Peter Pays Paul

The Wall Street Journal is reporting on the plight of Vallejo, CA today. The Journal reports that Vallejo is already down 20% of its police force since January and could loose another 20% of its force by the years end.

California Cities Cut Police Budgets – WSJ.com.

This is just one of the effects that cities are experiencing due to lost revenue from development fees and property tax revenues. City councils bought into the myth that real estate would continue to go up in value indefinitely and city services would be adequately funded.

An underfunded police force will likely affect real estate values in Vallejo and other municipalities like Vallejo. If crime rises and the perception of safety decreases, real estate values in some areas of Vallejo will likely decrease as neighborhoods become less desirable.

This could be an unending downward spiral for cities as property taxes are assessed on transfer value in California due to Proposition 13. Lower real estate values would generate lower property tax revenue and the city would have to cut more costs from their budget.

This is a key reminder to real estate investors that local government issues can affect long-term real estate values.

Deals in cities with bankrupt or poorly funded city coffers should be given a higher degree of scrutiny and underwriting.

A Vortex for Trouble:How the Central Coast became the center of a specialized type of lender fraud.

The LA Times is reporting that a Record number of California homeowners default on mortgages in 2nd quarter.

Year over year the actual number of homes being foreclosed on has increased 261%. The percent increase is dramatic. However the total number is only 63,061.

Based upon the U.S. Census Bureau Data California had 13,174,378 household units and 56.9% of those are owner-occupied. If these statistics are correct, there are 7,496,221 owner-occupied homes.

Though the increase is dramatic, the total number is still a small percentage of the total owner-occupied homes. This means that at most 0.84% of the owner-occupied homes are being foreclosed upon, or 8.4 out of 1,000.

However, my statistics do not breakout condos or home that were owned by speculators or investors. Many investors will stop making payments on their investment before they will stop making payments on their own home.

Likely, a lower percentage of owner-occupied homes are being foreclosed upon. A larger number are likely investor and speculator homes that were bought during the run-up in the real estate market.

Does the small increase from last quarter to this quarter signal that the damage is coming to an end? My crystal ball is broken. We will just have to batten down the hatches and ride out the storm.