I took a day of vacation from vacation (a.k.a. a day of work) when I was out in California to drive down to the Central Valley metropolis of Merced, which is by several measures (foreclosures, average price decline) the worst real estate market in America. I figured I might find good fodder for a column. Then I saw the long article about Merced’s real estate bust in Sunday’s NYT, and decided I probably shouldn’t do that column just now.
But I might still write it eventually, because the NYT didn’t focus at all on what I found most interesting about Merced–which was how unevenly distributed, and generally undisastrous-feeling, the area’s housing disaster seemed to be. (More after the break.)
I left the Bay area for Merced at 5:30 on a Tuesday morning. I was still on East Coast time, so I was awake anyway. I was groggy enough that I forgot my camera, though, which is why the only photo here is of a T-shirt that I brought home with me.
After arriving in beautiful downtown Merced (it really is a charming little downtown) at about 7, I had breakfast at Toni’s Courtyard Cafe (I think I still have a $1 off coupon for my next visit, if anybody wants it). I had been told that Toni’s was the Merced power brokers’ breakfast hangout, but it didn’t appear to be on this particular morning, so I ate my food, drank my coffee and then got back in my car and started driving around. At first I saw very few signs of distress. Among the treelined bungalow blocks of north of downtown, and the treelined cul-de-sacs of the pre-2000 subdivisions farther to the north and east, there just weren’t many obviously abandoned houses and the number of for-sale signs didn’t seem abnormally high.
Mark Zandi at Economy.com had told me that Merced County has the highest first-mortage default rate in the nation (9.16% of the mortgages in the county by dollar value were in default at the end of the second quarter). So I was beginning to suspect some kind of mass coverup–until I ventured north of Yosemite Ave. into the subdivisions built in the last few years.
There I began seeing something that looked much more like a disaster zone. In the newest developments, every inhabited cul de sac had at least a couple of obviously abandoned houses. And then there were the uninhabited cul de sacs, abandoned model homes, and sun-baked fields through which streets had been built but nothing else. Another striking thing about these newer developments was that the houses in them were much bigger than those in the rest of Merced. They all had two storeys. Pretty much everywhere else in Merced, people make do with one.
Later, when I explored other new subdivisions on the lower-rent west and south sides of town, I didn’t see many second storeys–but I did still see houses markedly bigger and nicer than those in surrounding neighborhoods. And I saw lots of for-sale signs and dead lawns.
So Merced’s real estate disaster has been focused on new subdivisions, subdivisions built to standards previously deemed too pricey for the inhabitants of one of the poorer cities in California. The same is true all over the Central Valley, I think. Elsewhere in the valley, the supposed justification for such development was the arrival of supercommuters willing to spend three hours in their cars every day getting to and from higher-paid jobs in the Bay area. That was the story on the west side of Merced County, in Los Banos. But in Merced proper there aren’t many Bay area commuters (not yet, at least), so the narrative centered around the fledgling campus of the University of California a few miles north of Merced.
Someday UC Merced will probably be a powerful economic engine. But right now it’s a lonely outpost surrounded by miles of nothing. “I think people overestimated the speed at which the university would transform the local economy,” said Alex Whalley, an economics professor at the university. When Whalley got to Merced two years ago, he told me, “I couldn’t understand why there were no houses under $350,000 in this area with few high-income jobs.”
Now the median house price is down to $221,000 (from $368,000 in 2005), and headed for the high 100Ks, Moody’s Economy.com projects. A lot of the houses in those high-end subdivisions are being rented out to UC Merced students. And some are being sold to locals. “We had priced ourselves so far out that only 11% of the people could afford a home,” said Scott Oliver, a local broker and former president of the Merced County Association of Realtors. “Now we’re seeing families with one income able to purchase houses.”
So my nagging question as I left Merced was, how bad a thing is this housing bust for the city? Whalley and others I talked to pointed out that in recent years construction and real estate had come to provide many of the best jobs in the city, where the biggest industry has long been agriculture, and that Merced is now definitely feeling the lack of those jobs. And of course the people who took out loans to buy $400,000 houses that they now can’t sell for more than $250,000 are suffering too, as are those who borrowed against the inflated value of their homes to buy boats, TVs, food, whatever. But much of that cost will end up being borne by banks and investors and taxpayers outside Merced. And in the meantime, the city has a lot of new housing stock that’s currently a boon to college students and other renters and will be much more attractive to buyers a decade or so from now when the trees planted in all the front yards have had time to grow a bit.