From Bust to Boom: Bankrupt City's Home Prices Skyrocket

Before Detroit's bankruptcy, Stockton held the ominous title of largest city in the U.S. to go bankrupt. Unlike Detroit, it was largely tied to the foreclosure crisis. Home prices have jumped 30% in the last year. What caused the turnaround?

Hudson Sangree looks at what's causing the turnaround in home values is Stockton and other San Joaquin County cities, including Tracy, Lathrop and Manteca. But first, some recent history that makes the escalating home values so noteworthy.

When home prices came crashing down in Stockton, the city became America’s foreclosure capital. Developer fees and property taxes dried up. Last year, the city of 300,000 became the largest to declare bankruptcy until Detroit filed for Chapter 9 protection in July.

Jeffrey Michael, head of the Business Forecasting Center at the University of the Pacific in Stockton, states, "The primary driver of Stockton’s bankruptcy was the housing collapse combined with a city that made a lot of risky and poor financial decisions.”

According to Business Insider (Nov. 5, 2012), "1 in every 67 homes received a foreclosure filing in Q3 2012", the highest of the 20 cities listed.

The northern San Joaquin Valley has booming Silicon Valley and the Bay Area to credit for its turnaround. It's not only workers in search of more reasonable home prices, but the real estate investors that preceded them. Key also is that "record low mortgage rates and tight inventory – are at work from Stockton to Modesto [Stanislaus County]".

At first, the buyers were professional investors scooping up cut-priced homes 10 at a time, he said. Then came some Bay Area residents who wanted to buy one or two rental homes. Now, with prices rising fast in the Bay Area, homeowners are once again driving across the Diablo Range to seek out homes they can afford, said Aaron West, an agent with PMZ Real Estate in Modesto.

According to Sangree, San Joaquin's second most populous city (after Stockton), "Tracy, a burgeoning bedroom community [of 83,000] for Bay Area 'super commuters' in the boom, experienced a nearly 40 percent gain in the median home price from August 2012 to August 2013, [Dataquest], the San Diego-based real estate information service said."

Home prices are expected to continue to rise due to low inventory and high demand. In fact, according to University of the Pacific's Michael, today's "low prices, combined with today’s ultra-low mortgage rates, make it more affordable to buy than to rent".

Until the new home builders really start building in force, there just aren’t enough homes for the amount of qualified buyers that are out there,” West said.

If a new wave of sprawl-based home building emerges to meet the growing demand for investors and super-commuters, will Stockton be setting itself up for a repeat of the circumstances that helped plunge it into bankruptcy? As Bill Fulton wrote in CNN last year (and reposted here), sprawl will place a toll on a city's municipal budgets and thus could reverse the financial progress Stockton has made since filing for bankruptcy in July of last year.

Full Story: Bay Area investors, commuters driving up San Joaquin Valley home prices

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