A zombie housing development comes back to life

David Weinberg Jul 9, 2013

A zombie housing development comes back to life

David Weinberg Jul 9, 2013

CORRECTION: The original text incorrectly referred to the state prison in Lancaster, Calif. It is formally known as California State Prison, Los Angeles County.

At the height of the housing boom, residential developments were springing up at an incredible pace. But when the bubble burst, many of those developments came to a screeching halt. That left a bunch of big empty plots of land just sitting there like ghost towns without buildings. Until now. Sometimes referred to as  “zombie” developments, these barren patches of land are being reanimated as the housing market recovers.

A lot of these “zombie” developments are in California, which in many ways was ground zero for the subprime housing disaster. The state received close to half of all subprime cash that flowed into the real estate market.

And all that cash caused home prices to sky rocket. “Which in turn proved what a great investment housing was, thus causing more people to get subprime loans to get more properties. It was just complete chaos,” says Chris Thornberg, a financial analyst at Beacon Economics.

In the midst of that chaos Thornburg noticed some red flags, and he spoke out about them. He was one of the few people who predicted the housing crash. “What leads markets is inventories” says Thornberg. “And inventories had been nice and tight and at the very end of 2005, early 2006, inventories started going up. And that’s it. When inventories start going up you know the game’s over”

Right around that time, in fact in the final hours of 2005, Andrew Johnson and Mike Wells were celebrating New Year’s Eve on a rooftop. They were drinking brandy and smoking fine cigars, thinking that they were on the verge of becoming millionaires.

“Oh man, we had over 300 homes slated for construction. We were happy,” remembers Johnson.

Johnson, a real estate agent, and Wells, a contractor, had a big whiteboard full of all the housing developments they were working on — everything from small plots to a huge development with golf courses and a school.

“We had signed contracts. Life was looking pretty good, like Andrew said, and then things started dropping like flies,” says Wells.

Just as Thornberg predicted, prices dropped, the market began its downward spiral and one by one each of Johnson and Well’s developments were erased from the whiteboard.

“I couldn’t keep my doors open because things weren’t selling. I think that next New Year’s I was at home, it was a totally different change,” Johnson recalled.

Of all the developments Johnson and Wells had on the books, only one survived — Desert Crest, a small plot of desert in Lancaster, about 70 miles north of Los Angeles.

The day I visited Desert Crest it was 111 degrees. A hot wind blew through a row of brightly colored flags advertising green homes of the future. But there were no houses yet — just a single yellow fire hydrant sticking out of the dirt and a cinder block wall with a huge pile of tumbleweeds leaning against it. On the horizon, California State Prison, Los Angeles County, shimmered in the heat.

The only sounds were the wind and the air conditioner of a trailer that doubles as Johnson’s sales office. Except for the occasional piece of graffiti, this plot of land has looked like this for the last seven years. But that is about to change. Within a few weeks huge machines will be laying down asphalt and pouring foundations.

The reanimation of this development started about two years ago when Johnson and Wells met with the private investors funding the project. After sitting on the land for five years, they decided the market had picked up enough to break ground. And their strategy was to build energy efficient homes.

“We decided to really go green. It’s the wave of the future and we thought at the time we might be a little too advanced for people,” says Johnson.

Desert Crest will have 44 homes starting in the low 300s, with standard features like solar panels and tankless hot water heaters. “The way the market is going now, I can’t see us having any inventory in three months,” says Johnson.

There’s a good chance that this time around Johnson’s plan will pay off. California is in the midst of a housing shortage.

“Ninety-eight percent of units that have been foreclosed on in California are already in the hands of a new owner,” Thornberg said. “We don’t have enough housing, haven’t in a long time.”

Part of the problem is that there’s been hardly any residential construction over the last seven years. Meanwhile the population has grown steadily, credit standards are loosening, and unemployment in California is dropping faster than the rest of the country. All of that means the state is poised for another construction boom.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.