Time to scale back our expectations

By David W. Hill
dhill@modbee.com

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The region's top real estate pros warned us a couple of years ago that home values in the Northern San Joaquin Valley were overinflated.

Then gasoline, food and other expenses started climbing. Adjustable-rate loans began to reset to higher payments, and defaults took off. Credit got harder to come by. New homes flooded the market. Sales stagnated and prices sank. Consumers hit the wall.

One of those who identified in early 2005 that the market was headed for a fall, Mike Zagaris, president of PMZ Real Estate in Modesto, said the current slide shouldn't be a shock, given the market's previous peak.

"In our industry, you tend to pay to the extent to which you were rewarded," Zagaris said. "If you have a hot cycle at which you are increasing at double-digit rates, when the market turns, it tends to turn more dramatically."

When that happened, those who were running for cover were left with few options. They couldn't refinance because their houses were worth less than they owed on them, and there weren't enough buyers for all those who needed to sell.

For every person who took out a self-indulgent subprime loan to finance a lifestyle far beyond their means, there are others who got exotic financing to take care of family, pay down debts or get into homes in a market they feared being priced out of. Some weren't savvy enough to understand what they were getting into, some were victims of predatory practices, and some just didn't read the fine print.

Zagaris said people got caught up in the easy credit terms, which created a spend-now, pay-later attitude. "So the availability of money to, in effect, take what was a historically conservative investment asset and convert it into an ATM that can be used for current expenses, has undermined the basic security that investment has had in the past for many people."

Many borrowers believed the people they were dealing with had their best interests at heart. If that single-income family of four couldn't really afford that 3,000-square-foot house, one of those pro-

fessionals would warn them off.

But that's not really how it works. Business is business; it's not personal. People are in business to make money, and consumers have to look out for themselves.

Bob Endsley, founder of Coldwell Banker Endsley and Associates of Turlock, believes people were taken advantage of. "They were talked into low teaser rates and told they can't go wrong. If those loans had not been available, the demand for houses wouldn't have taken off like it did, and we probably wouldn't be in this mess."

So where do we go from here?

Clearly the market is in turmoil.

One of the things driving the downward spiral these days is people's attitudes. But don't blame the messenger, that's just an easy out -- the numbers are the numbers. Being better informed just makes for better consumers who make better choices. Everyone wants that, right?

"People need to make more prudent decisions," Endsley said.

And the best way to do that is to learn as much as you can about the marketplace, understand your own financial situation so you don't overextend and take your time making such a major decision.

Larry Matos, co-owner of Century 21 M&M and Associates of Modesto, said buyers need to find a home that meets, not exceeds, their needs and get a loan they can live with.

"I think for any buyer the thing they need to look at is, 'Can I sustain this loan for five years or 10 years?' " Matos said. " 'Is this sustainable?' And if it is, then I believe you're getting into the right product."