If there’s one theme that’s been on my mind in this era of bailouts and debating how to fix the mess the country’s in, it’s been how different California seems from many places in the country where the debate rages.
There’s some interesting analysis of California’s housing trouble in a story in today’s Wall Street Journal. The story focuses on a Central Valley town called Los Banos, a place where “homes are starting to sell again,” which the article’s lede labels as good news.
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.
The Journal extrapolates on that situation, examining how the sides of the debate look in this state, especially in light of the national debate going on about how to fix the economy:
Until markets like this are sorted out, there’s little hope for calm in the global financial system. As banks and governments survey the wreckage of residential real-estate investments, the central mystery is how to value the trillions of dollars in securities that are tied to U.S. mortgages. These securities are so hard to value in part because no one knows when normalcy will return to places like Los Banos.
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.
The reporters found that while California represents 12 percent of the population in the United States, loans on its homes make up 34 percent of a typical mortgage-backed security, according to Fitch Ratings.
Economist Chris Thornberg responded to that: “California doesn’t have a Wall Street problem. Wall Street has a California problem.”
And Peter Viles at the LA Times’ real estate blog added this insight in his post of the Journal story:
California occupies a weird place in the American economy, and American politics, right now. It is the center of the housing crisis that helped cause the financial crisis that will probably tip the presidential election. More than any other state, it gave America subprime lending, no-money-down buying and the booming foreclosure market. Yet the state’s economy and specific problems go undiscussed in presidential politics because its votes are already counted for the Democratic Party. If Americans really knew about the details of our wacky housing market — median home prices above $500,000, house painters buying brand-new $375,000 homes with no money down, etc. — they would probably be shocked. But there’s no need to discuss these issues at presidential debates — California is politically irrelevant. Weird.
As always, you can send your thoughts, questions or story ideas to email@example.com.