Some Sellers in Quandary as Equity Shrinks

Back in November, 1989, a couple were grateful for being able to buy a three-bedroom home in Northridge. They paid $237,000 and managed to move in with just 10% down.

An out-of-town job offer has left them in a quandary. Their real estate broker says the house would sell today for only about $215,000. By the time they subtract a sales commission and closing costs, the couple, who prefer not be named, can expect to net about $198,000. That not only wipes out their down payment, but leaves them about $12,000 in the red with their lender. The couple have to decide whether to move and whether to sell their home at a loss, try to refinance or just walk away from the mortgage.

Adding insult to injury is the fact that this is the second time in five years they have lost money in California real estate. In the mid-1980s, they also lost money on a home in Fresno.

Another owner, Peter, is facing a similar problem with his home in North Hollywood. He bought the 1,500-square-foot house in late 1989 with two business partners--who anticipated making a profit on their investment--for $285,000. Another $6,000 has been spent on repairs, not to mention more than two years’ worth of mortgage payments.

But Peter’s partners want out. The house was placed on the market five months ago for $275,000, but the sellers will be glad to get $260,000.

“We’ve had a lot of people look,” the owner said, “but no offers.”

With a little luck, he will be able to sell the house and walk away with a small portion of his down payment.

“I’ll probably have to rent for a while,” he said. “I’m going to have to change my lifestyle. It’s created a lot of stress.”

These home buyers are not alone. In the San Fernando Valley and Ventura County, homeowners have been particularly stung by prices that catapulted in the late 1980s, only to plummet in the early 1990s.

Home equity fell an unprecedented 16.6% in 1990 nationwide and about 30% in California, according to the Federal Reserve Board. While 1991 figures aren’t in yet, many homeowners are reporting continued erosion of the equity in their homes.

Before local homeowners panic, it’s worth noting that the average price for single-family detached homes in the Valley declined only about 2% in 1991, according to figures compiled by the San Fernando Valley Board of Realtors. While this compares unfavorably with a 19% increase in 1989 and a 22% increase in 1988, the decline in prices was much more acute in other parts of the state.

And while the Board of Realtors reported only a 2% drop in home prices last year, that number just doesn’t seem to jibe with the reality of the marketplace. Many homeowners aren’t even bothering to sell in this home market, so their loss of home equity doesn’t show up in the monthly sales figures.

Some homeowners are really suffering.

“In many cases, homeowners owe more on their house than what they can sell it for,” said Marcena Yoshizuka, an agent at Greystoke Realty in Northridge. “It’s very painful for the owners.

“In the beginning, there’s denial and disbelief that it’s happening. The sellers get very emotional. I’ve seen my clients start crying and go to bed with a migraine.”

One of Yoshizuka’s listings is a Northridge home bought by a couple in late 1989 for $385,000. A year ago, this couple put their home on the market for $445,000--their asking price has since been slashed to $335,000.

A nearly identical home, with the same floor plan and square footage, recently sold nearby for $287,500. Yoshizuka reports that the owners just accepted an offer slightly below the $335,000 asking price.

Meanwhile, the owners are strapped for cash but are continuing to live in their devaluated home. If and when it sells, the couple expect to move into an apartment and start saving for a down payment all over again. Any money that is left over from their sizable down payment will have to be used to bolster their family business.

The loss of home equity affects sellers like these in two ways. First, there’s the loss of value in their property. Second, many would-be move-up buyers are in the same situation and have little choice but to stay put and wait for a market rebound.

Another family has been eyeing Ventura County as a new place to live. They like some of the newer communities and the reportedly better schools for the children. The husband was even offered a job there with a $6,000-a-year raise. But his family won’t be moving anywhere soon.

They bought their Altadena home in September, 1989, for $267,000 and have spent $12,000 on improvements. Today, the family would be fortunate to sell the three-bedroom home for $255,000. They have no choice, he said, but to wait out the recession.

At some companies, such as GTE California Inc. in Thousand Oaks, employees who are asked to relocate can apply for home equity loss reimbursement.

“If it gets to the point that they are ready to move, but can’t for financial reasons, the company will help them,” said spokesman Larry Cox.

GTE doesn’t like to talk very much about such relocation expenses, but Cox said, “The company did reimburse several relocated employees last year for loss of equity in their homes.”

“People are remembering what their house was worth at the top of the market,” said Dana Potter, owner of Pinnacle Estate Properties Inc. in Northridge. “Now they can’t believe what’s happened.” Much of his time, Potter said, is spent telling sellers: “I’ve got some bad news for you.”

Despite all the bad news, Potter is still bullish about residential real estate in the San Fernando Valley and Ventura.

“The marketplace has some wild swings,” conceded Potter. But “look at your investment over a long period of time.”

While buyers who bought two years ago are losing money, most long-term homeowners have experienced a healthy boost in their home equity, Potter said.

“About every decade there’s going to be a time when properties decrease in value. . . . Timing is everything.”