FEATURE-Stockton, California: The town the housing boom broke

Mon Mar 19, 2012 7:59am EDT

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By Michelle Conlin and Jim Christie

NEW YORK/STOCKTON, Calif., March 19 (Reuters) - For decades, Stockton, California suffered a civic inferiority complex. Los Angeles had celebrities and sunny beaches. San Francisco was awash in tech futurism and post-pubescent billionaires. Stockton was the polyester, buy-generic cousin, a dingy commercial hub for Central Valley farms that was just far enough from the San Francisco Bay area to be an irrelevance for the state's coastal elites.

But then came the housing boom, and sorry Stockton practically started to strut. Its loamy farmlands - among the most fertile in the United States - gave way to shiny subdivisions. Middle-class families, priced out of the Bay area housing market, snapped up the new homes, happily trading extreme commutes for the suburban niceties of four bedrooms and a yard.

Mayor Gary Podesto, a colorful character given to slicked-back hair and Guys and Dolls suits, saw the sudden influx of developer dollars and property taxes as the key to an urban renaissance. He kicked it off with a plush downtown sports arena complete with a Sheraton hotel, and a swank redevelopment of the waterfront that transformed it into a showpiece to rival San Antonio's Riverwalk.

Sushi joints started opening up. Reiki masters moved to town. Stockton started to turn, well, Californian.

If only it could have lasted.

At the Feb. 28 city council meeting, which ran for more than six hours, Mayor Ann Johnston started the proceedings by saying, "Lord, please help us."

A beat.

"Lord, we need your help."

Pending any divine intervention, Stockton would skip its next bond payment and enter negotiations with its creditors. The process could end with Stockton, population 292,000, becoming the largest U.S. city ever to file for bankruptcy. It has a little more than two months left to mediate with creditors.

Stockton is hardly alone in its suffering: across California and much of the nation, municipalities are struggling with plunging revenues, ill-advised labor agreements, soaring pension and healthcare costs, and too much debt. Stockton faces a deficit of as much as $38 million on its budget of $165 million, and is in its third year of fiscal emergency. Its retiree healthcare liabilities alone total more than $400 million.

But the crisis has been exacerbated by years of bad management, critics say. The economics of the arena didn't work out as promised and burdened the city with millions in debt. Then there were what one city official called the "Lamborghini" benefits for city workers: anyone who toiled for the city for as little as one month was eligible for retiree healthcare - for life. Their spouses got it, too.

Today, Stockton has 94 retirees with pensions of at least $100,000 a year. That's double the number in other Californian towns of similar size.

These luxe contracts with public-employee unions have proven wholly unsustainable: the police force has been slashed by almost a third, to 324 officers, and the city is pressing for further concessions even as the police union sues to get back what it has already lost.

Then there are the management gaffes that just keep coming: Last year, city officials discovered that they had made $15 million worth of math errors, including double-counting $500,000 in revenues from parking fines.

The poor decisions have been tiny and mythic - and have added up. During the boom, the city lured a celebrity chef to town by giving him a treasured, historic building rent-free for five years. Today it sits empty.

The city council also bought a new, high-rise municipal headquarters building for itself - at the peak of the market - for $35 million.

But that is all over now. With or without bankruptcy, the fiscal crisis has destroyed Stockton's dreams of glory and left it with a grim litany of urban woes. Crime has skyrocketed, with an all-time high of 58 murders last year, landing Stockton on the FBI's top-ten list of most dangerous cities in the country.

Municipal services, from libraries to street lighting, have been eviscerated. Unemployment stands at more than 16 percent, compared to California's rate of 10.9 percent; when a new Krispy Kreme advertised for jobs last year, 400 people lined up around the block to apply.

The Stockton Shelter for the Homeless is now at 125 percent capacity, according to executive director John R. Reynolds, with 15 percent "right out of the middle class", he says, meaning they had owned a home.

Many of the new homeless are evicted families with children. "It's hard to tell your kids you're going to live in a homeless shelter," said Araiz Avalos, whose family got booted from their rental apartment in January after their landlord was foreclosed.

HOUSING BUST, EXTREME EDITION

It's hard to overstate the depth of the housing crisis in Stockton.

According to online foreclosure marketplace RealtyTrac Inc, Stockton last year had the second-highest foreclosure rate of all large U.S. metro areas, with 5.43 percent of all its housing units receiving foreclosure filings. Las Vegas had the highest rate: 7.38 percent, compared with a nationwide 1.45 percent.

Virtually new three-bedroom homes with cathedral ceilings, fireplaces, skylights and roomy backyards can now be had for little more than $100,000. House prices in Weston Ranch, one of the signature new subdivisions of the Stockton boom, have dropped from an average $450,000 in 2007 to around $100,000 now.

The city has started passing out citations to residents, many of them underwater and unemployed, threatening fees unless they paint their yellowing lawns green.

Barbara Partyka, who was working in Silicon Valley as a business systems analyst when she moved to Stockton in 2006, never imagined it could end like this.

She put 20 percent down on a virtually brand-new home with slate floors on a corner lot with a sprawling backyard and a deck overlooking a lake. It was $400,000.

By 2007, she had a new job working as a business systems analyst at Washington Mutual.

By that time, the Stockton city council was spending freely, falling prey to the magical thinking of the moment: that this boom was somehow different, and would never turn to bust.

By 2009, though, it had all gone south for Stockton, and for Partyka. She was laid off by Washington Mutual - soon to be defunct itself - and went back to work for her old employer. Just a few months later, that job disappeared too.

"I sent out 80 resumes and I didn't hear one thing back," Partyka said.

In less than two years, the value of her house had halved.

The rest of Stockton's housing stock tanked even more, falling 75 percent from the peak. Soon the Repo Home Bus Tours were rumbling through town. A developer bought the new downtown Sheraton, for pennies on the dollar, and turned it into dorms for students at the University of the Pacific.

Many residents are now fleeing, and leaving their houses behind.

Partyka, 60, had no choice but to take a job in Minnesota.

But she was never able to work out anything with the bank to help her get a better mortgage, nor would the bank approve various short-sale offers. She's now in foreclosure.

Today, house prices in Stockton hover around levels seen during Ronald Reagan's time as president.

In the now-sleepy downtown, merchants fret that talk of bankruptcy will make a bad situation worse. "People come in here crying," Yvette Loberg, who runs a bakery near City Hall, said of city employees who spend money in the area. "It's crazy."

There is no end in sight. Celia Chen, an analyst with credit-rating agency Moody's Investors Service, predicts the housing market won't return to its 2006 levels until 2030. Economist James R. Follain, in a study of the real-estate bust, says it may never come back, comparing Stockton to "a ghost town from the Old West, a town that lost its reason for being".

That might be an overstatement. But for now, what was once the hottest job in town - real estate agent - is now arguably one of the toughest. "It's hard," said Stockton property agent Sheri Midgley, whose schoolteacher brother recently quit and left town because of the cuts.

"For a while, everybody came. As soon as prices fell, though, everybody went back home."

For a related story, click on (Reporting by Michelle Conlin in New York and Jim Christie in Stockton; Editing by Jonathan Weber; Desking by Dale Hudson)

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