In today’s Wall Street Journal story about the deflation of the housing bubble, “Housing Pain Gauge: Nearly 1 in 6 Owners ‘Under Water’,” consider this passage:
Stephanie and Jason Kirschenman thought they were being prudent when they agreed in late 2004 to buy a new four-bedroom home in Lodi, Calif., for $458,000. They put a substantial 20% down and chose a loan with a fixed interest rate for the first 10 years. Two years later, they took out a second mortgage to pay off some bills.
At the time, the home was appraised for about $550,000. But a mortgage broker recently estimated its value at well below the $380,000 the family owes on it, says Ms. Kirschenman. “We were quite shocked,” she says.
The Kirschenmans, who both work for a company that makes trailer hitches, thought about sending the keys to the lender. But their financial planner, Christopher Olsen, helped persuade them to stick with the house, noting that they could still afford the payments.
Let’s unpack it a bit, to see why a) the Kirshenmans — the only home buyers cited in this story — deserve little sympathy; and b) why the Journal’s reporter missed some key points.
Lodi, California, is out in the state’s Central Valley, on the outskirts of both the San Francisco Bay Area and Sacramento, the state capital. It had an enormous housing boom — as did many nearby communities — from the late 1990s until a year or two ago, fueled in part by the insane home-price inflation in the Bay Area and Sacramento. Speculators and their enablers (lenders and home builders, chiefly) went wild in the Central Valley during this period, financing and building tract after tract of new homes and pushing up prices of existing ones at rates never before imagined, much less experienced.
Look at this chart, from the Lodi Realtors group:
These are average prices. Median would be better, but the chart still tells the story. In 1998, the average house sold for under $150,000. By 2003 the average price had moved to around $250,000. Things went wild from there. In 2004, when the Kirshenmans bought their big new house, feeling prudent, no doubt, because they put down 20 percent (borrowing at least $370,000 if you consider the various fees that lenders charge), the average sale price had gone over $300,000. Prices peaked in the next several years at $450,000 — triple the average selling price less than a decade earlier.
We learn from the Journal article that the Kirshenmans took out a second mortgage in 2006, near the market’s top, to “pay off some bills” — how much, we don’t learn, but considering that they now say they owe $380,000 they probably borrowed in the range of $10,000 to $15,000. And now, given the plummeting prices in the Central Valley, something that was utterly predictable, they owe more than the place is worth.
Well, cry me a river.
These people, I grant, were more responsible than many of their neighbors. The pure speculation that went on in the Central Valley was nothing short of epic. But they bet on something that could not be sustained, and if they didn’t know that they weren’t paying attention.
The Journal doesn’t even have that excuse. There’s almost no context in this anecdote. Lodi and its surroundings were one of California’s bubble epicenters, are representative only of speculative excess. Isn’t that relevant?
By the way, if you want to see some valuable coverage of the Sacramento area real-estate market, check out Sacramento Land(ing), a blog that has been on this story since early 2006.