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 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.
