Cover Story : Real Estate’s Reality Check : As the Inflated Home Prices of the ‘80s Bottom Out, Buyers and Sellers Take Stock of the Situation

Software engineer Chris Farrar put his three-bedroom Hawthorne home up for sale three weeks ago, but even at $84,000 less than he bought it for five years ago, he’s not sure he’ll find a buyer.

Personnel administrator Penny Polston closed escrow on her Torrance home last Friday, but it sold for less than what she owed on her mortgage. She got relief, however: She worked out a deal with her lender to forgive part of her debt.

Business manager Kathleen McNamara once thought the $600,000-plus luxury homes in Torrance’s Pacific Colony were well out of her reach. But at an auction in January, she bought one of the gated community’s homes at almost half off, and moved in last month.

How’s the local housing market? It depends on if you are a buyer or a seller.

Throughout the South Bay, dreams have been fulfilled or fortunes have been busted. For buyers, there are bargains to be had, as many experts predict that prices are at or near rock-bottom.

But for the unfortunate seller, success is just staying afloat. And many of these sellers, especially those forced to move because they lost their job or are being relocated, often leave the South Bay with maxed-out credit cards, a hefty tax bill and a feeling of disillusionment.

“Most of the younger, first-time buyers (from the late 1980s) are kind of beat up emotionally,” said Torrance tax attorney Tim Moore, who gives seminars to those who face selling their home at a loss. “They saved up for years to buy their home, then lost (the equity).”

At the same time, home prices continued to fall. According to Dataquick, the average median price of a previously owned home in the South Bay dropped 7.3% to $237,400 in the fourth quarter of 1993 from $256,200 in the same period a year earlier. Values have fallen almost 20% since the fourth quarter of 1990, according to Dataquick Information Systems, which analyzes government records of completed transactions.

“There are so many properties upside down right now,” said Donna Shultze, a broker at Century 21 Union Realty in Torrance. The bright side is that families who before couldn’t own a home are “now realizing the American dream. But some of those dreams are at the expense of the seller.”

Sellers who stand to lose the most are those who bought when home prices were at their peak in the late 1980s and early 1990s, or those who added to their mortgages by taking out home equity loans, said Torrance real estate broker Robbie Mills.

Farrar, the Hawthorne homeowner, bought his home to gain equity after years of renting. He liked the quiet location on 140th Street and the layout of the house. It was built in the post-World-War-II-boom era of the late 1940s and featured hardwood floors. Paint and stucco work have masked similarities to the other tract houses on the street.

“I was told that it was the type of house to own to see an appreciation of property values,” said the 38-year-old Farrar, who is single.

As his employer, NCR Corp. El Segundo, began cutting back its staff a year ago, he considered selling. But he was in for a surprise.

“I knew property values had gone down,” he said. “I just hadn’t realized they had sunk that much.”

Still, when his firm offered him a separation package in December, he grabbed the chance, fearing that his options would only worsen as the company further cut staff. And recently, he found a job at Tandem Computer Corp. in Cupertino, which led to him putting his house on the market. He bought it for $273,000. It is listed for sale at $189,000.

“Buy at the peak, sell at the trough,” he joked.

In Cupertino, he plans to rent for a while until he can save enough for another down payment.

“It will take me a while to recover, but I don’t think it’s diminished my interest in owning a plot of land, owning a piece of America, as they say.”

Other homeowners are not as optimistic. Their houses, from ocean-view mansions on the peninsula to modest tract homes in Torrance, are worth thousands of dollars less than their mortgage debt.

“We have extremes of income in the South Bay, but it doesn’t matter,” Mills said. “I have seen people devastated by this. Their business went under, they got a divorce, their overtime got cut or they lost their job.”

Three years ago, Mills helped a homeowner sell his property, which was worth less than he owed. The homeowner, who happened to be a banker, suggested that they negotiate with the lender to forgive the difference between the selling price of a home and the debt due on a mortgage.

“He walked me through it,” Mills said. “I had no idea that you could negotiate with home loans.”

It worked. Banks and other lenders have become more willing to forgo part of a homeowner’s debt.

The practice, called a “short pay,” not only preserves a homeowner’s credit, but saves the lender from paying legal fees for a foreclosure and then having to find another buyer for the house. Brokers estimate that 20% to 30% of the transactions in the South Bay last year involved a short pay.

The problem for some homeowners is that they can face a hefty tax bill: The amount of debt waived is counted as income. And some lenders are more willing to forgive debt than others.

“Two years ago, lenders said, ‘Heck, we’ll take the property back,’ ” said Moore, the tax attorney. “That was until they had more properties than they could deal with.”

Polston, the personnel administrator at Allied Signal Inc., owed $190,000 on her Torrance home, but closed escrow for $179,000 earlier this month after the bank forgave a portion of her debt.

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It was a big relief. Her ex-husband helped with the mortgage on her three-bedroom Reynosa Drive house while their two children were in school, but when the younger one graduated last spring, that aid stopped.

“I knew if I stayed there I could not afford it,” said Polston, 40. “I can’t make . . . payments on the mortgage on my own.”

She tried to sell the house for $220,000 on her own last June, but had no luck finding a buyer.

“Then right down the street a home sold for $190,000, and that’s when the fear started,” she said.

In December she went to Mills, who helped negotiate a short-pay agreement.

Broker David Keller of Shorewood Realtors in Hermosa Beach has plenty of short-pay stories, which he dubs “Tales From the Crypt.” One couple bought a condo in 1989 for $360,000. They sold it late last year for $257,000. The bank was unwilling to forgive part of the debt.

“No one is too happy when they lose $100,000,” Keller said. “But they don’t blame the agent for the price. They understand it’s the market.”

Not everyone qualifies for a short pay. Lenders tend to forgive the debt only for those who can prove financial hardship.

Take Bill Van De Water, whose income and assets disqualified him for a short pay. He moved his family to Georgia in September to open a factory for his Compton-based aerospace plant.

At the time, he and his wife had put $515,000 into their Palos Verdes Estates home. They bought it in 1984 for $290,000, and spent another $225,000 to refurbish it.

“We were only going to do the bathroom and spend $35,000,” he said. “But we found it was one gyration after another. Someone must have looked the other way when it was built. Even the chimney wasn’t right.”

Last year, however, he had no choice but to move, he said. It was too costly to expand his company in Los Angeles. They put the house on the market for $600,000, but got no offers. Brokers said that the price would probably have to be about $450,000. Van De Water said that would not be enough to cover his loan.

“You can’t sell it, and you can’t keep it,” he said. “And you can’t turn it in to the bank without hurting your credit. It’s a Catch-22.”

Van De Water is making mortgage payments on the home and his Georgia residence, which he bought last fall. It’s expensive, he said, but he doesn’t want to sell at desperation prices.

Many middle-class families in the South Bay see the price erosion on the Palos Verdes Peninsula as a godsend: Now they can afford to live there.

“The exciting thing is that we’re getting new, younger families moving on the hill,” said Carolyn Malmquist, an agent at RE/MAX Palos Verdes Realty in Palos Verdes Estates. “We need that for our schools, businesses, and for the whole energy of the place.”

Elizabeth Sala was packing up her Redondo Beach home last week to move to a house in Rancho Palos Verdes with her husband, Kevin, and their two children.

“We thought we could never afford it,” she said. “We’re taking advantage of a down market.” She declined to say how much they paid for the new home.

They are moving to a smaller house, but it is near a canyon and has more privacy, plus better schools, Sala said. Their Robinson Avenue home, in an area dubbed the “TRW Tract” because of its proximity to the defense giant, was sold in four days earlier this month. Sala declined to reveal the price.

“We’re not losing money,” Sala said. “We’re making money because we bought before the market peaked.”

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Buyers are looking at other parts of the South Bay as well.

According to Dataquick, the sales of previously owned single-family homes in the South Bay edged up 4.6% to 1,497 in the last three months of 1993, compared to 1,431 the same period a year earlier.

In February, real estate firms reported record numbers of transactions, perhaps because a small increase in interest rates prompted buyers to act. It was the eighth straight month that sales were up in Southern California, according to Dataquick.

“We had one case where a home got four offers above the price where it was listed,” said Larry Moore of Moore and Associates in Torrance. “That’s not a normal thing. You have to go back to 1989 to find that.”

Chris Jacoby, 30, a Manhattan Beach computer consultant, made six offers in the past few weeks on homes in Rancho Palos Verdes, Redondo Beach and Torrance. He and his fiancee have been edged out on five, and are waiting to hear on one more.

“I’m just totally amazed,” said Jacoby, who has been renting an apartment. “I can’t believe that there are so many people back in the market. You hear so much about aerospace downsizing. And you don’t see many companies hiring a lot of employees.”

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Other buyers who currently own homes are willing to sell to move up to better housing.

McNamara, the business manager, just put her Brookside Village condo up for sale in Redondo Beach. She’s asking $195,000 for the three-bedroom unit. Although she bought the place for about $172,000 seven years ago, she spent $18,000 to fix it up, and at one point in the late 1980s, similar condos fetched $265,000.

McNamara has a pressing reason to sell: At an auction in January, she bought a brand-new four-bedroom home in the Pacific Colony, a gated community off Torrance Boulevard in Torrance. Her price: $345,000, about half of the asking price in 1992.

“I looked at the homes two years ago, and thought, ‘What a joke! $600,000,’ ” said McNamara, a business manager who lives in her new home with her son. “I told my girlfriend that they would be auctioning these off two years from now. And they did.”

The house has three bathrooms, a spiral staircase, a Jacuzzi and two fireplaces. The developer put it on the block to avoid foreclosure, she said.

She may have to make payments on two places for the time being, but so far it’s worth it, she said.

“I didn’t sleep for a week after I realized what I did,” she added. “I was at the auction, and all of the sudden I was writing a check for $20,000. But you have to take a chance. You have to know how to play the Monopoly game. That’s what it is, a game. And this is my Park Place.”

Community correspondent Samantha Dunn contributed to this story.

Make Me an Offer

The number of single - family home resales in the South Bay during the last quarter of 1993 increased compared with the same period in 1992, but the median price of homes dropped.

1992 1993 % Median Median % City sold sold change ’92 ’93 change Carson 114 110 -3.5 $174,000 $169,000 -2.8 El Segundo 35 22 -37.1 $294,000 $266,000 -9.5 Gardena 104 64 -38.5 $169,000 $159,000 -5.9 Harbor City 30 20 -33.3 $233,000 $210,000 -9.8 Hawthorne 155 198 27.7 $218,000 $205,000 -5.9 Hermosa Beach 37 32 -13.5 $310,000 $302,000 -2.5 Inglewood 112 106 -5.4 $196,000 $148,000 -24.7 Lawndale 37 31 -16.2 $176,000 $160,000 -9.1 Lomita 26 31 19.2 $226,000 $206,000 -8.8 Manhattan Beach 101 121 19.8 $382,000 $411,000 7.5 Palos Verdes 166 195 17.5 $492,000 $455,000 -7.5 Peninsula Redondo Beach 119 118 -0.8 $304,000 $261,000 -14.3 San Pedro 107 123 15.0 $254,000 $235,000 -7.8 Torrance 241 285 18.3 $260,000 $230,000 -11.7 Wilmington 47 41 -12.8 $155,000 $144,000 -7.1

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Average Median Price City 1992 sold 1993 sold % change Median ’92 Median ’93 % change TOTAL 1,431 1,497 4.6 $256,000 $237,000 -7.3

Source: Dataquick Information Systems