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PART TWO: Exurban Buyers Abandon Depreciating Homes

Image has not been found. URL: /wp-content/uploads/2008/09/home.jpgIllustration by: Matt Mahurin

PART TWO in a Series, PART ONE: Mortgage Crisis Triggers Walk Aways

Since the mortgage crisis began, cities have been dealing with the problem of abandoned and vandalized homes that banks foreclosed on but cannot sell. It’s different in the exurbs.

There aren’t boarded-up windows or trash-filled yards to give away the foreclosed status of bank-owned homes in Piedmont, a housing development some 40 miles south of Washington. There’s just the quiet. On long S-shaped streets that meander throughout the development, enough houses stand empty that there’s little noise one morning but the fluttering of the “for sale” signs. Orange stickers in some windows announce the home has been winterized, with warnings not to turn on the water – an indication that no one has lived there for a while, and no one plans to anytime soon.


Illustration by: Matt Mahurin

On a cold but bright day recently, Lisa Hilgenberg, 37, a trim, cheerful woman with light brown hair and an easy smile, sat at a table in her house beside a large window that lets the sun stream through. The window overlooks a grassy common area where neighborhood children can run and play while their parents watch, and socialize, from overhanging back decks or on lawn chairs.

“It’s really nice here for the kids,” she said, pointing also to the pool, within walking distance. Hilgenberg explained that while her home value has also dropped, she’s not particularly worried. Though their broker gently teased them about it at the time, she and her husband decided against an adjustable rate mortgage and stuck with the old-fashioned, 30-year-fixed loan. With two young children to raise, they’re not planning to leave anytime soon, either. They’re not at a crisis point, like some owners.

But they can’t control what’s around them, the way real estate trends come home to roost, right in their backyard. Hilgenberg pointed to the houses that surround hers: “This is a rental, so is this one, and this one, and the one over here,” she said.

When the Hilgenberg family moved in three years ago, investors were flipping houses, and neighbors came and went, some of them renters, some investors, and some, well, who knows. Now that the market is falling, houses again sit empty for months, or turn over to a succession of renters. It hasn’t done much for neighborhood stabilization. “So far, we’ve been lucky with the renters right in our block,” Hilgenberg said. “But I’ve been hearing a lot of things that not all the renting is going so well.” That’s been the hard part: ” You buy into a neighborhood,” she said, ” and you want it to maintain its quality of life.” These are not things you expect in the exurbs.

Already, someone vandalized the tot lot down the street, tearing down the fence around it. A house nearby sat empty so long some plantings died. Renters trashed a house and skipped out on a lease. These are not things you expect in the exurbs. This is not the Hilgenberg’s dream of home ownership. “I don’t think this neighborhood has ever really settled,” she said.

To Barton Smith, an economics professor at the University of Houston, Hilgenberg exemplifies what he considers an overlooked aspect of the foreclosure crisis: The “good guy” who pays the mortgage, stays in the home, and watches his values fall by 25 percent or more. The one who lives everyday with the sometimes devastating effects of all the foreclosures, renters moving in and out, houses sitting empty and other disruptions; the people and neighborhoods left behind when others walk away.

Smith should know. He lived in Texas during the 1980s oil and real estate bust. Thousands of houses in Houston were foreclosed on and a significant percentage involved people who walked away, Smith said, though no one has exact numbers. Neighborhoods that were once 100 percent owner occupied turned 60 percent rental. In Houston, with its lack of zoning laws, it meant that homeowner associations shrank in influence as well, and some neighborhoods began to deteriorate. At least “a couple of dozen” of Houston neighborhoods have never fully recovered, to this day, Smith said.

To him, what went missing during the latest housing boom was any mention of the fact that homeownership costs more than the mortgage. There’s maintenance, taxes, and utilities – all those high ceilings mean a house costs a lot more to heat. Home ownership rates climbed to record highs of nearly 70 percent by 2004 and politicians crowed about it, without anyone stopping to question whether that was an unqualified good thing.

“We’ve oversold the notion of home ownership in this country,” said Smith. “Not everyone should own a home. It makes for good political rhetoric. But it’s nonsense.”

Like neighborhoods with foreclosures and owners stuck with negative equity, the economy faces a painful adjustment ahead.Most of the economic recovery from the bursting of the technology bubble in 2000 was overly dependent on housing, says Sherle Schwenninger, director of the Economic Growth Program at the New America Foundation, a Washington think tank. Jobs, incomes and spending grew hand-in-hand with the housing boom from 2002 to 2006. Some 70 percent of the increase in net worth during this period was tied directly to real estate appreciation.

“What this means is that for a period of time the housing sector generally is no longer going to be a driver of economic growth and consumption,” Schwenninger said. “It’s going to be a major drag. The problem about the deflation of the housing bubble is that it’s a long process.”

In some blocks in places like Sacramento, every fourth house has for sale sign on it and none of them is moving. On the ground, that means owners will struggle for some time with too many houses built and sold at inflated prices. “In some blocks in places like Sacramento, every fourth house has for sale sign on it and none of them is moving,” Schwenninger said. “Some people aren’t going to be able to hold out.”

And some will take it harder than others, he said. An older generation of homeowners has lived through bubbles and their aftermath before. An entire younger generation has not. Instead they grew up on the idea that housing prices always go up, especially in brand new exurban developments.

In 2002 the Arces bought their first house, in a development just down the road from Piedmont, for $277,000. In the few months it took to build the house, it appreciated by $60,000. Two years later, they sold it for $450,000. They figured this sort of thing could go on for quite a while. Plus, their fortunes were becoming tied up in housing in other ways. Trina became a mortgage broker, Pablo sold mortgage-related insurance, and they had a couple of years where each one brought home a six-figure income. When Piedmont came around, Trina recalled, she said, “Hey, let’s do this one more time, and make a little more money.”

It was one time too many. “I just want to move somewhere and rent really cheaply for a long, long time,” Trina said.

Marie Black, a neighbor, agrees with that view. She and her family are renting a house that sold for $680,000 and now is appraised at $510,00. The owner wants them to buy, but they’re not particularly interested, given those economics. Renting, these days, seems just fine. “We’re just taking our time,” Black said. “I don’t want to move into a house and have it be worth less than what we paid for it a few months later.”

For homeowners with no such options, the question of how they’ll handle their negative equity remains far less clear. During the housing boom, people began to view their house more as an asset, than as shelter, noted Nicholas Retsinas, director of Harvard University’s Joint Center for Housing Studies. That may influence their choices.

“People make business decisions, and business decisions don’t necessarily get tied into the psychological connection to a home,” Retsinas said. ” If it’s an asset allocation decision, it’s easier to say, ‘I’m not going to keep my home.’”

Given all this, some think it’s not wise to push off the inevitable day of reckoning with voluntary workout agreements and foreclosure “pauses,” or lower interest rates and stimulus checks. It’s a 10-year bubble, and it’s not going to be pretty as it bursts. Maybe it’s just time to get that over with. There’s plenty of blame to go around. Schwenninger ascribes the current mess to “the economy running on hyper consumer spending made possible by government policies” stretching back to the Clinton years, with the push to lower deficits and bring down long- term interest rates, continuing through the Greenspan era and its support of non-traditional mortgage products, and including the Bush administration’s stimulus package.

But looking back won’t do much for people trying to figure out what’s ahead. Or how to end the torture of just waiting.

One day last spring, the Arces threw a birthday party for their two-year-old daughter in their backyard. In the sunshine children gleefully jumped around in an inflatable moonbounce. Guests munched on salsa and chips. Barbecue smoke wafted across the patio, one happy memory, at least, to salvage from a home that’s become just a house now, and a burden too heavy to carry for much longer.

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