Wednesday, March 14, 2012

The Real Estate Crash, Part 4

This is the car I drove to the ghost town, my first.
I always thought real estate was not like other investments. I thought it always went up, but there were some quirks in my thoughts. There was a little town near where I grew up that was a ghost town.

I drove out there a few times just after I got my driver's license. It was four or five miles past the covered bridge turn off to Dorothy's parents home in Elk River. When I first got my car I used to explore areas that I had never been.  I wanted to see where Elk River Road  went, so I decided to drive to the end of it.

As I drove, the pavement got narrower and narrower, and blackberry bushes came out from the sides over the pavement, so that it seemed to be a narrow one way road. Finally the paved road was blocked by  an old wooden gate, and it didn't look like any one had driven down that road for a long, long time. I turned my car around, climbed over the gate and started walking.

The paved road was still there, under my feet, but berry bushes almost completely over grew it. In some places it was so narrow that bushes from one side reached all the way across, and I had to duck or crawl through.

This is the brown house on the hill. From Gates: Falk's Claim
Then, down the road, I could see houses. A lot of them. It was a town, and it looked neat and trim.  There were sheep that kept the grass trimmed, so it looked like it was mowed. Everything was still and empty, no people. The sun was shining and it was warm and quiet. A town out of a fairy tale.

I came up to a rather large brown house on a hill. I walked up to the porch. A bee was buzzing in the white Himalaya blackberry flowers. It was warm and spring. The door was open a little. I pushed it open and walked in.

There was a table with dishes and a few magazines with 1950's and 1940's dates. It looked like the people just walked out and left things. I went in all the rooms then back out on the porch. This house was up a hill, so I could see from the porch the other houses below, and some large buildings, a warehouse or something. I decided to go see what they were.

The largest  building was a lumber mill. The giant saws, used to cut huge redwood logs were still there, and all the machinery, rusting now, but looking to me like it could be started up by just flipping an electrical switch. All abandoned.
My wife Dorothy (middle) at Elk River School. 1947
This was the town of Falk. Once a booming lumber town. It even had a railroad, store, post office and gas station. When my wife, Dorothy, was a girl, the train loaded with redwood logs, would come by as she walked home from school, down in Elk River, but now even the rails had been removed. 

Jon Humboldt Gates, a friend of my sister Jacque, eight years younger than me, published a little book about Falk in 1983, Falk's Claim. In it he says  that in 1944, "Access to the townsite was blocked and the whole area was declared off limits to sight-seers and souvenir hunters. The general store was boarded up. But many homes, as well as the post office, the dance hall, the hotel cookhouse, the gas station, the mill, the logging camps, were all just left opened and abandoned."

Gates says that "two or three of the old timers continued their hand to mouth existence" at the town with the last one leaving in 1961. I was there in spring of 1957, and it was probably one of these old timers who I finally heard coming toward me,  where I was exploring. I hurried out of the building and ran back to my car and left, but Falk has always been in my mind. I wondered, "Why did people just walk out of those nice old homes?"

On a massive scale, the real estate crash of today is just the same as those old logging and mining ghost towns of earlier California and the west. The economics made it impossible for the people to remain. Falk was a company town, and the trees were all cut, the company moved on, so the people left.

Today, March 2012, on a road only one half mile from my house that is only one mile long,  there are ten homes, three of them are abandoned, because of the real estate crash, waiting for a buyer.  I have read that there are entire neighborhoods in parts of Nevada that are empty, essentially modern ghost towns.

So real estate is not any different than any other commodity. The price goes up, and it comes down, sometimes so rapidly that owners cannot get out without loosing large sums of money. I was just beginning to realize that in 2005 and 2006 when I was trying to sell my little house on Laurel Street.

Our little house with an inflated price.
My real estate agent was encouraging me to let the lender pay closing fees above the selling price of the home. She was still trying to further inflate the cost, raising her commission.

We got another offer (you might want to review Part 2  of these blogs) a few days after the first one fell through because the buyer could not get a loan. The country was at the peak of the real estate boom at this time in January, 2006.

Had lending not began to tighten up, we would have sold our little house for close to $170,000, but that sale fell through, and my real estate agent tried to get me to return her $1000 deposit. I said, "No!"

The second offer was for $146,500. We signed the papers immediately and it went into escrow. The new loan charges of $4000 were paid from our side of the ledger. That means that the buyer put no money down and we paid his bank fees. That's the way the real estate agents and banks kept raising the prices on real estate. The buyer would make an offer, and the banks would allow all banking fees for new loans be added to the price to raise the apparent value of the home. That new price became the sale value that taxes were levied on, and the value as listed on the sales reports of real estate firms.

In the old days, and again now, the buyer must put those fees up as a down payment plus at least 20% of the purchase price. In this case the buyer should have put up at least $29,000 down payment.

He didn't, and the property was listed in the newspaper within the next couple of  years as in default. The buyer could not really afford the home, yet everyone was pushing for that price, that buyer, and that loan. If he would have had to put up the $29,000 down he couldn't have and wouldn't have purchased the home.

This is the price, $59,300 that the property has fallen to today, March, 2012
We actually had the same kind of situation all over the United States that existed in boom lumbering and mining towns. The ore, or timber ran out. Only this time the "ore, or timber," were the regulations that allowed and even encouraged lending intitutions to make dumb loans. It became apparent that buyers everywhere were in over their heads. No one would lend at the same price again. Prices began dropping until they will eventually reach a level that old fashioned bankers will approve.

I do not think they have reached that level yet. Zestiment thinks this property is now worth $59,500, but keeping a tenant at $800 per month in this home in this area is almost impossible, so the rents have to drop until they reach a level where people can afford to pay the rent.

The town of Falk when it was a productive lumber town.
Instead of having a complete ghost town, we have pockets of towns where the houses cannot be sold, but it is essentially the same. We have completely livable homes that no one will live in, just like in the lumbering ghost town of Falk.

Here is a note that Edna Shoemaker Augustine, my wife's sister sent me about Falk:

Edna, when she visited Falk.
Stan, that is so fascinating!!  I can't remember for sure what year it was (1955, '56, or '57), but I also visited the ghost town of Falk.  I didn't drive then, but a fellow student named Don Short came out to our house and it seems like Dorothy was with us too, and we went down to explore the place.  I remember seeing in one house a piano and, in what must have been the General Store, we saw rows of shoes and boots on shelves, glassware, etc., and a typewriter.  Many times over the years, I've wished I had been able to take a camera along--but, of course, we didn't have a camera back then, though I think Daddy had a movie camera--however, us kids would never have asked to use it.  I have to admit, I have also thought/wished that we would have "absconded" with some of those treasures for keepsakes.  However, we touched nothing and took nothing.  Years later, Augie and I drove down there to see what we could see but it was gated off with many "No Trespassing" signs everywhere.  Good memories!  Love to you, A&E