Californians Can Learn From Texas About Falling Home Values

This article posted below is in today’s Austin Statesman. It makes reference to the late 1980’s and early 1990’s when Austin’s real estate market was in the tank, and compares what happened in Austin back then to what some are now experiencing in California. Namely, owning real estate that is worth less that the amount owed – being upside down in their properties.

Those of us who were in Austin in the mid 1980’s remember that a perfect storm of the Texas Oil Bust, 1986 tax law changes, and the S&L (Savings and Loan) fraud/crisis wiped out the Austin real estate market. The legend holds that large numbers of Austinites simply left the keys on the kitchen counter and left in droves (I don’t know anyone who actually did that). Real estate fortunes evaporated almost overnight and the US Government became the biggest real estate owner in Austin, selling homes through HUD and RTC (Resolution Trust Corporation)

The tech industry took hold in Austin the early 1990’s and everything was great for the next decade, until the stock market slide and the high-tech bust, and thus our recent 5 year skid that ended about a year ago.

It’s funny, whatever you want to believe about the severity, or lack thereof, of the current real estate market in “bubble” areas such as California, Arizona and Nevada, can be confirmed or contradicted by any number of news articles and stories. I don’t know which ones to believe, but I do know that it’s not a good idea to be upside down in real estate. The article below takes a less than optimistic view of the California market.

SANTA ROSA, Calif. — In a laid-back kind of way, the Flamingo Resort Hotel and Spa, where I am staying, is centrally located. Drive in one direction and you’re less than a mile from downtown. Drive in another and you’re at a casual shopping center. Drive in still another and you’re on your way to Glen Ellen and wine country.

My son Ollie, who lives in Santa Rosa, told me that real estate values are down.

A day later, the Santa Rosa Press Democrat had an article observing that the median price is down 4.2 percent — to $565,000. This means the median home price here is now only 10 times the $55,000 median household income in the area.

Worse, prices have fallen for four consecutive months. This means that many of those who bought at the top — which the Press Democrat identifies as August 2005, when the median home price in the area peaked at $619,000 — are now upside down. With virtually no down payment and creative financing, recent buyers now owe more than their house or condo is worth.

This may be a good time for Californians to talk to Texans who went through the Texas real estate crash in the late 1980s and early 1990s.

Back then I wrote about Dallas “condo slaves.” These were people who had bought overpriced condos in a rising market. They bought them with buy-down mortgages that would reset to a higher interest rate in a year or two. They bought them with very low down payments, often less than 5 percent.

Then the market turned.

Prices slipped. Inventory ballooned. Thousands of homeowners and condo owners put their keys in the mailbox and walked away from their mortgages. When that happened, prices plummeted. Then the condo lenders disappeared. Condo prices fell some more.

Those who tried to tough it out found themselves in an odd position. They could rent identical units around them for less than they were paying on their mortgages because the other units had been sold to speculators who paid cash. But they could not refinance to a lower interest rate because their condo was now worth less than their mortgage balance.

They were “condo slaves.” They were indentured to their depreciated property.

Well, it’s starting to happen in Northern California. Listen to this story.

Over lunch at Monti’s Rotisserie, a friend tells me her Tale of Two Transactions.

Now a renter, she sold her townhouse in the mid-$400,000s, nearly three times what she had paid for it. Today she rents a smaller townhouse for less than $1,000 a month.

Her shelter expenses are way down. The equity from the townhouse, after paying off her credit cards, has been invested. To celebrate, she replaced her decrepit early 1990s Honda with a mature but beautifully maintained Lexus.

She is a happy camper. She believes the sale of her unit last August was the last sale in her entire complex.

But the next-to-last sale was to a speculator.

The speculator, a woman my friend knows, made a $50,000 down payment (which may have been taken from a home equity credit line on her personal residence) on another mid-$400,000s unit.

The speculator immediately found a tenant at about $1,400 a month. That’s nice, but it doesn’t cover expenses. Figure a $400,000 mortgage at 6 percent, interest only, and you’ve got a $2,000 monthly payment. Add taxes, insurance and homeowner association dues, and you’ve got another $700 a month, at least. So of that $2,700, the speculator is paying about $1,300 a month and the tenant is paying $1,400. The place will have to appreciate at nearly 4 percent a year just to cover the monthly losses.

Worse, if the unit was sold at a loss of 6 percent plus a 6 percent real estate agent’s commission, the speculator would be looking at losing her $50,000 down payment and, maybe, bringing a check to the closing to cover the remaining loss. The site, which tracks real estate prices, shows average and median sales price declines of 7 percent and 6 percent, respectively.

The speculator is between a rock and a hard place. She may need to hold the property for years before she can sell it and break even. If she does hold it, she’ll have to have enough income from other sources to cover the monthly loss.

As thousands who survived the Texas crash will be happy to affirm, monthly losses get old really fast.

Does this mean a great real estate crash is coming?

One is coming for speculators who don’t have deep pockets. That’s certain. Without staying power, they will be wiped out.

For others it’s a question of how great the collateral damage will be.

2 thoughts on “Californians Can Learn From Texas About Falling Home Values”

  1. The California market is a cyclical one and very vibrant at that. The Southern California market had its share. Late seventies–big boom–many areas more than doubled in value. Early eighties–sizable bust–homes lost a little over a quarter of worth. Late eighties–sizable boom–homes nearly doubled in value. Early nineties–big bust–homes lost close to a third of value. Late nineties and early 2000’s–gigantic boom–home values nearly tripled!! Late 2000’s–I foresee a crushing 40 percent devaluation. Texas can learn from California about busts. And Californian’s can learn about housing price fundamentals from Texans.


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