Downtown L.A.'s Underwater Home Mortgage Crisis
ILLUSTRATION BY JONATHAN BARTLETT
In many movies, downtown Los Angeles is a stand-in for New York City. Its nooks and crannies mimic that most urban of American cities, and Ramon Garcia's condo on Seventh and Spring streets is no exception. His seventh-floor window overlooks a courtyard in the Bartlett, a 1911 bank designed by the architects who planned City Hall, and his 550-square-foot residence is smaller than a racquetball court.
But one detail would be unthinkable in New York. If he sold it, Garcia estimates he'd get $105,000 — half what he paid in 2005. While 30 percent to 60 percent of the Inland Empire's homes have "underwater mortgages," making that region a national symbol of the nation's housing crisis, rarely reported is that downtown L.A. is just as "underwater" as Riverside: Its residents owe far more than their homes are worth.
"It kind of sucks, because I don't know if it will ever be worth what I paid for it," Garcia says.
According to Zillow Real Estate Research, 31 percent of American homes are underwater, about like the city of L.A. (Other data peg the percentage lower.) But in 90014, Garcia's ZIP code, an astonishing 78 percent of condos and lofts are underwater. Nearly four out of every five residents in the area roughly bounded by Sixth Street, Ninth Street, San Pedro Street and Grand Avenue own places worth far less than the loan they signed.
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In the United States, ZIP code 90014 is in the top 1 percent of underwater mortgages.
And it's bad all over downtown.
ZIP codes that extend from downtown north and south into other areas are underwater, by 66 percent (90017: part of the Financial District and part of Pico-Union), 64 percent (90021: part of Industrial District, Warehouse District and part of Skid Row), 51 percent (90012: City Hall, Civic Center, Chinatown), 44 percent (90013: site of Downtown Art Walk, part of Skid Row), and 36 percent (90015: South Park, L.A. Live, Fashion District).
You see devastating numbers above 50 percent in San Bernardino. But it declared bankruptcy. Downtown was a flagship for "smart growth," a preview of the new, hyper-urban Los Angeles.
Ramon Garcia moved downtown in 1999. He and a friend rented a large loft on Spring Street for $700 a month. There was no air conditioning or heating and their friends were afraid to visit.
"It was like a ghost town," he says. "No restaurants, no coffee shops, very few businesses."
The area around Fifth and Main streets was a notorious open-air drug market. Downtown booster Brady Westwater today points to shops there that were fronts for illegal operations. "This place sold crack 24 hours a day," he says. Now it's a nice Italian restaurant, Portofino. "Every business was owned by drug dealers. People were helpless."
The citywide crime rate began to plummet as the crack epidemic subsided and the economy turned. Downtown's renaissance was allowed by the Adaptive Reuse Ordinance of 1999, passed the same year Staples Center opened. The law let developers more cheaply and easily convert abandoned hulks into retail space on the ground and residential above — in part by cutting the number of parking spaces developers were required to construct.
Over the next nine years, more than 7,000 housing units went up, surpassing the 4,000 built in L.A.'s lightly inhabited downtown during the previous 30 years.
The often publicly subsidized downtown renewal, as well as troubled subway construction projects of the era, generated tremendous controversy.
Critics bitterly accused city fathers of directing vast civic resources to downtown while generations-old pipes and roads in the Valley, South L.A. and the Eastside crumbled. In 2002, furious residents of the San Fernando Valley tried to secede from L.A.
Downtown activity rose to a feverish pace as the housing bubble grew nationally. Developers borrowed heavily, and the mostly young buyers did the same.
Without warning, Ramon Garcia's landlord doubled his rent.
"My parents are immigrants from Central Mexico. They came here in the early '70s, did the American dream," Garcia says, meaning they bought their own home. "At that time, I felt like I needed to do my American dream, too."
The Cal State Northridge English professor, then 37, started pricing lofts. They were expensive in 2005, and Ralphs hadn't even opened.
"The cost per square foot ... was like for a fully developed community," says Nathan Wittasek of consulting firm Exponent.
"A lot of my friends are professors, and none of us could afford anything," Garcia says. "It was this existential crisis, because we weren't gonna be able to do what our parents did."
But bank loan officers "wanted to give me all this money," Garcia recalls. "I was like, 'Did you even look at my salary?' "
The prices were suspiciously high. But loan officers were pushing buyers to take a risk, and dangling low interest loans to sweeten the pot. Buyers were dying to jump in.
What could possibly go wrong?
Kevin Scott, a fiscal adviser to local governments, and a longtime downtown dweller who lived in a huge Industrial District loft not far from the 1939 Coca Cola Building, recalls how he decided to eyeball the condos being constructed inside the long-empty 1100 Wilshire Building skyscraper next to the 110 freeway. It was the height of the downtown L.A. bubble.
“They walked me through this empty tower, down this hallway — they had drawn chalk lines to show where the condos would be. Chalk lines! They wanted something like $900 per square foot! Maybe less, but close to it. Now, you’re right next to the freeway in this nothing building with no green space. It was just crazy! Chalk lines — honest to God! An empty hall, and a few pipes above!”
Something about the emotionalism shown by both the developers and the prospective buyers struck the downtown denizen as unsettling and frightening. He went on to live in two different and beautiful downtown condos. He insisted on leases.
Wittasek, the consultant, also was tempted to buy a loft downtown during that period. In fact, he had an agreement in hand one day. But then, he recalls, “I heard a rumor that Countrywide was going under. I pulled out, right before.”
Then the housing market crashed. It started slowly in 2006. By late 2007 federal officials were warning that the bursting bubble could ruin the U.S. economy. By the fall of 2008, the globe was in financial crisis.
"Supply was artificially high" — particularly downtown, Wittasek says. "There were buildings that weren't even finished. Housing was sitting there unused, piling on top of itself, creating a steep decline in prices."
Downtown is having a harder time bouncing back than most areas because of the people who want to buy: mostly young, urban pioneers. They tend to have too-small down payments, making them high-risk. Combined with the fact that interest rates of late have sunk to record lows, lenders aren't interested.
Now, downtown is filled with underwater owners who can't sell, and renters in former condos that didn't sell.
The surprise result is a tight housing supply. Downtown is in "a very strange 'rebound,' " says Tiffany Gatto of L.A. Loft Realty. "Of probably 88 units" her firm has available for sale, "29 are in undesirable areas, 25 are above $700,000 [and] two are under $250,000."
She's seen bidding wars, but those deals can be quashed when appraisers won't approve the jacked-up bids. Real estate agents claim that appraisers are misjudging downtown because home values are a hodgepodge, often shifting block by block. Spring Street is 250 feet from Broadway, yet they're like distant planets. The Toy District, Jewelry District, Gallery Row, Financial District, Old Bank District, Historic Core and South Park rub against each other but don't quite blend.
While agreeing that appraisers can be wrong, and downtown "can change within a block," Tupper Lienke of Hampstead Appraisal Co. says, "If they have a bidding war between buyers, do we really have market evidence that that's the value? Or do we have people who, in a contest to see who can get the property, have left the realm of reality?"
The Los Angeles housing market is improving, says Richard K. Green, director of USC's Lusk Center for Real Estate. But it's "nothing like what it was. You're still way far away from where prices were in 2005."
That's not likely to change anytime soon. Downtown L.A. never became the huge jobs-housing center the boosters promised. Today, analysts say downtown accounts for perhaps 2.5 percent of L.A.'s jobs — like a suburb. (Downtown Chicago and San Francisco account for 15 percent of the jobs.)
Yet there are people who want downtown life, like Ramon Garcia. "I grew up in suburbs ... baseball and family and church," he says. "So this is refreshing."
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