When considering California foreclosures and how they affect California, consider how many different things had to have gone wrong for the Golden State to have ended up with the foreclosure issues it now is facing. Rampant speculation and unbridled exuberance masked the fact that the good times could not possibly have lasted forever, though many thought they would.
For around a decade, from 1995 to 2005, California experienced some of the hottest real estate market activity in the country. Before 1995, it was a fact that home prices most anywhere usually rose at a very steady and controllable pace. Indeed, homes were looked at as places where people tended to live and not just invest in and then take profits and move on from after a sale occurred soon after a purchase.
However, a new phenomenon began to emerge which eventually led to an increase in the rate of California foreclosures out in California. Many home buyers began to expect that they’d be able to pull large profits from a home not soon after its purchase. As a result, many began to over-leverage themselves by taking on equity lines of credit and second mortgages and the like.
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.
Combine much of this over-exuberance for California real estate with the fact that many people were loading themselves up with much more home than they should have bought and it was easy to see that real problems might develop over time. A lot of people bought homes with initially-low payments on the expectation that they’d be out of those homes with a nice profit before those payments increased.
But that kind of formula (buying more home than could be afforded and taking profits before the monthly payments went up steeply) can only work as long as home prices continue to climb. It was inevitable that a recession would hit and one did in 2007, though California began to experience a softening of the real estate market in late 2005. Many people chose to ignore it, unfortunately.
Once Golden State property values started on a downward swing, that drop was only intensified by the fact that financial markets themselves tanked in late 2008. At that point, California foreclosures really began to increase as many home owners found themselves in even more dire fiscal straits than could have been foreseen at the time many of these homes were purchased, shortly before the recession.
What this rate of California foreclosures means for the Golden State is simple; a steep drop in home ownership, which means a commensurate steep drop in revenues brought in by municipalities and the state from owners of those homes (banks pay minimal property tax according to valuation of the property) and no end in sight, at present. Perhaps California can patch itself up soon, which is something many sincerely hope.