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The New York Times today has an article on the city of Vallejo, CA declaring bankruptcy. In what the Times calls “a potentially ominous harbinger” for other California cities, the City Council of this northeast suburb of San Francisco voted unanimously, citing no other choice due to dwindling tax revenues and a depressed housing market.

Our Q1 08 Quarterly Home Value Report for Vallejo shows a pretty bleak picture for homeowners. Home values are down 24% year-over-year, and 91% of Vallejo homeowners who bought in 2006 are now in a negative equity situation - owing more than their home is worth. It doesn’t help that the median down-payment in 2006 in Vallejo was 0% — a classic situation where recent homebuyers overextended themselves when they bought during the boom (in contrast, the median down-payment nationwide was 10% in 2006). The graph below shows the exact correlation between a dropping median home value (Zindex), zero down-payments and now widespread negative equity situations for homeowners.

It’s not clear to me what exactly happens when a city declares bankruptcy and how this affects its citizens. The Vallejo Times Herald quotes a city official as saying that they will continue providing city services and the move will allow them to restructure their finances. Meanwhile, it’s a fair bet that other cities facing housing woes and rising rates of foreclosure will be watching what happens closely.

Last 5 posts in Real Estate

• See Something Weird? Probably Related to Foreclosure - May 13th, 2008
• Dr Stan Humphries - speech @ The Rainier Club on 5/19 - May 12th, 2008
• Fish for Foreclosures - May 12th, 2008
• "Go Big or Go Home" - May 8th, 2008
• What are you reading? - May 7th, 2008

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