In California, foreclosure's next wave?
High prices and ebbing wages in Central Valley are helping push more homes into foreclosure.
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Investors and subprime borrowers took the brunt of the first and second wave of foreclosures. Now, the broader economic stagflation here imperils another batch of borrowers.
These homeowners have mortgages higher than their home's value, and the payments have gotten beyond their reach, not necessarily because interest rates have risen, but because their budgets have tightened.
Now, he's the one down and out.
Mr. Scarpitto's pool business dried up last year when banks tightened home equity lending. He went from a $300,000 salary to zero trying to keep the business afloat. With no income and a higher cost of living, he lost his modest home to foreclosure. He sold everything, except a prized boat, which he just put on craigslist.
"My guess is the majority of foreclosures that will take place are for families whose homes are underwater or whose current income is not sufficient – thanks to a burst of inflation and [stagnation] of real incomes," says Andrés Carbacho-Burgos, housing economist at Moody's Economy.com.
Over the past year, the Central Valley communities of Stockton, Merced, and Modesto have been passing around the dismal distinction of No. 1 foreclosure city in America. Scarpitto's hometown, Merced, now tops the charts with 9.3 percent of first mortgages in delinquency, according to figures from economy.com. Stockton sits at 8.6 percent and Modesto at 8.3 percent.
Meanwhile, incomes in the three cities fell by around 4 percent over the past year in terms of purchasing power, according to estimates from Mr. Carbacho-Burgos.
"That doesn't sound like much, but it can make the difference between being able to comfortably service the mortgage and significant tightening of the belt in order to make the payments – especially if you have a long commute," he says.
For Scarpitto, the high prices hastened the depletion of his savings and the day in April when he had to hand back the keys of his home. He took out a $320,000 mortgage in 2005, but a neighbor short-sold his house recently for $180,000.