subject: When Considering California Foreclosures And Their Affect On California Economic Activity [print this page] The rate of California foreclosures and how it's been affecting California presents a case study in how to not run a real estate market for long-term benefit, basically. California benefited from at least a decade of unbridled enthusiasm for its real estate that was coupled with uncontrolled speculation that masked the fact that nothing ever lasts forever, including a booming real estate market it would seem.
For around 10 years, from the mid-90s to about 2005, the Golden State had some of the most vigorous and exuberant real estate markets in the country. Prior to 1995, most people everywhere considered that a home would be something one would purchase and then live in for quite some time. As a result, home values remained fairly steady and prices rose at a very measured pace, for the most part.
And this is where the first issue with the increasing rate of CA foreclosures began to show itself; in the fact that home buyers were expecting to take profits from a home not soon after they purchased it. What this means is that they were loading more debt onto the home in the form of second mortgages and home equity lines of credit (HELOCs) as well as expecting a large profit from a sale in the future.
It wasn't uncommon during the 1995 to 2005 run-up in real estate prices in California to see buyers get into a home and get out a year or two later with a 30% return on their investment. Any person with economic savvy would have said that this wouldn't have been able to last forever, but unbridled exuberance convinced many that it could, unfortunately.
Add in the fact that many of these people were over-leveraging themselves to get into homes that were being priced increasingly higher because of the increase in the demand for such homes and a recipe for potential disaster was being created. Taking home loans at initially-low payments and interest rates and then expecting to beat the market by getting out of the home before the rates increased made a little sense, initially.
In reality, any market such as real estate which assumes that there would be a perpetual an unending increase in value is doomed for an inevitable correction when a recession finally begins, which it did in 2007. In reality, the Golden State actually began to see a bit of a softening in its real estate markets in 2005, though it took a few more years to catch on to that fact.
Once the decline in prices really began to take off after the financial markets basically collapsed in late 2008, a huge number of home owners in California found themselves sitting on properties that were worth far less than what was owed on them. It was inevitable that the rate of CA foreclosures would then begin to start climbing, sometimes steeply, all across state.
As to what the rate of CA foreclosures might mean for California, most would say that a period of decline and a shakeout accompanied by a solution to California's budget woes and structural defects in its real estate markets is necessary. With so many homes sitting in foreclosure or unsold, California is going to have to work hard to improve itself, which is something most hope it does soon.
