s Bay area and Silicon Valley. The town, which was originally put on the map during the Californian Gold Rush in the mid-1800s, became popular again when new housing sprang up on the outskirts as builders took advantage of cheap land prices and potential homeowners sought refuge from price inflation in the major urban conurbations.

Today, that new gold rush is over. The city is hurting and the local economy is taking a nose dive. Just a fortnight ago, even the local Sheraton hotel – intended to be the centrepiece of a regeneration of its tired marina area – went into receivership.

The hotel was a victim of over-construction, notably the developer’s desire to place 40 condo-style apartments on top of it and attempt to sell them for $750,000 (£380,000) each. The condos now lie empty and unfinished.

As I wander Stockton’s inner districts on foot, the problems are clear. A classic American home with a white-picket fence and three bedrooms is up for sale for $99,950. It belongs to a local young family who over-extended themselves and couldn’t afford their mortgage payments after the initial low interest rate was reset at a much higher one.

House prices here fell by 37pc in the three months to June, compared with the same period last year, according to the area’s largest estate agent, PMZ Real Estate. It is questionable what value the banks are generating from foreclosing on homes rather than renegotiating mortgage deals. But foreclose they do, despite the fact that two of the banks in the city centre – Bank of America and Wells Fargo – continue to heavily plug new mortgages.

For Marian Norris, a local broker with Prudential California Realty, new lending remains a key part of the problem.

“There is no mortgage insurance,” she says. “You just can’t get it and so, without that, the customer needs to come up with 10pc down [deposit]. That might not sound like a lot but, when you’re a family living on $35,000, it’s an impossible amount of money.”

But there is a glimmer of hope. She is seeing some evidence of prices bottoming in the sub-$250,000 market, partly because multiple buyers are now beginning to make offers on properties, a direct result of the exposure the city has received.

“There is a frenzy going on in some parts of town,” she says. “The press says the market is bad but a buyer goes into a property and there are 15 other people standing in front of him.”

However, such a disconnection between popular perception and reality is not the case in other parts of the market, where sales remain sluggish, she adds.

State Governor Arnold Schwarzenegger has recently given more funding to 39 Californian not-for-profit organisations to help those in trouble. One of them, Visionary Home Builders, offers counselling and assessment of the scale of individual problems. It helps people speak to their lenders to see if something can be worked out, which in many cases it can.

Visionary also builds houses and apartments that can be part-bought or rented at a reasonable rate, properties that are increasingly in demand as a result of the town’s problems. A recent survey showed rents in Stockton last month rose 1.1pc as foreclosed former homeowners seek somewhere to live.

“Sure there’s a problem,” admits Robin, a local truck driver. “But locals are sick of talking about it. We all know it’s a mess but we’re fed up of hearing about it.”

On an otherwise desolate street corner to the north of Stockton’s downtown area sit three colourful buses in a car park. Some of the estate agents and mortgage brokers have started running bus tours of homes that are subject to foreclosure.

“Repo Home Tour” read the signs on the vehicles, which are daubed with pictures of people cheering and smiling – not quite the image one might expect given the grim subject matter in hand.

The business is run by two local mortgage brokers – Cesar Dias and Jorge Espino – whose business, Approved Financial and Real Estate, was simply a mortgage broker before the property market crash.

The previous night’s tour visited Stockton’s northern suburbs, with around 12 people on board, looking at 10 houses.

“It was great,” smiles Espino, who explains the idea for the tours developed after their original business began to suffer. “There was a need to do some business; the market went crashing down and we needed to do something about it.”

The Latino pair have become the unlikely poster boys of Stockton’s foreclosure crisis, appearing on national television and in a cacophony of newspaper articles on the subject.

Many locals are clearly unhappy with the publicity they’ve received, criticising them as vultures who are preying off those worst hit. But the pair are helping Stockton by attracting buyers and clearing the backlog of properties which is keeping prices low.

Another estate agent says some sale prices are being inflated by buy-to-let investors but “the investment market is difficult because you need 25pc to 30pc down [in the form of a deposit], and to get a loan which is applicable for Fannie or Freddie coverage [the two main government-sponsored mortgage agencies], you can’t own more than four or five properties.

“We need to get foreclosures out of the market; we need to get short-sales out of the market, and we need to get back to real buyers and real sellers, and some sense of normality. That is slowly beginning to happen.”

Published in: on August 5, 2008 at 8:34 PM  Leave a Comment  

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