Modesto Bee - May 4, 2007

Going bust in the valley

Housing boom didn't spawn hoped for high-wage economy

By Dale Kasler and Jim Wasserman, The Sacramento Bee

onstruction worker Kenneth Tate lives in a neighborhood so new, there are houses going up on the next block, a potent symbol of the Central Valley housing boom.

But the home in Merced's Summer Creek development isn't his. Tate, 32, lives with his mom while he looks for a permanent job. With building slowing to a trickle, there's little available at the temp agencies, he said.

"Construction," Tate said, "was good to me."

Few places in America benefited from the housing boom more than the Central Valley.

It brought prosperity to this agricultural slice of California on a scale not seen in decades. Unemployment in Merced and most other counties fell below 10 percent. Restaurants and shopping centers sprang up to cater to the newly arrived population from the Bay Area and Southern California, bringing new jobs.

Now, housing starts are down 20 percent to 50 percent, depending on the market, and construction work has tapered off.

There are fears of widespread foreclosures. A January freeze devastated crops and reminded the valley that its economy still is largely agricultural. As the housing market peters out, uncertainty abounds.

"Bankruptcies are up and construction has slowed," said former Modesto Mayor Carol Whiteside, head of the Great Valley Center think tank.

Still, the boom likely changed the valley's economy forever. The new rooftops aren't going to disappear, and demographers say California's population will continue to migrate inland. Unemployment still is low by valley standards. "I certainly don't see the bottom falling out, yet," Whiteside said.

But even if the valley rides out the housing downturn, many experts lament an opportunity lost. The boom didn't spawn a permanent high-wage economy.

As Tate put it: "It's still a very poor county. It's so hard to get a job out here."

Because of low incomes, the valley is especially vulnerable to the downturn. Nearly 22 percent of all Merced home mortgages as of December were subprime loans, the highest in California and seventh-highest in the nation, according to First American LoanPerformance. The U.S. average was 15 percent.

Many of these loans are ticketed for disaster: The nonprofit Center for Responsible Lending predicted 25 percent of the subprime loans taken out in Merced during the first nine months of 2006 will result in foreclosure. Other valley cities won't be far behind, the center predicted.

For the first three months of the year, nearly 5 percent of Merced and Stockton homeowners, and 5.6 percent in Modesto, were delinquent on their mortgages, according to Equifax and Moodys.com. That's well above the U.S. average.

If any place in the valley seemed immune, it was Merced, home to the fledgling University of California campus. The boom drove Merced unemployment to an unheard-of 6.9 percent last fall, about half what it was in the mid-1990s. Since then, seasonal farm layoffs have pushed unemployment over 10 percent, more than twice the state average.

Eventually, UC Merced will spawn huge numbers of high-wage, high-tech jobs, local leaders say. For now, though, expectations are more modest.

"We aspire to be average," said Scott Galbraith, head of the county Economic Development Corp. "If we had the average California unemployment, we'd be fabulous. If we had the average California income, we'd be fabulous."

Median annual personal income in 2005 was among the lowest in the state at $26,988. The poverty rate was 18 percent, well above the U.S. average of 13.3 percent.

This, in a place that was among the hottest of boomtowns.

Housing prices rose 31 percent here in 2005, more than in any other market in California and the ninth-best in the nation, said the Office of Federal Housing Enterprise Oversight. Shopping centers and subdivisions were carved out of the farmland.

It seemed everybody wanted to buy a home in Merced, even people who didn't want to live here; at the peak, nearly one in five homes sold went to investors, according to LoanPerformance.

Hai Nguyen was one of those investors. The former San Jose resident bought a $420,000 home last year in a new development near UC Merced. But the rental market was weaker than he thought. Now living in Arizona, Nguyen has the home up for sale -- and is throwing in a $40,000 Cadillac Escalade to sweeten the pot.

"I've learned a lesson," said Nguyen, 35, who has a real estate license. "I'm stuck."

The investor market, geared toward UC Merced renters and responsible for much of the runup in prices, has slowed substantially, said Dorathe Schalk of Coldwell Banker Mortgages in Merced.

"Everyone wanted to buy homes they could rent to students in the future," she said. "And there's a lot of those homes here, but you don't build a university and then have 20,000 students in six months." About 1,300 students are enrolled at UC Merced, which opened in 2005.

Aside from 900 or so university employees, Merced hasn't developed a permanent base of high-wage jobs. Much of its job growth has been driven by population: construction, retailing, etc. With the boom over, employment in most industries has held up, but construction employment is down 5 percent from last year.

"The problem (occurs) once the growth engine stalls, which is probably going to happen," said Southern California public policy expert Joel Kotkin.

When home buyers began spilling into the county from the South Bay, community leaders figured companies such as Intel and Cisco would move operations here to follow the labor force. But a study of workers in Los Banos, at the western edge of the county, dispelled that notion. The Bay Area transplants were mostly low- and midlevel service workers seeking affordable housing, not engineers and R&D types.

Some believe that the valley could follow the same path as Riverside-San Bernardino, whose decadeslong housing boom eventually translated into good jobs. But Kotkin isn't convinced, now that Silicon Valley outsources work to the Midwest and India.

"You have to have relatively high-end job growth to sustain those high housing prices over time," he said. "I believe long-distance commuting is not a viable basis for an economy."

Experts say the valley hasn't outgrown age-old problems such as drugs, crime and low educational attainment. A study by the Fresno Workforce Investment Board found that, despite high unemployment, thousands of jobs go unfilled because of a shortage of skilled workers.

"That sounds crazy where you have 10 percent unemployment and the employers say we can't find workers," said Joseph Penbera, an economist at California State University, Fresno.

There are some reasons for hope, however.

Relatively affordable housing makes the valley a growth magnet. Its main transportation artery, Highway 99, is getting a $1billion makeover. A new task force appointed by Gov. Schwarzenegger is helping communities work more cooperatively on accessing state aid.

The housing slowdown, too, could be short-lived. But a resurgence in home building won't be a cure-all, many agree.

"We still have problems in our economy that aren't going to be solved by housing or construction or any one single thing, for that matter," said Jim Zauher, head of the Shasta County Economic Development Corp. The county's unemployment rate is 7.8 percent.

"I take that back," he said. "It could be solved by one single thing: higher-paying jobs."

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