TOO ALLURING TO FAIL?
Values of modern homes fell with the housing
crash -- but their appeal still stands strong
From the pages of the CA-Modern magazine
By Dave Weinstein
Published January 2010
For years, lovers of mid-century modern have been living a dream. Window-walled houses, which lenders once shunned and real estate agents disparaged, were suddenly hip.
Modern homes that once sold for less than their non-modern neighbors were suddenly going for a premium, particularly those that had been well-preserved or sensitively remodeled. Encouraged by ever-rising housing values and spurred by cheap home equity loans, fans spent generously to restore original Eichler siding, replace skylights in Streng atriums, and much more.
Then, as 2007 neared its end, the real estate market shuddered. Within six months it was staggering. People who'd bought homes with sub-prime and adjustable rate mortgages felt the pain first. Soon, many who had taken on interest-only mortgages were hurting too.
By December 2007, the real estate crash had brought on a recession. Unemployment rates soon soared to higher than ten percent nationwide and in California higher than 12.
By that time, even people with conservative, fixed-rate mortgages were losing their homes as they lost their jobs. As home prices plunged, many people who'd considered themselves financially prudent found themselves owing more on their homes than they were worth.
MID-CENTURY HOMES TAKE A HIT
Mid-century modern neighborhoods were far from immune. Even in such high-end neighborhoods as Eichler's Upper Lucas Valley, whose pristine homes nestled in a rural valley regularly sold for $1.3 million, disasters struck.
"Upper Lucas Valley has had the unthinkable," says Catherine Munson, a real estate broker who has been selling in the neighborhood since it was built in the mid-1960s. "We have had two foreclosures. The last foreclosure here [before that], oh, it was so long ago, I can't remember."
Many other modern neighborhoods have suffered foreclosures and short sales, homes selling for less than the owners owe on them. There have been between five and ten in the Eichler subdivision of Rancho San Miguel in Walnut Creek, according to Heidi Slocomb, a Walnut Creek broker who focuses on Eichlers, and a handful in the Eichlers of Concord.
In some neighborhoods, it was much worse. In River City Commons, a beautifully tended 30-year-old neighborhood of attached 'half-plexes' in Sacramento's neighborhood of South Natomas, homes that were going for $300,000-plus in 2006 plunged to $100,000 by mid-2009, although by the end of the year prices began firming up, with sales in the $125,000 range.
"They got hit really hard there," says Steve Streng, a Sacramento broker who focuses on modern homes. His father, Jim, and uncle, Bill, built River City. "It's a great neighborhood. All of a sudden so many of the houses hit the market, and the banks wanted to just get out from under them and sold them really cheap."
The housing type also hurt, says Michael Triglia, a broker who lives in one of Sacramento's 50-plus Eichlers. "When the market goes down the first drops are in condos, then half-plexes, then single-family homes," he says. "But River City fared better than the other half-plexes in the Natomas area because they have a good neighborhood association. The sense of community helps a lot."
Nick Correale, a 20-year resident of River City, said many of the buyers who lost big were investors who bought near the height of the market and were renting their properties out. "The long-term owners, I don't really think they've been affected," he says.
Pat Sandlin, president of the neighborhood's active homeowner association, says. "It's the newer buyers who bought at the height of the real estate boom. Their homes have devalued, and some of them have walked away from them."
"It's sad," she says.
MODERN HOMES RETAIN THEIR APPEAL
The real estate meltdown may spell the end of the great 21st century housing bubble. But does it spell the end as well for high times for high modern?
Don't bet on it.
Modern has become firmly established in the marketplace as a style that people appreciate, says James Ebert, a Los Angeles appraiser who has worked with many buyers and sellers of well-known modern homes. "The original mid-century properties will maintain their strength, just like the classic Mediterranean and Spanish of the 1930s, and like the well-maintained Craftsman style before, have," he says.
"There will always be sustained interest in mid-century modern, in contemporary homes," Munson agrees. "It's not an anomaly."
"Style-wise, modern is the new Craftsman," says Craig Terrien, who handles real estate in the San Fernando Valley with Valley Modern. "Today, Craftsman doesn't enjoy the extreme of popularity it did 20 years ago, when people first rediscovered it. But it's still a respected style that people will pay a premium for. The excitement for modern may die down some day. But modern will always be a popular style."
"The interest in Eichlers has continued," Slocomb says. "That hasn't changed. If it's a good house, and it's been true to the Eichler style, it may sell in less than a week."
Another indication that mid-century modern will remain a popular style is the way its appeal has spread nationwide. Thanks to magazines such as Dwell, and to local real estate agents such as Gail Jodon of Charlotte (North Carolina) or Craig Mayer of Mile Hi Modern in Denver, the value of modern homes is becoming engrained in American culture, not just on the West Coast.
Jodon has helped boost interest in Charlotte's modern homes in part by putting on home tours with the group Modern Charlotte. "I've pretty much created the market," she says. Homes that once sold for less than their non-modern rivals now sell for more, she says.
In Denver, Mayer says, homes in Krisana Park, a neighborhood of homes that were frank copies of Eichlers, also have gone from selling for less than non-modern homes to commanding a premium.
Throughout California, in many markets, including San Francisco, the East Bay, and Orange County, both tract and custom-designed mid-century modern homes sell more quickly, and often for more than their comparable, non-architecturally distinctive rivals, precisely because they are out of the ordinary.
Craig Terrien has observed the same phenomenon in the San Fernando Valley, where homes have declined about 20 percent from the height of the market in 2006.
"Even in this [downturned] market, houses that are true to the architecture are selling at a premium to ones that are poorly done or to houses without architectural distinction," he says. "If I have a listing for a house that has been thoughtfully renovated, and the comparable is a whatever-house in the same neighborhood, they'll both get multiple offers, but mine will get more offers and will get five to ten percent more."
Sam Benson, a broker in the East Bay, has tracked recent Eichler sales in Walnut Creek, Concord, Castro Valley, and Oakland and found that the modern homes sold more quickly than their non-modern rivals in most areas.
"The statistics show that modern homes are faring better than ranch-style homes," he says. "However, we are still not out of the woods. 2010 will certainly have its share of short sales and foreclosures."
"I work with a lot of people who have to have an Eichler," says Glenn Sennett, a broker in San Mateo. "If somebody has to have an Eichler, it will sell for a little bit higher, to that person. A lot of people want an original. They don't want to buy a home that has been changed by somebody else. They want to buy an original, and then if any changes that will be made, they will make them."
In San Francisco, broker Tal Klein brought a 1963, 2,400-square-foot home designed by the famed Northern California architect Warren Callister onto the market in June 2009 and sold it in three days for the asking price of $1.85 million. "It tells me that good, well-designed homes get a premium and sell quickly," she says.
Cynthia Randolph, an artist who bought the home with her husband Andrew Simsak, still thinks it was a lot to pay for a house -- they'd started out two years earlier looking for a San Francisco Eichler -- but has no buyer's remorse. "This house wasn't necessarily something we were looking for, but it was what we wanted and didn't know it," she says.
In a stronger market, she says, there would have been a bidding war for the house, which blends mid-century modern with Arts & Crafts and Asia in the unique Callister way. As it is, she had to move fast, putting in a bid before the first open house.
The relative scarcity of such modern, architect-designed homes in San Francisco makes the ones that do come onto the market particularly attractive, she adds.
Kelly Larnard, who handles Eichlers in Orange, says prices have dropped. But she says they sell quickly, and at a premium, especially when compared to non-modern homes nearby. She attributes that to their architecture. "There are many, many more not-so-great houses on the market than great houses," Larnard says. "The great houses go very quickly, very quickly. They get multiple offers."
Triglia, the Sacramento broker, says the relative scarcity of Eichlers means they are still selling at a premium to non-modern homes, although they have declined about $50,000 from the height of the market.
The Eichlers are in South Land Park, one of Sacramento's premiere neighborhoods, which has retained values better than much of the area, Triglia says. Some Streng neighborhoods have done well also, including the upscale Wilhaggin development, which had few if any foreclosures, Steve Streng says.
Another area that has fared relatively well in the downturn was the San Francisco Peninsula, Sennett says, where values fell 20 percent both for modern and non-modern, but where prices began firming up earlier than most other markets. Sennett credits the area's relatively low unemployment rate, high-paying technical jobs, good schools, and convenient location between San Francisco and Silicon Valley.
Santa Clara Valley is another pocket where prices held fairly well. Nil Erdal says the price drop after October 2008 was ten to 15 percent. She also says that sales of Eichler homes slowed several months after other home sales in the area were affected by the downturn.
Not surprisingly, values in upper-income neighborhoods have often fared better than lower-income.
Although home values declined everywhere in Los Angeles, Craig Terrien says, "The Westside's been hurt a little bit less because the people there have more money, and they don't have to sell as much as people in lower-income neighborhoods. There are more people there who say, 'This is what my house is worth, and if I'm not going to get it, I'm not going to sell it.'
"In the (San Fernando) Valley, people often have to move. If you have to move, you have to sell. That's the way it is."
LIGHT AT THE END OF THE TUNNEL
In some markets, prices have already returned to pre-boom levels, including San Mateo Highlands, where values had fallen 20 percent. "We weren't at our absolute high for very long," Glenn Sennett says. "We're back down now to 2004 prices. From 2004 to 2007, houses went up about 20 percent."
In the East Bay, Sam Benson says, things are also looking up. "You're seeing a lot of people at open houses. There's good, strong activity." An Eichler recently sold in Oakland for more than the asking price, and with multiple offers. Benson attributes the improvement to "buyer confidence. And the rates are down so low."
Another positive note for the housing market: Congress extended the tax credit for first-time homebuyers and add a credit for move-up buyers.
Good news can be found statewide. In Northern California, the median price for a home rose seven percent in October 2009, and 1.8 percent in Southern California, from the prior month.
But bad news can be found also. In Northern California in the third quarter of the year, one in 20 mortgages was facing foreclosure -- a record. Also, a third of the new foreclosures were on fixed-rate mortgages, suggesting that job losses, more than over-enthusiastic borrowing, were to blame.
And the downturn in prices may not be over, some agents warn. Even though prices are going up in modern neighborhoods throughout Sacramento, Streng says, "It worries me a little because there's still a lot of inventory of bank-owned homes out there, and it would adversely affect prices if they all come onto the market."
Nil Erdal believes this is a good time to sell an Eichler for someone who's thinking about moving within two or three years, because interest rates are low and are more likely to rise than to decrease much. And it's unlikely home values will rise significantly for the next several years, she says. But an owner who has no reason to move for the next six or seven years may do better to stay put, she says.
As for buyers, Erdal suggests not waiting for interest rates to drop further, because they may not. "And you have to live somewhere," she says.
Asked to predict how soon housing prices will return to previous levels, Heidi Slocomb laughs. "Who knows? How can you discover that? You can't."
Photos: David Toerge, Ernie Braun
Financing: pendelum's
conservative swing
Where once buyers could qualify for loans by smiling and properties by having four walls, today "there are tighter standards for loans that are securitized," says Cynthia Kroll, senior regional economist at the Fischer Center for Real Estate and Urban Economics at UC Berkeley's Haas School of Business. "Freddie (Mac) and Fannie (Mae) are going to hold the line more now than in the past. We could also see more regulation."
"I think it's going to be harder to get financing than it was two years ago -- and it should be," Kroll says.
"It has gotten a bit harder to qualify, but that's good," Orange realtor Kelly Larnard says. "People are going to qualify who can afford their loans. This is the way it should always have been done."
Tighter standards are affecting homeowners and buyers in several ways. It is more difficult to qualify for loans without showing full documentation, principally tax forms. This makes it particularly hard for people who are self-employed to qualify for new home loans or refinancing.
Tighter rules for appraisals mean appraisers can no longer factor into a home's value any architectural or historical qualities it may have, which hurts owners of distinctive architectural homes.
And home-equity lines of credit and other home-improvement loans are now largely a thing of the past.
The good news is, the chaos that affected the loan-hunting process in 2008 is a thing of the past, says Nil Erdal, a broker in Santa Clara Valley. "Now everybody knows the rules," Erdal says, "so everyone is preparing themselves and there's no wasting of time."
The loan process has gotten "about five times harder than it used to be," Walnut Creek broker Heidi Slocomb says. "It's very tedious process." However, for those who qualify, "Many people today are getting houses with three to five percent down and FHA financing."
Both state and federal incentives and tax credits for first-time buyers have helped in some markets.
Even better for most buyers, the amount of a 'conforming' loan they can incur to buy a home increased in June 2009 from $417,000 to $729,950, depending on the median home price in their area. The lower amount was too low to help many buyers in California. 'Conforming' loans are those that qualify for guarantees from the quasi-governmental agencies Fannie Mae or Freddie Mac. That designation reduces the risk for the private lenders who make the loans, which means lower interest for borrowers -- currently, about five percent.
Fannie and Freddie adjust their loan limits every year, so it's unclear how long this affordable financing will be available, or whether the limit will be raised or lowered. The increase is likely to be extended in some form.
People seeking higher-end homes, however, in the $2 million-plus range, have to pay larger down-payments and higher rates, because their loans don't quality for Fannie Mae for Freddie Mac guarantees, and the investor market for securities based on jumbo loans has collapsed.
The Federal Housing Administration also guarantees loans, and FHA financing is particularly useful because the down payment can be as little as 3.5 percent.
Financing changes have placed the self-employed at a particular disadvantage, says Jim Bailey, a manager of the mortgage-banking firm Magnifund Group, with offices in Murphys, California. The debt-to-income ratio that lenders demand hurts the self-employed because the 'income' they base it on is the applicant's net income -- after all possible tax deductions have been taken. This can seriously undercount how much the buyer can actually afford to make in mortgage payments.
The new procedure is in stark contrast with procedures pre-collapse, when entrepreneurs could get 'no-documentation' loans simply by stating what their income was -- a procedure that often worked fine but was open to abuse.
"It's unfortunate that the pendulum has swung so far to the other side that the guys who are self-employed are getting pounded," Bailey says. "One day, I think, the pendulum will swing back into the middle, but I'm not sure where the middle is." One way to get around the problem, Bailey says, is to limit your tax deductions before applying for a home loan or a refinance.
Changes in financing may also hurt modern neighborhoods by making it harder to restore properties. For years now, sophisticated buyers have been restoring their new modern homes, often spending months at it before moving in. With financing more expensive and difficult to obtain, that is becoming less common.
"You can't really get a loan on your house anymore for renovating," says Craig Terrien, a Los Angeles agent who lives in a Palmer & Krisel home in Los Angeles' Corbin Palms neighborhood.
"There are no second mortgages, or home-equity loans, or lines of credit out there. And if there are, they're very expensive," says Sam Benson, an East Bay broker and former mortgage lender.
Refinancing homes has gotten hard, Bailey says, because lenders are determining what the house is worth by looking at recent prices for nearby homes, which tend to be low because of short sales and foreclosures.
One major hindrance for sellers and buyers of architecturally distinctive properties are new restrictions that make it harder to up the appraised value of the home based on its architectural qualities.
This change, the Home Valuation Code of Conduct, mandated by the Federal Housing Finance Agency for loans that are sold to Fannie Mae and Freddie Mac, was intended to eliminate appraisals based more on fantasy than market value. But it's had the unintended consequence, many agents complain, of scotching deals when both seller and buyer agree on the price of a home but the bank won't lend the full amount because the appraisal, based on conventional data, comes in low.
"Many appraisers do not know or understand the mid-century, California-modern style of home," Benson says. "Many homes sales have fallen out several times based on the comparison of these homes to ranch-style properties in the same neighborhoods."
"Banks have a responsibility to protect their investment so they have a consistent perspective of being on the conservative side," says James Ebert, a Los Angeles appraiser. "They tend to want to look at [a home] as sticks and mortar, as shelter. Banks don't lend money to buy pieces of art, because art is a very subjective thing."
Buyers and sellers can deal with low appraisals in several ways -- besides lowering the price of the home. "We can always work around them with bigger down payments," says Peninsula agent Glenn Sennett. And Ebert has used his knowledge of modern architecture to help convince banks that the quality of the home should figure into its appraisal.
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Taking action to lock in
the value of your home
No prayer, no imprecation, no potion can help the individual homeowner control the gyrations of the real estate market. But there is plenty that can be done to help homes increase in value, both short-term and long-term, whether owners plan to sell soon or to hold tight.
Both before and during the downturn, agents say, well-maintained homes that preserve the original architecture, or show artful, sensitive, reinterpretations, do best in the market. "Good taste always wins with an Eichler," says Catherine Munson, a real estate broker in Marin. "But it's got to be good; it can't be hokey."
Plan to sell? The market is saturated with foreclosed properties, many in bad shape. Don't add to the glut. "The appraisers don't want to see peeling paint," says Heidi Slocomb, the Walnut Creek broker. "They want the wood in good condition. They don't want to see a leaking roof."
There is evidence that historic designation helps boost and retain housing values, according to a study, 'Historic Designation and Residential Property Values,' by a trio of University of San Diego professors, Andrew Narwold, Jonathan Sandy, and Charles Tu, who studied homes in historic districts that took advantage of California's Mills Act tax relief provisions. The study suggested that "historic designation results in a 16 percent increase in housing value."
This study was done, however, before recent rules were imposed making it difficult to base appraisals on historical or architectural factors.
It's also clear that an organized neighborhood, focused on keeping property maintained, can be a boon. "If a neighborhood maintains its integrity as a group, it adds value to the individual homes if the whole neighborhood looks good," says Slocomb, "because people are choosing a neighborhood as well as a home."
Nowhere is this better seen than in Sacramento's River City Commons. There, home values dropped precipitously -- but to a lesser extent than nearby neighborhoods that lack River City's active homeowner association, which enforces rules about architectural preservation and general upkeep.
Rather than moan about foreclosures, the River City association has moved aggressively, leaning on banks to cut lawns and repair abandoned properties.
Neighbors themselves pitch in to preserve their neighborhood's looks, even during the current crisis. Nick and Amy Correale, who have lived in River City for two decades, often pick up trash that blows into their neighborhood from the park across the street. They also volunteer, along with other people from River City, at the park, tending the rose garden or maintaining the new Fort Natomas playground.
When the house next door to his went vacant, growing weedy with lack of maintenance, Nick took it upon himself to weed and water. He assumes the home is in foreclosure. "I've been maintaining the front yard because everything started dying," he says. "I care about our neighborhood."
The association recently won court approval to enforce CC&R restrictions that limit the percentage of non-resident owners to 25 percent of the neighborhood's total. The percentage recently hit an all-time high of 35 percent. "We have not found investors to be particularly diligent in keeping up their properties, even before the current financial market," association president Pat Sandlin says.
"That's our goal," Sandlin says, "to keep up our property values. I think we're doing as well as we can.
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Newcomers boosting
value in neighborhoods
Bad as times have been for sellers, they have offered great opportunities to buyers. Throughout the state, people who have been priced out of the market for modern homes are taking the opportunity to buy their dream houses.
Among them were Camila and Matthew Baum, avid buyers of all things modern, including space-age lighting, a houseful of period furnishings, a 1959 Aristocrat trailer, and, now, their own Eichler home in Concord as the centerpiece of their collection.
Also taking advantage of the market were Billie Parish and Nancy Nickle, who just bought a Streng home in River City Commons in Sacramento.
Camila Baum, a social worker, and Matthew, who works in online employment marketing, couldn't have afforded an Eichler in the Bay Area before the crash, Camila says, and it wasn't easy snagging one after.
They focused on Concord, figuring the Eichlers there for the most affordable in the Bay Area. But selling in the mid-$500,000s, they weren't affordable enough. As prices slid, the Baums pounced. In June 2008 they bid over the asking price for a foreclosed home that had been abandoned for a year.
"But we wanted it because we thought, 'When are we ever going to find another Eichler that's been foreclosed on at that price?'" Camila says. "But that was just the tip." The house attracted six or seven other bids. "Needless to say, we didn't get it," she says.
They moved from San Francisco to an Eichler rental in Concord to see if they really like living in one -- they did -- while they watched as ten to 15 bank-owned properties popped onto the market, many disappearing in a day. Eichlers that once would have fetched in the $500,000s were priced in the low- to mid-$300,000s through foreclosure or short sales.
"Most of them needed work," Camila says. "Some had kitchens that had been torn out. People were in the middle of remodels, and for some reason the rug had been pulled out from under them."
As it turns out, the Baums didn't need to buy a foreclosure because the home they were renting became available.
The three-bedroom, atrium home had been beautifully restored, with new kitchen cabinets and doors, tasteful landscape complete with rows of bamboo trees, and what Matthew cared most about, a pool. "The price we paid for this home is incredible given the amount of work the couple put into the home," Camila says.
Besides bringing to the neighborhood their modern furnishings and their Aristocrat, the Baums are contributing something else. Camila is already delving into the history of their small tract. She's also getting to know her neighbors, and they are getting to know the Baums.
Chances are they like what they see. What, after all, can be better for a neighborhood, or for home values, than enthusiastic newcomers who know they're not just buying a home? They're building a community.
Parish and Nickle, who were living in what Parish calls a "monster home," and one that was paid for, chose to move into a much smaller Streng because they love the style of the houses, wanted to downsize, and were familiar with the neighborliness of River City. "We gave away a lot of furniture," Parish says.
They bought the home through a short sale -- which proved to be a long process. "Buying a short sale is anything but short," she says.
"This is the only neighborhood where we looked," Parish says. "We chose this community special."
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