STOCKTON, Calif. -- Two years ago, Sharon Halligan drove from Kentucky to California lamenting that she couldn't afford a home in the high-priced state.
Her job search brought her here, and she rented. Then the 61-year-old Halligan watched prices tank as the subprime lending mess engulfed home after home.
This month, the human resources manager moved into her $260,000 two-story home in Stockton after losing seven other bids on foreclosed homes. Thirty months ago, her new house appraised for $608,000. "Isn't it amazing?" she says, standing next to her U-Haul.
Stockton, a boom-and-bust town hit early and hard by the nation's foreclosure crisis, is digging out of the financial excesses of its past. Here, two hours from the San Francisco Bay Area, more than 7,500 homes and condominiums have been lost to foreclosure since the end of 2006, says real estate researcher MDA DataQuick. The glut has cut median home prices by more than half, spurring multiple offers on foreclosed homes and record sales.
But the city's hangover is likely to be a doozy. Its experience mirrors that of other U.S. cities devastated by foreclosures and underscores that recovery from the national mortgage and credit crisis will be painful for many people but filled with opportunity for some.
In the second quarter alone, one in 25 Stockton homes received a foreclosure notice, one of the highest rates in the nation, researcher RealtyTrac says. Some blocks have been so depopulated that even the Saturday afternoon jingle of an ice cream truck is greeted with silence. The telltale signs of homeownership gone bust? Brown lawns dying in the Central Valley heat and black lockboxes dangling from front doors.
"We used to have block parties," says Stockton homeowner Anitra Deramous, 47, a hospice nurse. "We knew everybody. It used to be all homeowners. No more. The majority are renters now."
Stockton's city budget, which draws 43% of its funds from property and sales taxes, faces an 11% shortfall, necessitating "draconian" cuts, budget analyst Joe Maestretti told The Stockton Record newspaper this month. In September, the city's unemployment rate hit 12.4% vs. 8% for the same month two years earlier, when construction and finance jobs were plentiful.
The effect of so many foreclosures has seeped into other parts of the community. School enrollment is down 7% from 2006 in a district heavily affected by foreclosures and population dips. School closures are possible, says Jason Messer, acting superintendant of the Manteca Unified School District, which serves some of Stockton's population.
The Women's Center of San Joaquin County, which serves victims of domestic abuse, gets more calls of distress as bad finances and bad relationships collide, coordinator Tiffany Fields says.
And in another part of the city of 290,000, prayer groups field numerous requests to pray for those fearful of losing homes, says the Rev. Marc Maffucci of Quail Lakes Baptist Church.
"In years past, we would go a long time before we had to pray for someone getting kicked out of their house," Maffucci says.
Foreclosures driving sales
Other U.S. cities hit hard by foreclosures are seeing many of the same trends.
In Las Vegas, where RealtyTrac says foreclosure filings hit one in 75 homes in August, home prices have dropped 37% in the past two years. September home sales were torrid there, too. Almost three out of four involved foreclosed homes.
Prices continue to inch down as foreclosed homes sell fast only to be replaced by new ones, says Patty Kelley, president of the Greater Las Vegas Association of Realtors.
In Cape Coral, Fla., the police and fire departments are bracing for staff cuts of 9% and 11%, respectively, due largely to lowered property tax revenue, spokesman Michael Jackson says.
Southern California home sales in September were up 65% from the prior year. Half involved foreclosure resales, DataQuick says. In the Bay Area, the September median price for homes and condos sold was 36% less than a year ago, DataQuick says.
Throughout California, the number of mortgage default notices — the first step in the foreclosure process — fell 22.5% in the third quarter from the second, due to a change in the state's foreclosure process, DataQuick said Thursday.
In Stockton, lenders are more willing now than in past months to redo loans for those who can't make monthly payments, says Stockton Realtor Laurie Hallquist of Prudential California Realty Stockton. She says about 27% of current home sales are "short sales" in which, to avoid a costly foreclosure, lenders allow a home sale for less than what's owed and forgive the difference.
Still, DataQuick says 2,128 Stockton homes were lost to foreclosure in the third quarter, up 18% from the quarter before. Statewide, no peak is in sight for foreclosures until early next year, says the California Association of Realtors.
Many of Stockton's now-empty homes were owned and occupied by Bay Area workers. Others were bought by investors as rental properties. Buyers gobbled up homes because they were cheaper than in the Bay Area and showed strong gains. At the same time, lending terms were generous, and housing stock was ample.
During Stockton's boom years of 2003, 2004 and 2005, home builders constructed almost 8,000 homes in the city — an amount equal to 11% of its single-family-home inventory. Home prices soared 25% from the end of 2004 to the end of 2005 alone, DataQuick says. Lenders required no money down, sometimes handing out loans for 100% to 105% of the home's value, says Hal Lurtsema, president of Prudential California Realty Stockton.
When home prices soared, many owners refinanced and spent the proceeds. When prices got so high that new buyers stopped coming, they started to tank. Many owners ended up owing more than their homes were worth. "The vast majority of people in foreclosure had no money in and had money out," Lurtsema says. "The whole thing was crazy."
"This is where it went up the fastest and down the fastest," says Kevin Moran, of PMZ Real Estate. He now checks out abandoned homes for banks.
Homeowner Deramous was caught in the frenzy.
She and her husband relocated to Stockton from the Bay Area in 2000, buying a 2,400-square-foot home for $176,000. As home values soared, so did their spirits. The house appraised for $500,000 in 2006. They refinanced, took money out for a new car, vacations and other expenses. Now, they owe more than $300,000, and the house "is probably worth $176,000 again," Deramous says.
"It was foolish of us," she says. "My parents never took money out."
Deramous hopes their lender will lower their payments. It already has agreed to keep their interest rate at 7% vs. the 9% it could go to, she says. Foreclosure would wreck their credit. "We did borrow the money," she says.
Down the street, Manuel Leighton, 63, stands behind the white picket fence he built around his yard. He and his first wife bought the home in 1998. The next year, his wife of 36 years died at home of breast cancer. Leighton remarried. Near the peak of the market, the house was appraised for $465,000. He and his wife refinanced three times in almost six years, each time taking out cash to pay for a pool that never got built.
Now, Leighton laments the loss of his better judgment and that he owes $390,000 on a house worth far less. A house next door recently sold at auction for $265,000, he says. "That hurts me," he says. "I'm going to call my lender and see if they'll redo my loan. If they can't, I may end up walking."
A silver lining for some
None of this is evident to Paula Pelzl, 24, a stay-at-home mom, and biotech employee Troy Avidano, 29, of San Jose. Gripping a list of eight foreclosed homes that they checked out online, the couple recently scanned the outside of a foreclosed home in Stockton's Weston Ranch subdivision, a favorite with Bay Area commuters.
They hope to buy their first home for less than $200,000. Despite drops in Bay Area home prices, a similar property there would still be about $600,000, they say.
"It's a good time to buy. We got lucky," Pelzl says.
Mark Pekarek, 27, didn't get lucky the first time around, but he hopes to on the second.
The civil engineer bought a house in Modesto, 25 miles south of Stockton. He bought with a friend, who was also an engineer, for $425,000. They paid no money down and got a five-year, interest-only loan. Their plan was to live in the house for two years, sell it and make a little profit. The only problem? They bought at the top of the market, and the home is now worth about $225,000.
Convinced that real estate in California's Central Valley will once again be a good investment, Pekarek and his fiancée recently bought a foreclosed house in Stockton for $170,000 from lending giant Wachovia. Pekarek hopes to negotiate with a different bank to unload his Modesto home without going into foreclosure, or keep it as a rental property.
He's also considering buying another foreclosed property in the area with his cousin. To finance it, he knows they'll need at least 20% down, given tightened standards by lenders. To get that, he may tap his 401(k).
"You win some. You lose some. I just happened to buy at the top of the market," he says. "Now I have to buy back in at the bottom."