The roots of the problem of California foreclosures in California has a long and thoroughly undistinguished history that goes back to the mid-70s. With the passage by the U. S. Congress of the Community Reinvestment Act of 1977 (more familiarly known as the CRA) and the anti-property tax initiative known as Proposition 13 by state voters in 1978, all the ingredients for an eventual real estate crash in California were there.
What most don’t realize is that the CRA wasn’t originally written to do what it was made to do at some point in the mid-1990s. Misapplied as it was, home loan lenders were soon being encouraged to extend many more loans than they really should have underwritten. Proposition 13 also did its part by keeping the costs of home ownership in California lower than they probably should have been.
Some economics experts believe that a combination of easy lending (brought on by the CRA in many cases, as it was misapplied by federal housing regulatory agencies and the Congress) and the possibly artificially-low property tax rates created a long and unrealistic demand curve for a supply that was insufficient to meet that demand (homes and properties of all types). House prices went up, sometimes steeply, for far longer than was the norm.
Up until the mid to late-90s, home prices had generally been rising at a slow and generally very reasonable rate, in adjusted dollars. Houses were looked at as “homes” and many people held onto them for very long times, often putting down 20% of the home’s appraised or agreed-upon price as an equity payment. They were very rarely looked at as investment instruments.
That changed as the cost of money (in terms of the interest rates banks and lenders were charging to get it) went down, steeply in many instances. Easier money and even easier lending and underwriting standards — encouraged by federal regulators in accordance with what they believed the CRA was demanding — soon saw people getting into homes with little or no money down and often with home loans that were extremely liberal in terms.
Naturally enough, all these buyers were looking for homes and they were qualified for homes loans for far higher amounts they’d normally have been able to obtain. Sellers were listing their homes for ever higher prices and it seemed like the cycle would go on forever. Of course, nothing lasts forever and sooner or later it was all going to have to come to an end. Sometime in 2006, it finally did, though much of the country missed it at first.
California, however, began to feel that deflation sooner, and because of it the rate of CA foreclosures began to climb as owners found themselves sitting on homes they’d paid much too much for and with no prospect of unloading them. Many experts trace this phenomenon back to the 1970s, though that’s cold comfort to people and banks sitting on properties they can’t hope to sell, though a smart and savvy investor could possibly do something in this market.
For many people, not only in California but around the country, the fact of CA foreclosures and their rise over the last several years should give them occasion to fervently hope for an economic recovery. With many real estate markets having lost up to 50% off the median price of a home in those markets, any news indicating that these markets have finally begun to stabilize will come as welcome news for most, and not soon enough.
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