Looking At The Seeds Of The Start Of California Foreclosures In California Real Estate

California foreclosures and how they got started in the Golden State is a story worthy of cinematic treatment for the breadth and scope of the issues and how they created the bust in real estate markets out in California. Starting with the Community Reinvestment Act (CRA) of 1977 and running through the enactment of Proposition 13, the anti-property tax initiative passed in 1978 by state voters, all the ingredients for an eventual crash were on the table.

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.

Through the late 1990s, values of homes had been increasing at a very stately pace and perfectly in keeping with normal supply and demand curves. Before the mid-to-late 90s, people mainly bought homes because they wanted a home to live in and not an investment instrument. Traditional lending standards were usually observed and they quite often put down 20% to get a home, which was the norm.

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.

It is only natural, then, that so many people chasing a limited supply of homes — often with inflated pre-approved home loans — would cause sellers to begin raising prices for their properties at much greater rates than used to be the case in the past. And while it looked like it could last forever, the balloon slowly began to deflate around 2006, though other parts of the country didn’t see it until 2007.

Not out in California, though. And soon enough the rate of CA foreclosures began to climb. Many experts ascribe this climb to actions that occurred way back in the mid-to-late 1970s, as a matter of fact. And now that the bubble had burst, many owners were sitting in properties that were worth much less than they paid for them and suffering from the recession as well. No wonder banks are sitting on properties they can’t even begin to recoup on, though a smart investor may be able to.

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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