Too many new houses. Too many investors. Too many exotic loans.
They created a lethal mix that caused the Northern San Joaquin Valley's housing market to soar, then crash into a painful collage of foreclosures, unsold homes and financial woes.
That's the consensus of experts who try to explain why home values and sales have fallen so far and so fast in Stanislaus, San Joaquin and Merced counties.
The rapid and sharp downturn contrasts dramatically with the real estate market's roaring good times a few years ago.
The region's homeowners were living large in 2005. Their houses had tripled in value in less than a decade. They could sell with ease for hefty profits or -- better yet -- borrow against their equity without hassle so they could buy cars, pay off credit cards or finance vacations.
They could qualify to buy big, new homes with no down payments and teaser-rate loans that made living in luxury affordable, at least for the first couple of years of the mortgage.
Easy-to-borrow money and get-rich-quick advice also persuaded record numbers of home buyers to try their luck at "flipping houses." They gambled that home prices would continue climbing long enough for them to cash out with big bucks.
Developers couldn't build houses fast enough. They sold more than 47,000 homes from 2001 to 2005 in cities throughout the three counties.
Hordes of new sales agents and mortgage brokers entered the industry, swelling the ranks of those with active real estate licenses to more than 11,500 in the region by 2006, nearly double the 2004 number.
And the booming housing in-dustry sprouted a plethora of businesses, from landscaping services to furniture stores.
My, how times have changed: 2007 will be remembered as a brutal time for real estate in the valley.
The three-county region has become America's foreclosure capital. Foreclosure auctions are held daily on county courthouse steps in Modesto, Stockton and Merced. Lenders have repos- sessed more than 5,400 homes in the past year.
Thousands of other homeowners are in mortgage default and at risk of losing their homes in the next six months.
Virtually every street in the region is sprinkled with "for sale" signs, many of which tout "price reduced." Homes often linger on the market month after month with no interested buyers.
In Modesto, about 2,400 houses and condos are for sale, nearly six times more than in spring 2005.
Because only about 50 Modesto homes have been selling per week this fall, sellers are finding it extremely difficult to attract buyers without significantly dropping their prices.
Developers have sliced new home prices repeatedly, often by $100,000 or more, to unload their finished-but-empty inventory. Only 88 new homes sold in August in Stanislaus County, compared with more than 350 in August 2005.
Several of the region's builders have slashed staff and are in financial straits. Others have put construction on hold, keeping subdivision lots vacant. And many proposed developments have been shelved indefinitely.
Home auctions are becoming commonplace as banks and builders try to move bargain- priced foreclosed properties and new homes that haven't sold through traditional means.
The foreclosures, auctions and abundant supply, combined with higher interest rates and stricter lending standards, have made buyers a rare commodity. And many of those who can afford to buy keep waiting for better deals.
Dead lawns, boarded windows and stagnant swimming pools mark the abandoned houses in neighborhood after neighborhood.
That has helped force down home values.
Sale prices have plummeted 10 percent to 41 percent since the fall 2005 peak, depending on the city.
Atwater is suffering the most. Its median home sales prices have plunged 41.6 percent since the peak. This weekend, Pacific Union Homes dropped the price $140,000 on one of its new Claremont Reserve homes. That 3,144-square-foot, five-bedroom house is now $352,310.
Prices are way down in Salida, too. The median peaked at $415,000, but was at $277,000 in September -- a 33.2 percent drop.
Patterson prices are off 29.7 percent. Ceres prices have dropped 24.7 percent. Parts of Modesto are down 33.3 percent, parts of Merced are down 35.8 percent, parts of Manteca are down 26.6 percent and parts of Tur- lock are down 22.7 percent.
With home prices so relatively low, real estate agents insist it's a great time to buy. But many of those who study the market cal-culate it may take several more years for home values to recover. No one is sure where the bottom of the market might be.
How it all began
How did things go so wrong, so fast?
The valley's roller coaster housing market cycle started inno-cently enough with families seeking an affordable place to live, said John Knight, director of the University of the Pacific's Real Estate Institute.
Stanislaus County's median home sales price in October 1997 was $103,000, and the county's median-income families could afford 74 percent of the homes. San Joaquin and Merced counties also had affordable home prices.
But that wasn't the case elsewhere in California.
"We have a close proximity to the Bay Area, and you can get a lot more for your money over here than you can over there," Knight said.
Sales to commuters began increasing at the turn of the decade. "It started based on just good, solid fundamentals," Knight said.
Fueled by commuters and the fact that Bay Area workers earn significantly more than those in the valley, the region's home values started rising.
The Office of Federal Housing Enterprise Oversight calculated the region's homes appreciated more than 10 percent in 2000 and about 20 percent in 2001. By 2005, annual appreciation rates were nearly 30 percent.
"Once the rapid appreciation was seen (early in the decade), investors entered the market as speculators," Knight said. Many buyers had no intention of living in or renting out the houses; they planned to resell them for profit. "I believe there was false demand created ... because so much demand was determined by investors."
Knight said valley house prices got out of whack with the region's incomes.
Stanislaus County's median home prices hit $392,000 in De- cember 2005. That was so high that the county's median-income families could afford only 3 per- cent of the homes.
Builders, meanwhile, developed hundreds of subdivisions. Nearly 47,600 new houses were sold in Stanislaus, San Joaquin and Merced counties from 2001 through 2005, and many thousands more were planned.
"A tremendous new supply of homes came on the market, and it caused a supply-demand imbalance," said Stuart Gabriel, director of the Ziman Center for Real Estate at the UCLA Ander- son School of Management.
Gabriel said builders flocked to the Northern San Joaquin Valley because there was a lot of open space and its governments were amenable to development.
"Relative to the Bay Area, there's almost no regulation restraint" in the three counties, said Gabriel, noting that California's coastal counties tightly restrict building.
Many of the valley's builders got caught with too much inven-tory once the market turned.
"It's not rocket science, really. We just have an oversupply of homes," said Modesto builder Mark Wilbur, owner of McRoy-Wilbur Communities. "As builders, clearly we overbuilt."
Wilbur said he was more fortunate than most. His company sold 400 homes in Merced County before the market crashed, and his current project in Ripon is selling OK.
"But we're not making any money," he said. "There's no builder in the whole three-county area making any money. If you're breaking even right now, you're a hero."
That's why many developers have stopped building in the region.
The Grupe Co., whose Stockton-based firm has built homes for 40 years, has halted new con-struction in Stanislaus and San Joaquin counties. It's leaving lots empty, such as the 24 it has vacant in Waterford's River Pointe subdivision.
"If you can't sell product at a price that makes a profit, why put money into it?" asked Kevin Huber, Grupe's chief executive offi-cer. He said he doesn't expect the housing market to stabilize until late 2008.
Huber said that's because many previous home buyers have yet to have their adjustable- rate mortgages "reset" to higher interest rates. The number of resets is expected to peak in March, which likely will trigger many more foreclosures.
Nation's foreclosure capital
Foreclosures already are at epidemic proportions throughout the region. The three counties consistently rank among the nation's worst when it comes to percentage of homes in loan default.
"There's a significantly higher incidence of subprime lending in the Central Valley than elsewhere," Gabriel said. He said valley home buyers used a "disproportionately high share of innovative housing finance instruments," such as loans that required no money down and no documentation of income.
Some loans allowed negative-amortization or interest-only payments. Others started with teaser rates before resetting to much higher monthly payments.
Valley residents opted for such risky loans because they couldn't otherwise afford the initial monthly payments. Gabriel said many of this region's buyers were "newcomers to homeownership" who didn't qualify for conventional loans.
"The mortgage industry re- acted to the lack of affordability by creating innovative instruments that increased the number of people who could qualify for loans," Gabriel said. Essentially, the homes being bought were expected to appreciate in value, and that expectation was used as collateral for the loans. "The instruments were experimental in a way ... and the qualification standards were way too lax."
So when homes stopped ap- preciating and adjustable mort- gage rates started rising, many homeowners found they couldn't afford the higher payments, couldn't refinance because they had no equity and couldn't sell because their houses weren't worth what they owed on it.
"The math just doesn't work. We're completely at a loss for what to do," said Summer Wolfe, who bought a new $439,000 home in Patterson two years ago at the peak of the market, using an adjustable-rate mortgage with no money down.
"We thought that if we didn't buy then we'd never be able to because prices kept going up," said Wolfe, who is raising two children with her husband. "We wanted to have a home life."
But their home recently ap- praised for only $315,000, a 28 percent decline. Their monthly payments, meanwhile, are rising as their mortgage interest rate adjusts. That rate could double within two years, increasing their mortgage pay- ments $1,400 a month.
"We're just stuck," Wolfe said.
So are thousands of other homeowners throughout the region.
"It's very difficult to find a refinance loan in the Central Valley" compared with other parts of California, said Raphael Bostic, assistant director of the University of Southern California Lusk Center for Real Estate.
Bostic said lenders instead are steering money to the Bay Area, Los Angeles and other places where they believe home values will recover more quickly.
"It's a flight to perceived safety," Bostic said about where lenders invest. He said those who do loan money to valley residents have become very choosy about who gets the cash.
"The easy money is gone," he said. "Borrowers are going to have to show a higher degree of creditworthiness ... because the capital markets are paying more attention to the details of these loans."
That tightening of credit means more than 25 percent of the region's potential home buyers who could have gotten loans two years ago no longer can qualify, said John Hillas, a Modesto appraiser who is on the Appraisal Institute's national board of directors.
Another group of potential buyers that has disappeared is investors. Hillas said speculators bought more than 25 percent of the region's homes a couple of years ago, but they've pretty much stopped buying.
"So half the demand for homes is gone," said Hillas, who con- siders supply and demand when appraising home values. "The worst price declines are where there's the greatest oversupply. Just look for where there's the most building going on."
Take northeast Modesto, for example. Hillas calculated that home values there have been dropping 1 percent to 1.5 percent per month for the past year.
Hillas said "there are definite bargains out there" for home buyers who plan to stay in their homes long term, but he doesn't expect prices to start rising again until at least 2009 or 2010.
Bee staff writer J.N. Sbranti can be reached at email@example.com or 578-2196.