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Underwater’ Homeowners Try To Catch A Breath

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Aired 11/2/10

I moved to San Diego in 1998 and bought a house in Normal Heights. I sold that house this year for a profit of $220,000, which I invested into a new house that is 800 square feet bigger. I was lucky. Greg LaMarca was not.

— I moved to San Diego in 1998 and bought a house in Normal Heights. I sold that house this year for a profit of $220,000, which I invested into a new house that is 800 square feet bigger. I was lucky. Greg LaMarca was not.

Greg LaMarca hopes a "short sale" of his Carlsbad home will relieve the burden the house has become for him.
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Above: Greg LaMarca hopes a "short sale" of his Carlsbad home will relieve the burden the house has become for him.

Greg is a small-business man; a real estate developer, in fact, who bought a home in Carlsbad in 2005. He sat with me outside Peet's Coffee in La Jolla a couple of weeks ago and told me his house is 3,700 square feet with four-and-a-half bathrooms. He bought the place for $1.1 million, and invested $150,000 in improvements. Today, the house is worth around $800,000.

Greg owes more on his house than it’s worth. In other words, Greg is underwater, as are about one in four homeowners in San Diego. Meanwhile he and his wife have hit hard times.

"And so we basically ran out of money, is what it came down to,” said LaMarca. “We're both entrepreneurs, we don't have paychecks coming in. So we had a finite amount of money to live off of and rebuild our businesses. We've been unable to really do that."

The volatility of the San Diego real-estate market makes some people winners and some losers.

Matt Battiata is the CEO of Battiata Real Estate Group. He thinks one in four is too low – as many as 40 percent of San Diego homeowners may owe more on their homes than they’re worth.

"If you look at the chart of the market over the last 50 years, it's a roller coaster,” he said. “There are peaks and valleys. We had a peak in 1980. A bottom in '84. Peak in '90. Bottom in '96. A peak in 2005. The point of the story being there's a huge number of people in San Diego county who owe at the top of that last peak."

Matt is representing Greg LaMarca in a short sale, where he’s trying to convince LaMarca’s two lenders to take a loss and approve a short sale of his Carlsbad house.

We'll get back to Greg in a minute. But first, let's meet Alejandro Estrella, a mailman from Riverside. And if you think San Diego has it bad, half of all homeowners in Riverside are believed to be underwater. Estrella's income and home expense are much less than LaMarca's. Aside from that, he tells the same story.

He bought a small, detached home in Riverside for $298,000 in 2006. Now he says it's worth less than half that. His income has also gone south as reduced postal volumes mean he has lost the overtime pay he'd come to depend on.

"My brother's having the same problem,” said Estrella. “My niece lost her house. And my sister, they tell her, ‘We'll give you this program. Just come up with $10,000 and we'll help you.’ If they had $10,000 they wouldn't need help or anything!"

Both LaMarca and Estrella bought at the peak of the home market. For Estrella, that was painful but not disastrous. A group called Hope Now hooked him up with a federal loan modification program, which he says reduced his loan obligation by $50,000. Estrella calls it a godsend.

But LaMarca is still hoping to get his short sale approved. I asked LaMarca whether he should have known better than to the buy at the peak. He said nobody anticipated the catastrophic downturn that occurred in the housing market. He said there's blame to go around, and he most of it should go to the banks that made a bundle on easy credit.

"When you're giving 100 percent financing and you’re not taking any responsibility for that money, because all you got to do is package it up and resell it, then the consumer will ultimately always take that. They will always take free money, because that's what was given out,” said La Marca.

I asked Battiata if buyers should be allowed to get out of their mortgage obligations. He answered by giving the example of a young couple who bought a condo in 2005 for $335,000. Now it's only worth $150,000.

"You know, what do you expect this couple to do?” said Battiata. “They're looking at several years at least, before they can ever sell that property and not be a short sale. They're in a one-bedroom condo and they're now in a complex that's got all sorts of crime problems and issues. Would anyone in that situation in that situation say, I'm just going to stay here for another 10 years?"

You can be the judge of that.

I wonder… What if I had moved to San Diego seven years later, in 2005. Would I have still bought a house and ended up underwater? Or would I have said, ‘These prices are crazy!’... and waited for the bubble to burst? Back then lenders were offering free money, and lots of people thought if they didn't buy a house now, they'd never be able to afford one. For a lot of us, it was an irresistible force.

Comments

Avatar for user 'hopeheadsd'

hopeheadsd | November 2, 2010 at 7:03 a.m. ― 3 years, 5 months ago

Nice blog piece Tom. I moved in here at the end of 2004 right when the madness was hitting peak. I can tell you that the latter of what you said, "These prices are crazy!" was what I said weekend after weekend looking at the shiny new places downtown and homes around town.

2 words sum up the theme and feeling I got from the majority of RE "professionals" during that 05-07 period: Cocky and naive. 500k was not enough to buy anything decent. Thats right...a half million dollars for a starter home was the norm! The looks I would get from agents and friends alike about NOT buying was laughable and disturbing at the same time. The madness was ingrained into everyones psyche that SD real estate is untouchable.

Well fast forward to now. Those terrible sales professionals are gone as are my friends that bought in way over their heads.

I think you summed it up when you say "...lenders were offering free money." What no one was offering was common sense....which is also free, but who wants to hear that? A dollar is a dollar no matter how many ways you try to spin it.

What is happening right now is terrible as well the lives that are being changed as a result of the economy normalizing. My thoughts and prayers to those folks that are just trying to make ends meet.

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Avatar for user 'gaiamoth'

gaiamoth | November 2, 2010 at 7:16 a.m. ― 3 years, 5 months ago

greg invested $1.1 mill into a home when he and his wife are entrepreneurs, a job that is risky. rather than putting money into savings they dumped an additional 150k into the house. sounds like they like to take a lot of risks.

he is wrong when he says no one predicted the catastrophic housing downturn. analysts had been warning the bubble would burst for a few years. if he chose to ignore that (and take more risk)... thats his choice.

i hope his short sale goes through. but if it doesn't, greag is not the kind of homeowner that taxpayers should be bailing out. his own actions are the biggest reason he is in his tough spot.

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Avatar for user 'Tom Fudge'

Tom Fudge, KPBS Staff | November 2, 2010 at 9:46 a.m. ― 3 years, 5 months ago

The home price insanity of the mid-2000's is fresh in my mind. And I recall having many conversations about it as the host of These Days. And I remember lots of "experts" predicting that the cost of housing would stop rising, but it wasn't going to crash. They said it would simply "plateau." I heard that word more than once. That said, I must give a shout out to a financial planner named Gabe Wisdom (a former radio guy, by the way) who appeared on one of my shows and stubbornly argued that what goes up like that WILL come down. Today, when you consider the history that Matt Battiata describes in my story, you do wonder why we didn't all realize that.

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Avatar for user 'Ucitymom'

Ucitymom | November 2, 2010 at 10:59 a.m. ― 3 years, 5 months ago

We bought our home in 1998 and I do consider myself more lucky than smart about real estate. However it is not true that no one saw the real estate bust coming. In 2004 I mentioned to my Dad (who at the time was 70 years old) how much our house was worth and how much equity we had. He said "A house is worth what someone else is willing to pay for it on the very day you have to sell it and not a penny more." He then said that he thought all this craziness was going to end in ruin for many people. I took his words to heart and stopped feeling rich with all that "funny money". There were other people who like my Dad realized that there is no easy money. I don't like the idea of bailing out the banks and as someone who did not go crazy with my "home equity" helping out people who should have known better is a bit distasteful. That said, I think the banks need to encouraged (forced) to accept short sales as a way to avoid foreclosures and to more quickly get real estate prices back in line with what people are willing to pay.

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Avatar for user 'MamaBear'

MamaBear | November 2, 2010 at 4:27 p.m. ― 3 years, 5 months ago

We bought our house before this mess too, and I agree with Ucitymom that I am more lucky than smart. HOWEVER...

When we bought our house in 2002, prices were already starting to rise. I remember doing all sorts of math and planning. What do we do if the market tanks? How much do we need to have saved? Do we plan to move in the next 10 years (if the market falls apart, we would not be able to)? What if I lose my job? We were childless at the time, so we bought a house that could accommodate a growing family -- in case the market tanked and we couldn't move before kids. We never took money out of our house, since it didn't feel like "real" money to us. We figured that if we wanted to move, we'd need the money as a down payment anyway.

That said... I also agree with gaiamoth. I have a lot of empathy for the people who suffered in this mess. BUT I'm not sure Greg is one of them. Why would someone with an unstable income spend a huge amount of money on a house and then sink $150,000 into it? Couldn't he have cut back on his budget just a bit and bought a 2,500 square foot house. That's huge by my standards! 3,700 feet? That's ostentatious, and I have a hard time feeling sorry for someone who didn't live within his means. I'm a little resentful that all of us will end up paying for his mistake if a short sale is approved (the cost is always passed on to consumers). But if he's not bailed out, the housing market will be even more unstable and we'll pay for it that way too. All because a guy bought a mansion that he couldn't afford.

Alejandro is the kind of person I can have empathy for. He stretched to buy a modest home. How could he have known the market would collapse? Sure... I could argue that he stretched beyond his means too. But he was stretching for the basics. It's hardly the same.

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Avatar for user 'MrForeclosure'

MrForeclosure | November 3, 2010 at 7:36 a.m. ― 3 years, 5 months ago

Definitely an "irresistible force," which now has homeowners not just in San Diego, but nationwide regretting their decisions to buy when they did -- just take a look at http://shortsales.net. The sheer number of short sale listings grows everyday! Sure, it's not ideal to sell your home and move, but homeowners in distress need to be realistic -- it certainly beats foreclosure. The good news is it seems more and more homeowners are opting for short sales and more and more lenders are approving them to keep the market moving.

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Avatar for user 'SDSFNdotCOM'

SDSFNdotCOM | November 3, 2010 at 9:19 a.m. ― 3 years, 5 months ago

A lot of people focus on the pain, but re-read the first paragraph folks. The pain of downward spiralling home prices has created opportunities for move-up buyers like Tom. Sure, if you sell now, you are selling at fire sale prices, but can move up and buy at fire sale prices, so the $$ difference is less now than it would have been 5 years ago for the same move AND rates are at near historic lows making it even more affordable to make the move up.

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Avatar for user 'SDSFNdotCOM'

SDSFNdotCOM | November 3, 2010 at 10:09 a.m. ― 3 years, 5 months ago

Here's another bright side to today's market:
Folks short selling today who execute a plan to rebuild their credit are putting themsleves in position to capitalize on the low prices of this distressed market. According to Fannie Mae home loan qualification guidelines under normal circumstances, people with short sales on their credit report can qualify in 2 years but Foreclosures require 7 years waiting time to qualify. So if people are experiencing hardship with their payments, are underwater, and want to be homeowners with equity,the short sale is an option that makes good sense. I recommend getting professional input and making a plan sooner rahter than later.

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Avatar for user 'srs'

srs | November 5, 2010 at 3:45 p.m. ― 3 years, 5 months ago

Interesting post but I disagree vehemntly that "no one predicted the crash". Peter Schiff did...Nouriel Roubini did...the hedge fund managers who made billions shorting financial stocks did...countless housing blogs did. The math, for example comparing incomes to housing prices, never made sense. The historical charts, were well, off the chart. Anyone acting rationally would not buy at a peak, overimprove their house, than wonder: "Gee, what happened?".

Nothing is for free...the statement: "Hey, since the banks were giving free money of course consumers would take it" is only true when said consumer is an idiot or not doing their homework (i.e. looking at future income, looking at debt ratios to that income, not factoring in appreciation because housing prices can drop, etc., etc., etc.) Sorry, but, no one held a gun to their head to sign the contracts. While the banks should get hammered for the unscrupulous aspects of their role in this mess, I wish consumers and politicians for once will stop the nonsense of "No one could have predicted this". Wrong, people predicted this, just like the stock market bubble was predicted, but they were ignored.

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Avatar for user 'Tom Fudge'

Tom Fudge, KPBS Staff | November 9, 2010 at 9:48 a.m. ― 3 years, 5 months ago

I think this discussion is a good reason to revisit a 2008 radio documentary call The Giant Pool of Money, which aired on This American Life. Here's the URL for the transcript. http://tinyurl.com/2eyvtx8 It's an eye-opener.

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