Born during the housing bubble, this San Joaquin County bedroom town was America’s most “underwater” community six years ago, a reference to the ocean of homeowners who owed more than their properties were worth.
Mountain House had another unhappy distinction: It was one of the biggest black holes in CalPERS’ investment portfolio.
At the depths of the housing-market slump, Mountain House represented a $1.06 billion loss for the California Public Employees’ Retirement System. It was a vivid symbol of the huge setbacks CalPERS suffered during the financial crisis.
CalPERS held onto its Mountain House investment, so the loss was only on paper. Now the community is coming back and CalPERS stands to benefit. The pension fund’s investment is still deep in the red, with an estimated negative value of around $870 million, but CalPERS officials say they believe Mountain House will eventually turn into a winner.
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“In the long picture of things, we think CalPERS will be rewarded,” said Ted Eliopoulos, the fund’s interim chief investment officer, in a recent interview.
A quick payout is unlikely; Eliopoulos said recovery at Mountain House could take 10 years. For now, though, housing prices are rising, and construction of new homes has resumed. Hundreds of residents attended a ribbon-cutting ceremony last month for the $92 million Mountain House High School, which will open this fall and is expected to draw more residents.
“Together we had to weather the worst downturn,” Eliopoulos told the crowd at the high school ceremony. He added that CalPERS “always believed there was something special about this community and its people.”
CalPERS bet heavily on the housing market a decade ago, and took a major beating when the bubble burst. A bankruptcy case swallowed its entire $920 million investment in a Southern California residential development called Newhall Ranch. It lost $500 million on an apartment complex in New York and $370 million on a housing development in Arizona. In total, the value of its real estate portfolio shrank by $10.8 billion in the fiscal year that ended in June 2009.
After the crash, CalPERS overhauled its real estate holdings to concentrate on safer investments, such as leased-up office buildings and shopping centers. Eager to clean up its portfolio, it sold off several troubled residential investments, even though that meant converting paper losses into hundreds of millions of dollars worth of real cash losses. The pension fund’s real estate holdings have done better lately, with CalPERS on Monday reporting the portfolio gained 13.4 percent in the just-ended fiscal year.
Mountain House’s fate was uncertain for a while. CalPERS thought about “liquidating at fire-sale prices,” Eliopoulos said.
But the pension fund held onto its town. Part of the reason was gut instinct. Geoff Le Plastrier of LDC Advisors, an Irvine consulting firm advising CalPERS, remembered visiting Mountain House during the low point. He stumbled on a resident mowing the lawns of vacant, foreclosed homes in his neighborhood. That told him the community was resilient.
“I said, ‘There’s something going on,’ ” Le Plastrier said.
There were less-sentimental business practicalities to be considered as well, Le Plastrier said. Much of the infrastructure had been built, mostly with CalPERS’ money, meaning the pension fund could recoup its sunk costs more quickly at Mountain House than at developments that were still raw land. And the attributes that drew CalPERS in the first place were still in place, notably the location just east of the Altamont Pass, a prime spot to capture homeowners seeking relief from Bay Area housing prices.
“It has attractive demographics,” Eliopoulos said.
CalPERS jumped into Mountain House in 2005, a year after the development – advertised as “The Town of Tomorrow” – opened for business. In partnership with Shea Homes, the pension fund pumped $1.1 billion into the development.
The market was hot back then. Median sales prices peaked at $677,000 in March 2006, according to market researcher DataQuick. Building permits for 878 new homes were issued that year alone, according to the community services district.
Two years later, the housing market imploded. In late 2008, market researcher First American CoreLogic reported that nearly 89 percent of home mortgages in Mountain House were underwater, more than any other community in America.
Some in Mountain House said the study was unfair. The results were based on ZIP codes, and a ZIP code consisting of nothing but relatively new houses was destined to look especially bad after a market crash.
But even Mountain House’s defenders acknowledged that their community was in trouble.
Shaun Zamrykut, a real estate agent who moved in from Dublin five years ago, recalled living on a block where nine of the 16 homes were vacant.
“It was eerie,” he said. “Desolate.”
At bottom, CalPERS valued its investment at just under $90 million in June 2010. The pension fund now estimates the development is worth $280 million, Eliopoulos said.
“We’re coming back,” Eliopoulos said.
CalPERS has been more than a spectator during the comeback. Spokesman Joe DeAnda said the pension fund pumped $52 million into construction of the high school, more than half the cost.
The project is a milestone for Mountain House. No longer will teenagers have to travel 6 miles to Tracy to attend high school, making Mountain House more attractive to newcomers.
“It makes us more of a legitimate city,” said Drew Jacobsen of Mountain House Real Estate Group. He said he thinks the high school will be a trigger for development.
Even though the new school won’t open until this fall, last month’s ribbon-cutting was a sign of Mountain House’s resurgence. Booster clubs and sports teams set up booths to sell Mountain House Mustang T-shirts and whip up enthusiasm.
Mountain House resident Annabelle Cerdas, who was signing up parents for the PTSA, said her street used to be like a ghost town but has now filled out. “The prices of the houses are up – it’s good,” she said.
The community remains a work in progress. It has 4,200 rooftops now, and CalPERS owns enough land to build 8,000 more. Housing starts have come back but are still a fraction of what they were during the boom. For every well-tended neighborhood, there’s an empty field of weeds.
Even the high school is unfinished; it’s unclear when such features as the planned aquatic center will get built. Commercial development is almost nonexistent, and the nearest supermarket is 5 miles away. Eliopoulos said an announcement on construction of a supermarket could come within weeks.
Nonetheless, Jacobsen and Zamrykut said home sales are strong and sustainable. DataQuick said median prices hit $476,500 in May, up from a low of $285,000 in late 2011.
That’s still well short of the 2006 peak. CoreLogic no longer breaks down its data by ZIP code, but clearly some mortgages in Mountain House remain underwater.
Matt Balzarini, a member of the community’s school board, holds one of those mortgages. A San Francisco firefighter, Balzarini moved his family from Fremont when Mountain House opened a decade ago and paid $500,000 for a home. The property’s value sank to around $200,000 and now is worth something north of $400,000.
Balzarini said he has no regrets about staying the course, saying the hometown feel of Mountain House is well worth the one-hour commute and the roller-coaster ride in real estate values.
“I was sold on the dream,” he said after speaking at the ribbon-cutting. “I want to see everything come to fruition.”