Postcards (page 2)

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By Pat Regnier, Money Magazine editor-at-large

That's the bet Michele Porter (no relation to Scott and Joyce) made - and lost. In 2007 she bought a one-bedroom condo in Long Beach, just south of L.A., for $289,000. Condos, not just in California but in other hot areas like Florida or the Southwest, can get especially overinflated during booms because their relatively low price draws in small-time speculators. They also attract first-time buyers like Porter who probably should have kept renting. Using a high-rate loan "piggybacked" with a smaller, even higher-rate loan, she put down only $2,000. Her $2,200 monthly payment was a stretch, but she was nearing 30, had landed a job scouting restaurant locations for a national chain and wanted to establish herself financially by owning a home. "Being in that rush to get somewhere, I lost clarity," she admits.

Soon after she closed, she discovered that the apartment had a problem - the creepy, crawly kind. "Some people are afraid of heights," says Porter. "I'm afraid of roaches." Exterminators got rid of the bugs, but she's too uncomfortable to live there now. Porter found a renter for $1,100 a month, exactly half her mortgage. She'd love to sell and move on, but when she listed the apartment for $199,000 - a 31% loss - she got not even a nibble.

Until the market turns, Porter is in a bind, but she's determined to avoid foreclosure and protect her credit. For more and more homeowners, though, walking away is going to look like the best of a bad set of options. Others will simply have no choice. The problem goes beyond subprime borrowers hit with rate-reset shocks. As interest rates fall, that's less of an issue. But then there's that class of debt known as optional-payment loans - pay the low, low minimum and the amount you owed the bank actually went up. That gimmick, pushed hard by mortgage brokers and poorly understood by many of their clients, helped lots of prime borrowers in Orange County trade up. As those loans reset, they will be delivering payment shocks well past 2010.

The risk is that the unwinding of all this funky debt could send home prices into a downward spiral. As resets and reality force more foreclosures, putting more homes on the market, that could yank prices even lower. Those lower prices could in turn generate more foreclosures, and so on. "To some extent, it's rational behavior by borrowers to fight harder to save houses with a lot of equity than those where they owe more than it's worth," says Kurt Eggert, a law professor at Orange County's Chapman University who has studied the mortgage industry. Every month that prices slip, more homeowners lose hope.

So many homes, so few buyers

Most people think California's real estate woes began when prices started racing southward last year. But that depends on where you stood. For home buyers and would-be buyers who kept their heads, 2005 and 2006 were the real drag. In 2001 if the median homeowners in L.A. County bought the median home, they would have used a little over 30% of their gross income with a standard mortgage, notes Christopher Thornberg of Beacon Economics, an early and outspoken bubble basher. By 2006 that household would have used 68% of their income. "You can't do that," says Thornberg. "You have to buy food and gas and save for the future."

Let's say you wanted to live in the Santa Clarita Valley, 35 miles north of downtown L.A. In 2006 you'd have needed over $500,000 to get a new three-bedroom starter home in Canterbury, a little pocket of houses overlooking a dry flood basin. For that price you would have gotten a community pool and clubhouse but also a steep bill to pay off a bond for schools. And your kids would be dodging cars because the lots are too small for real front yards or a sidewalk.

In 2008, Canterbury looks like a far better deal - much to the grief of those who already live here. There are 13 bank-owned or at-auction properties in the 164-home tract. "Everybody I know has no equity in their home," says a resident who doesn't want to be identified. He bought two houses on the same street, one for about $500,000, the other for almost $600,000. Nearby homes are now selling in the high $300,000s. As he stands on his porch, a Volkswagen cruises by, the driver and passengers peering out at each for sale sign. "Those are the second people I've seen today," he says. Indeed, Canterbury is crawling with real estate agents leading bargain hunters around.

At some point those discount shoppers will save the day. But too few of them are committing now, and there's not nearly enough of them to absorb the supply. Foreclosures keep flooding the market: Recently repossessed homes were one out of three sales in greater L.A. in March, according to DataQuick. But there's more to the overhang. Parts of Southern California were seriously overbuilt at the tail end of the boom as builders rushed to take advantage of high prices. And some of those projects are just finishing up now.

Like city living? Downtown L.A. is filled with condo towers in progress. Willing to take a long commute to the exurbs? Out east in Fontana, real estate agent Adam De Corte points to a listing for a group of brand-new homes for around $388,000 - just $38,000 more than the empty bank-owned house he's showing, which after 157 days on the market is filling up with windblown grit that gets in under the doors. (On a trip out to those houses, De Corte gets lost; the streets are so new that they don't show up on his car's navigation system.) In this environment, builders who used to charge for additional electrical outlets will agree to just about anything. Want a free interior remodel? Sold. Trouble is, to get these deals you have to 1) be able to get out of your current house and 2) get a loan. Both are tall orders right now. Keith Myers, who runs a large ReMax agency in the San Fernando Valley, says that a third of his sales now fall apart after going into escrow.

Cheaper but not cheap enough

There are people out there who managed to resist the siren call of easy loans. They'd be ideal buyers. Matt Conrad and his wife Alison rent a three-bedroom in Mission Viejo, just outside Ladera Ranch. They considered buying a couple of years ago but decided to wait the market out after they saw that the only single-family house in their area under $600,000 was a 1970s fixer-upper. Now Conrad, a C.P.A., checks online-discount brokerage Redfin every day for bargains. But unfortunately for the sellers in Ladera, the Conrads are in no rush despite price declines. "I'd still be paying a third more than my rent to live in a similar house," Conrad notes.

Today fewer than 10% of homes in L.A. are affordable to a typical family using a fixed-rate mortgage, according to the National Association of Home Builders. Nationally, the number is 46%, down from 64% a decade ago. And around big cities with decent economies, numbers in the teens and twenties are common.

To pull the Conrads and others like them off the fence, prices are going to have to get a lot lower. So why aren't they there yet? Agents all over Southern California say that owners (like the Porters), as well as lenders with houses to sell, have been slow to accept just how weak the market has become. (Agents, of course, are very anxious to record some sales ASAP.) Erik van Joosten, market manager for Redfin, observes that around 25% of listings in Orange County are would-be short sales - that is, the owner hopes to convince the bank to take a price less than the value of the loan as an alternative to foreclosure. But short sales make up just 5% of sales pending, which suggests that banks aren't approving a lot of offers.

Maybe the banks have reason to believe things aren't as bad as they look - or maybe they're just overwhelmed by all their exploding loans. Nick Roshdieh, an Orange County agent specializing in short sales, says it can take up to 45 days for the bank even to assign a negotiator.

Waiting on a bailout

Adding to the confusion, for now, is the argument over a Washington bailout. Congressional Democrats, as well as presidential contenders Hillary Clinton and Barack Obama, say the only way to prevent economic crisis is for the government to guarantee some loans if banks agree to reduce what's owed. The White House and Treasury Secretary Henry Paulson have preferred a bully-pulpit approach, urging banks to work with borrowers voluntarily. That's complicated: Because of the way mortgages were sliced up and resold, the "lender" is now a group of investors with sometimes-competing interests, says Eggert. Some are first in line to get paid back and would benefit from a quick foreclosure and sale; others farther back in the queue might prefer to modify the loan. As long as the debate rages on, bankers and prospective sellers alike have a little extra incentive to hold out in hope of a better deal around the corner.

The point is that the real estate market is murky, not liquid and fast-moving like, for example, the S&P 500. It will be hard to spot the bottom when you get there. "People ask me how they'll know when its okay to get back in," says Thornberg. "Simple. When prices stop falling for six months."

For all the anxiety and analyst sessions that falling prices have induced around L.A., a few folks have figured out how to play the game and keep winning. Jim Fisher is one of them. He lived the California dream in the bubble, and he's still enjoying it in the crash. Fisher, a software salesman, and his family are ensconced in a 5,000-square-foot home in Huntington Beach with a harbor for their backyard. And they pay just $2,800 a month.

How? They're house-sitting while the owner tries to sell. They stage the house with their own furniture - agents believe it's harder to sell an empty house - and agree to skedaddle on short notice once there's a sale. (You want to say "Only in California," but Showhomes, the company that arranges this, is based in Nashville.) The Fishers have been roaming from mansion to mansion since 2004, when he decided that home prices were just too crazy. It sounds like an amazing deal until you see how clean they have to keep the place.

Still, there are perks. Standing in a great room that could hold Michele Porter's condo and then some, Fisher says, "I don't want to have a mortgage right now." He has a lot of company. To top of page

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