Locked out?

Realtor Eric Christensen scrolls down the list of houses for sale in Chico, looking for an example that will explain today’s wacky home-buying market.

The online Multiple Listing Service, the searchable database of property listings once available only to real-estate agents, was opened to the general public in the mid-1990s. It pops up houses all day, and the most aggressive agents keep close watch, looking for hot properties to show their clients. In Chico these days, almost every property is hot.

There are a handful of houses for sale for less than $200,000, but they’re either small or in high-traffic or otherwise less-than-fantastic neighborhoods. It isn’t until Christensen’s mouse hits upon the $215,000 level that he sees a listing that looks promising.

“This will be a feeding frenzy right here,” he predicts. “It’ll be gone in 20 minutes. This will probably generate four offers by the end of the day.” To make matters more interesting, he adds, “That house five years ago would have been $103,000.”

Christensen, an agent with Coldwell Banker DuFour Realty, has seen asking prices go up 5 percent in the last two or three months alone. But the historically high price tags don’t seem to be scaring buyers away. He has 17 clients in escrow right now, compared to the typical three or four.

“For first-time buyers, a nice, three-bedroom, two-bath home in a nice neighborhood is about $200,000 now,” Christensen said. “What is absolutely amazing to me is that entry-level people can afford this much.”

Last month, the Office of Federal Housing Oversight released a report that ranked the Chico-Paradise area No. 2 nationwide in terms of how much house prices have gone up in the past year. The figure is 15.42 percent. During the last five years, prices here rose 52.63 percent.

The report lent credence to what was being heard anecdotally all over Chico: It’s insane. A listing can generate multiple offers within hours—often for well above the seller’s initial asking price. Housing developments are sold out before construction even starts. Families are moving to Orland, Paradise, Oroville and other “bedroom communities” nearly a half-hour away rather than pay Chico prices. People who already own a home are choosing to add to it instead of trading up.

According to data collected by the Chico Association of Realtors, the average selling price of the 1,120 homes sold in the Chico area in 2002 was $223,370. And just when house-watchers thought it couldn’t get any hotter, prices shot up again.

“The end of February, it rose with a vengeance,” said Christensen, who no longer tells buyers to sleep on it. So far in 2003, 120 homes have sold, with an average price of $230,506. The 168 houses that are currently pending escrow were listed at an average of $262,285. Compare all this to 1996, when the average price of a house in the Chico area was $132,217. (For statistical purposes, the Chico area also includes Durham, Forest Ranch and Cohasset.)

Dennis McLaughlin, the housing officer for the city of Chico, figures that by now everyone’s realized house prices are through the roof in comparison to past years. The question is, what are they doing about it—and should the city revise its role in helping those who are effectively “locked out.”

To be able even to ponder the decision of buying a house is indicative of a trend: Houses are within reach—albeit barely—for more people than ever. That’s because mortgage rates are the lowest they’ve been since the 1960s, which translates to lower payments and a lower overall payoff on a house. People can afford to buy pricier houses, and some of those who were on the cusp of qualifying are now able to do so. And lenders have loosened up on loan requirements, opening the market to traditionally marginalized buyers such as minorities and people with below-average incomes or credit histories.

With interest rates as low as 5 percent, compared to up to 12 in the 1980s, McLaughlin said, “it’s a big deal and it’s allowed people to keep up.” Each percentage point increase translates to about $10,000 in house value, McLaughlin said.

The conventional wisdom used to be that buyers could afford a house with a price tag roughly equal to two years’ income. “With interest rates the way they are today, and if you can afford a 5 percent down payment, you’re really looking at three and one-half times the income in today’s market,” McLaughlin said.

“To buy the average home in Chico, you need about $50,000 a year,” he said. That’s about equal to the average income for a family in Chico: Picture one person making $25 an hour or two people earning $12.50 each.

“That’s moving away a bit from the first-time homebuyer,” McLaughlin said. “The stereotypical imagery of you get married and you buy your first house just doesn’t work anymore. The level at which you can buy a home has pretty much moved up a notch.”

The trouble is, while $200,000 could have bought a very nice abode four or five years ago, today that’s the low end of what’s available price wise. And one conventional “out” for the first-time buyer is no longer available. “The two-bedroom home in South Chico is not $85,000 anymore. It’s $145,000, if not more,” McLaughlin said. Even condos routinely go for more than $100,000.

Mark and Desiree Gonzalez feel like they slipped in just in time: They locked in a price of $139,000 a year before their house was built. By the time they moved in, in March 2002, their house’s value had gone way up, and just last week one of their neighboring houses sold for $210,000.

“If we had waited any longer, we probably wouldn’t have been able to do it,” Desiree said. “We had a whole year to basically sell everything we owned, put everything else in storage and get two jobs.” (Mark is a university locksmith, and Desiree works in the development office for Chico State’s Agriculture Department.) The family, which includes 8-year-old Ivy and 2-month-old Harley, went to live with her parents in Forest Ranch so they could save the $20,000 down payment. To save more money, Mark put in the lawn and dug the sprinkler system himself.

They had been content to rent for years at $575 a month. But when Chico rents went up and they were faced with paying more than $900 for an old house, Desiree said, “we got shocked out of our comfort zone.”

The Gonzalezes consider themselves lucky to have gotten a mortgage loan. “They market was so hot, they didn’t have time for us,” Mark said. “People used to shop for a home. Now they go and beg for a home.”

For those earning below the median income, the city can step in with its mortgage subsidy program that provides low-interest loans. But there have been so few houses in the allowable price range that Chico has approved only two mortgage subsidies in the past year, and one of those was for a condo. Four years ago, when the city awarded about 30 subsidies a year, the income ceiling was $36,500 for a family of three. Now, that same family can make as much as $40,000 and still qualify.

“Our program has really suffered in this market,” McLaughlin said. Even if a buyer can qualify for the city subsidy, he said, the seller will often reject the offer in favor of one with traditional financing.

A city committee this month released a draft version of the proposed revision to the Housing Element of Chico’s General Plan. McLaughlin said that, besides raising the income limit for the mortgage subsidy program, the city could explore such measures as assisting developers in financing homes for moderate income, as well as low-income, residents. “The carrot is the money,” he said. The question is whether the City Council “is ready to wield the stick.” That could include changing zoning in such a way that developers are forced to build a wider range of housing units.

More-affordable homes aren’t going to spring up on their own in an industry that is inherently market driven. House prices, which last rose sharply in 1989 and 1990, were flat through most of the 1990s. The economy was pretty good, earnings were going up, inflation was low and consumers felt confident.

Around 1999, McLaughlin observed, “a lot of demand occurred and housing prices started going up, but people realized they could still afford them.” Around the same time, Chico rents rose, providing further incentive for those who were on the fence and could afford to buy.

House sales generally pick up each January, as buyers regroup after the holidays—sometimes flush with a gift from Mom and Dad. But in 2000, January was especially busy. “It kind of snuck up on everybody,” Christensen said. At the same time, several housing developments of the 1990s finished up and sold out, dropping the inventory of new homes. “When 2000 hit, there were hardly any new homes to buy, so the market went to existing.”

It looks like classic supply-and-demand: the housing crunch developers have been warning Chicoans about for years as they clamored for a release of environmental constraints on land here.

Greg Webb builds “middle market” houses costing $270,000 to $320,000. “Almost all are second-time home buyers coming out of an equity situation,” he said, estimating these families earn between $60,000 and $70,000 a year.

The Webb family has one of the last remaining stockpiles of developable land in Chico, having bought in the 1980s.

In the 1990s, Webb said, “you started seeing the end in sight.” Federal agencies stepped in with concerns about wildlife, and it started taking longer to get building permits. Small-time builders were squeezed out. Land prices went up, as did developers’ frustration level—especially since they could see acres and acres of land in Southeast Chico sitting idle in order to protect fairy shrimp and Butte County meadowfoam plants.

“I just know it’s going to come to a screeching halt in a couple of years,” Webb said, predicting rising prices like those seen in the college town of Davis several years ago.

“If I could have my wish, I would have Fish & Wildlife and the EPA go away,” he said. “They’re forcing urban sprawl. We need to open up more land. It needs to be simpler. [But] nothing’s going to happen. It’s going to be buried in politics. A lot of people don’t feel the need because they got theirs.”

Webb believes the oft-repeated anecdote of people coming from the big city to gobble up houses in Chico is overstated. Even so, about one-third of his buyers are from out of town.

Christensen cites a survey in which 80 percent of real-estate agents responding said that out-of-town buyers account for 10 percent or less of their sales. “That just blew me away, because I thought our Chico market was being blown away by out-of-the-area people.”

Tony Symmes of Aspire Homes is the only developer in Chico building new houses that sell for less than $225,000.

“He’s building the true entry-level home,” McLaughlin said. “And they’re selling as fast as they can build them.”

Many of Symmes’ houses were quickly snapped up by investors, including four real-estate agents, according to Butte County property records. One person who already owns 13 properties in Chico got five of the houses, a couple who has 12 houses in town got three, another couple has five and a Paradise family business owns another five.

There are several for-rent signs in Symmes’ two most recent developments.

The Gonzalezes live in a Symmes home and can’t say enough good things about the builder, who also helps buyers obtain financing. Still, they can’t help feeling sorry for their renting neighbors. “These are families who are looking for these exact same homes and they can’t find them,” Desiree Gonzalez said. “That’s kind of the bummer that we see. It would be nice if they could stay. They’re single-family rentals instead of single-family homes.”

Even in the midst of war and an economic slowdown, consumers still feel good about buying houses. One theory is that the stock market is so shaky that people are putting their money into real estate. (In Chico, only 40 percent of single-family homes are owner-occupied, compared to 67 percent nationwide.)

Some have gotten “sticker shock,” reassessed what they’re willing or able to pay in the way of mortgage, and backed off the house search.

“It was very surprising. It was discouraging,” said Ryan Duffy, 25, a computer consultant who had assumed he would be able to buy a house in Chico.

He and his wife, Kristin, are expecting a baby in June. “We were looking to get a place where we’d have little yard for the kids,” Duffy said. But the houses they toured in their about-$200,000 price range “were kind of dumpy—like rental homes people wanted to cash out of.” The least expensive newer homes were too close together for meaningful yard space, and townhouses posed the same problem. “We’re trying to get to the level of living like our parents are presently, but maybe we need to adjust our expectations.”

For now, they’ve decided to stay put in their two-bedroom apartment and save up a down payment that will get them into a $225,000 home, even though they know they’re taking a risk, since prices could continue to rise.

Dan and Christie Bryant, who are 30 and 26, have also decided to wait it out.

They looked fairly seriously last summer, tired of paying $810 a month to rent an apartment in a noisy, traffic-heavy complex near Chico State University.

Christie’s parents were prepared to help them with a down payment. They started looking in the $165,000 to $175,000 range, but “those houses were major fixer-uppers,” she said. They upped the ante to $185,000 to $195,000, and “the houses were swept from under us before we could even make an offer.” The process was frustrating. “You kind of get your hopes up and your heart set on this one house that you think is darling.”

The Bryants will have more money when Dan, a guitar teacher, gets his degree, and they might look again then. In the meantime, they’ve moved into a nice house renting for $950 a month where Parker, 6, and Izabelle, 2, can play in the back yard. “It’s not ideal because we’re not building equity,” Dan said. “But it’s definitely worth the extra $140 a month. Just the fact that we have a laundry room is worth it. Most important, we don’t have anybody living in our attic.”

Christensen advises against waiting it out, if possible. “In the flatness of the ‘80s and the ‘90s it would have worked splendidly. But it doesn’t make any sense right now. In a market like this, they’re just going to be chasing the house.”

Saving up for a house used to be the way everyone did it: In the 1930s, it was typical to put 40 percent down, but now 40 percent of first-time buyers make a down payment of 10 percent or less, and 16 percent put down 5 percent or less, according to the National Housing Institute.

Who can afford a 20 percent down payment, which would amount to $40,000 on a $200,000 house? “Someone who already has a home,” said McLaughlin.

Indeed, it would appear existing homeowners are sitting pretty, breathing a sigh of relief that they got in when they did and marveling at what their neighbors’ houses are selling for. But it still stings if a family is looking to “trade up": swap their current home for a bigger or better one.

Erika Rogers and her husband Mike were happy to find a newer house for $147,500 in 2001, right as prices were rising. “We wouldn’t be able to afford it if we were buying now,” said Erika, 29, who works in client services at Uniprise. “We would have ended up buying a smaller home or one that needed more work.” Just 18 months later, they refinanced to take advantage of lower interest rates and learned that their house had risen in value to $203,000— so much that they were able to get rid of the private mortgage insurance (PMI) that almost always must be paid when a buyer puts less than 20 percent down.

The couple had planned on switching to a bigger home in a few years, but now they’re going to stay put. “It sounds like a grand idea, because you could sell your house and make all this cash, but you’re just going to end up buying something that is really highly priced,” Erika said.

Christensen said the sellers’ market has put a different face on the industry.

“In the old days, it was like an event, fireworks: ‘We finally got an offer.’ Now the sellers hold all the cards. In a sellers’ market like we’re in, the seller can do as much or as little as they want, because they can say, ‘If you don’t like my house, I have four other people who will,'” he said. This doesn’t mean sellers are a collectively greedy lot or can slap whatever price they want on a house and expect it to sell. Houses will still sit on the MLS for months if they’re overpriced.

This hints at the refrain of those who doubt the validity of today’s housing market: The real-estate people are using high-pressure tactics to whip up a panic among buyers so they can cash in.

Christensen hears that a lot. “The reason why I say that’s not true is it comes down to the law of supply and demand, and nothing I say as a Realtor can change the laws of supply and demand.

“If we all got together one day at our meeting and said, ‘Let’s all price our homes $50,000 more this week so we can make more money,’ the consumers won’t react to that,” said Christensen, who says real-estate agents, who are paid a commission by the seller, aren’t reaping as much as observers might assume. “We’re making fewer deals, but we’re making more money per deal. So, in general, the agents are making about the same.”

Journalists who cover real estate have been writing columns on a phenomenon some suspect is on the horizon: a “bubble” that will burst, sending prices back down.

“I’ve never seen prices go down in California,” McLaughlin said. “We keep looking for signs that something is slowing down.”

And by Christensen’s crystal ball, it won’t happen anytime soon. He moved to Chico in 1973 and first bought a house here in the 1980s. “I’ve been watching the market all these years and seen a steady rise in Chico.” It’s not like the Bay Area, where there are big peaks and valleys and the median house price is now $327,600, according to the California Association of Realtors. “Chico is a nice, even line.”

“It’s definitely going up. There’s no way we’ve peaked.” Even a rise in interest rates would only slow sales a bit, Christensen said.

Asked what advice he’d give to a first-time home buyer in Chico, McLaughlin’s answer was sobering: "Move to another town. Move to another Chico that isn’t there yet. Alternatively, just go to another community."