It’s just before 11 a.m., and a small group of men in scuffed sneakers and blue jeans have assembled on the courthouse steps in Stockton, Calif. They’re here for what’s become a familiar ritual in U.S. cities hit hard by falling house prices: the foreclosure auction. At the peak of the housing bubble, Stockton was one of the most frenzied real estate markets in the country. Now, with many of those homes in foreclosure, the bidding wars have turned surreal.
An auctioneer steps out of the courthouse, and with little fanfare starts to read out the details of several foreclosed homes. For a while there are no takers. Then he gets to a house in the nearby town of Manteca—opening price: $99,870.08. “Two more pennies,” says one bidder in a muscle shirt. Another man steps forward: “Plus a penny.” It goes on like this, the two bidders anteing up copper Lincolns for a home that, four years ago, might easily have fetched $40,000 above the asking price. “Going once, twice, third and final time. Property is sold at $99,870 and 13 cents.”
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In a country that’s always done things bigger—bigger booms, bigger bubbles, bigger busts—California stands apart. Few other places saw real estate mania reach such feverish heights. Fewer still have seen their fortunes plunge to such abject lows that the decision over whether to buy a house comes down to five cents. With the world’s eighth-largest economy brought to its knees, Maclean’s took a road trip through one of the hardest-hit parts of California: the region encircling the San Francisco Bay Area. It’s a ring of misery, where unemployment is nearing 20 per cent in some counties. In cities like Stockton, one in 60 houses are in some state of foreclosure. With shopaholic Californians hunkering down, retailers are shutting their doors, from exclusive boutiques to outlet malls in soccer mom enclaves like Elk Grove. One city, Vallejo, unable to pay its bills, has given up and declared bankruptcy. More are expected to follow. Even Silicon Valley, California’s most resilient region and its best hope to lead a recovery, is struggling.
California has always been a barometer for the rest of the country. As the Golden State goes, so goes the United States. Now everyone is waiting to see whether the California dream can be resurrected. “People are watching California closely because what happens here is seen as an indicator of what will happen elsewhere,” says Alex Whalley, an economist who teaches at the University of California-Merced. “California is the leading edge of what’s to come.”
The city of Merced sits some 200 km southeast of San Francisco, and a lifetime away from the glitter and restlessness of coastal California. But those two worlds have come together in this dusty corner of a farmer’s fleld in mid-March. The Governator is here, and he’s brought cash to upgrade a nearby freeway overpass. It’s been six years since Arnold Schwarzenegger gave up acting to take top billing in the state legislature. And as he speaks, a trucker passing by on the highway spots him and honks. “We will be pumping in as much money and pumping out as much money as we can,” he says, punching the air with his giant fist and sounding not unlike Hans and Franz from that old Saturday Night Live sketch. “We will rebuild this area and create as many infrastructure projects as possible.” That’s because, like everywhere else in this recession, “infrastructure” is a code word for jobs, and jobs are something Merced desperately needs.
The latest figures released last week are startling. In February, unemployment in Merced (pop. 80,000) hit 19.9 per cent, double the national average and well above California’s already high rate of 10.5 per cent (only Michigan has been harder hit). During the housing boom, half of all new jobs in California were tied to real estate, and Merced was no different. With the housing collapse, thousands of construction jobs have dried up. The region relies heavily on agriculture, but a three-year drought has crippled the sector—in February, Schwarzenegger declared a state of emergency because of the water shortage. Several retailers in the city, such as Linens N’ Things and Circuit City, but also local building supply stores, have closed. Quebecor World, the Montreal-based printing company that sought bankruptcy protection last year, operates a plant here that has laid off staff. Ellie Wooten, the 75-year-old mayor of Merced, recently warned it might close altogether. “Merced was a sleepy little town that nobody had ever heard of,” says Whalley, a Canadian from London, Ont., who moved to Merced at the peak of the boom to work at the university. “Now everybody knows it as the centre of the bust.”
The first thing that’s striking upon arriving is that this doesn’t look like a city in the grips of a crisis. You expect to see rows of boarded-up stores and despondent souls roaming the streets. Instead, downtown Merced is quite charming. There’s a lineup at the Starbucks on Main Street. And the streets are full of cars. But head north of Yosemite Avenue, which once served as the outer limits for the town, and the full scale of America’s woes hits you head-on.
Large signs that advertise housing developments with names like Windsong and Riverstone point instead to overgrown grassy fields. Roads have been built and light standards put in place, but most of the lots are empty. Where you’d expect to see rows of cookie-cutter homes, there are just small clusters of houses scattered awkwardly across the landscape. Sometimes work crews simply put down their hammers and walked away, leaving behind wood-frame skeletons to bleach in the sun. In the evening you can stand on the divider of a freshly paved four-lane road for 15 minutes and not see a soul. When a woman finally does come along with her dog, she says that some people have walked away from their homes and left town. She and her husband are still holding on, but “it’s scary.” They owe $135,000 more than their house is worth.
Every mania has a foundation, and in Merced it was anticipation over the new university, which opened its doors in 2005. While crews worked on the campus eight kilometres north of town, developers scrambled to fill in the cow pastures in between with homes. Many believed that overnight, Merced would be transformed into a thriving university town. The city was also touted as an emerging commuter city for the Bay Area. Speculators, mostly from San Francisco, snapped up the new homes, driving prices up 50 per cent between 2002 and 2004. But eventually, reality set in, even as new developments were being mapped out. With just 2,500 students, the university is not much larger than a high school at this point, though it’s expected to grow. What’s more, it’s a daunting three-hour drive past grain elevators to get to San Fran. Whalley recalls the mood as the bubble began to burst. “Sales started to slow down but the line was, ‘It’s only temporary, there won’t be a decline, at worst prices will just flat-line,’ ” he says. “It’s kind of what you hear in Canada right now.” At the peak in 2005 the median house price in Merced was $382,000. Today it’s just $105,500.
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