Town takes a downturn

MERCED, CALIF —  .

It wasn’t long ago that Andy Krotik was selling houses to out-of-town investors who would sometimes buy two at a time. ¶ Now, Krotik spends his days warily entering abandoned houses, checking for angry holdouts or startled squatters. He wants to make sure the properties are empty and secure so he can sell them for the banks that have repossessed them. ¶ “We’re experiencing a tsunami of bank-owned properties,” said Krotik, who has been selling real estate in this Central Valley town since 1989. ¶ Few places in California flew as high in the real estate boom and crashed as hard as Merced. ¶ Three years ago, home values were rising at 30% a year or better, making it one of the hottest markets in the state. Now it has one of California’s highest foreclosure rates. ¶ In the hardest-hit part of town, there were 112 foreclosures in the first three months of 2008, up from 19 in the same period a year earlier, according to DataQuick Information Systems.

Along with the pain felt by individuals losing their homes, foreclosures have reversed this community’s fortunes.

Houses vacated by their insolvent owners have become damaged eyesores on many blocks. Businesses such as plant nurseries and paint stores have seen sales plummet as construction and remodeling work has stalled. The local association of real estate agents has seen its membership drop to 650 from more than 1,000 two years ago.

“It definitely has affected every business around,” said Dan Perry, a salesman at Kerr Rug, who added that the store’s business was off about 30% from two years ago.

Merced officials say they’ll need to cut spending by 5%, forcing them to leave 20 open positions vacant.

“The whole foreclosure problem and the economy is our major concern now,” city spokesman Mike Conway said. “Some people are torn between spending their money driving to work in Silicon Valley or on the house payment.”

Faced with that choice, he said, the job will come first. “If they don’t have the job, they won’t be able to make the house payment anyway.”

Mark Torrence, owner of Merced Pools, had 15 employees a couple of years ago. The company had plenty of work, installing three or four pools a month. Not only was there a steady stream of new houses, but many existing homeowners also took advantage of their rising equity to install pools.

Today, the business has just Torrence and two other workers. And forget about building pools; these days, all they do is clean and service them.

“There’s just no equity. Most houses are upside down,” he said, referring to homes worth less than their mortgages. “It’s over for the industry. I’m done building.”

Housing developers have also stopped building, a reality that Harwinder Sharma confronts every day.

When he traded up to a brand-new house in 2006, Sharma expected to be living in a beautiful new neighborhood, surrounded by other homes with landscaped front yards like the ones depicted in the diorama at the sales office. Instead, he now lives in a kind of modern-day ghost town.

The developer never finished building the neighborhood as demand for new homes vaporized and would-be buyers canceled their contracts. So Sharma’s house is ringed by vacant lots and empty houses, and the neighborhood is overrun by dry weeds and brush.

There is a shell of a two-story house across the street. It’s become a party house for local teenagers, who occasionally go in with boxes of beer.

“When I signed up they said there were going to be new parks, a school,” Sharma said.

Now, Sharma doesn’t expect any of those features of a normal community to materialize soon. He’s enrolled his two children in a private school and waits for the day the housing market rebounds.

Across the empty lots, he can see the next abandoned development, its four model homes locked and surrounded by chain-link fencing.

There are three consecutive signs leading to the shuttered sales office, each with a single buzz word promoting the neighborhood that never came to be: “Responsible,” says the first, followed by “Vibrant,” and lastly, “Community.”

The decision to locate the newest University of California campus in Merced gave the city an extra boost during the housing boom. But now, with values falling, the benefits from the university to the housing market will probably take years to materialize.

That’s actually good for many locals, said Loren Gonella, a Merced real estate broker. At the height of the boom, Gonella estimated, only 11% of Merced residents could afford to buy a home.

“Now it’s 60% to 65%,” he said. “That’s the reason we’ve put over 300 homes in escrow this year.”

Gonella said foreclosures would keep prices down at least through 2009, which would enable first-time home buyers to slowly purchase the excess inventory of houses.

That would be a welcome development for James Barnes, 29, who works as the new-student orientation coordinator at UC Merced.

A dedicated runner, Barnes would pass houses under construction every morning during his first few months in town in 2006, when prices were still rising.

“I’d hear the first nails being pounded in the morning,” as carpenters began their work, he said.

At the time, Barnes wondered whether he would ever be able to afford one of those homes. With prices of many new houses now below $200,000, that’s no longer a worry. He says he’ll soon decide whether to buy and that price would be a secondary consideration.

Buying a house, Barnes said, should be “a commitment to your community. If I buy a house, I know I will be in it at least five years.”

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peter.hong@latimes.com