In The Big Short, Michael Lewis delves into the overextension of credit and the poor management of real estate. The overbuilding of houses and overextension of credit to less worthy borrowers is highly evident in Fresno. The Sunnyside area of Fresno, which holds many acres of agricultural land, was a great example of overbuilding and what happens when residential demand outpaces demand for all other uses. With high foreclosures and a customer base that mirrors some of Lewis’ examples, Fresno was obviously not insulated from the crash. The end of the real estate boom left many areas deserted with developers leaving in droves just as fast as they came in. The Sunnyside area of Fresno is no stranger to these developments.
Financial bubbles have occurred since the beginning of financial markets. In the past 30 years we have seen history repeat itself several times but our memory remains very short-term. When demand skyrockets and optimism abounds, things can get out of hand. This is very evident in Fresno where developers began to take large lots of land, often agricultural areas, and build housing developments.
The Sunnyside area of Fresno, which was mostly comprised of agricultural land, transformed quite a bit during the real estate craze. Bounded by Chestnut Avenue on the west, most of the area is considered County land. When the general real estate market began to heat up, so did the public’s need for more residential land. In southeast Fresno this meant replacing farm land with new housing development. Builders clamored to convert lots for residential use. The extension of highway 180 also helped boost demand for these homes. The Sunnyside area that once contained large lots with spacious backyards began to see the typical traits of new housing where lots are smaller and neighbors are closer together. Population density essentially increased by 50 percent (Advameg, 2010).
A big issue with real estate booms is the inherent risk involved with mortgage loans. Lengthy terms, borrower creditworthiness and fluctuating economic conditions can all affect real estate markets. As a lagging economic base, Fresno’s markets tend to experience the effects a bit later than northern and southern parts of California. Fresno’s agricultural base also creates employment that is very sensitive to changing prices as well as seasonal trends.
In The Big Short, Lewis cites many cases where banks did not do their due diligence in screening borrowers. He writes about a strawberry picker who made $14,000 a year and was approved for a $700,000 mortgage (Lewis, 2010). For many new developers in the Sunnyside area, this scenario could have very well been true. First-time buyers with low or seasonal wages soon became viable borrowers for an industry that began to run out of truly qualified participants. In this situation the Sunnyside area saw an influx of builders coming in and capturing these untapped borrowers in an area that was largely undeveloped (Fresno, 2008). Unfortunately, many were simply too late to the game.
Michael Lewis paints a picture of uncertainty and desolation in the aftermath of the real estate boom and bust. He points to areas like Bakersfield that were once beacons of hope and now are largely abandoned. A quick drive to the Sunnyside area a few years ago likely evoked those same emotions. Unlike more developed areas that simply have “for sale” signs dispersed throughout a neighborhood, many of the housing developments in the Sunnyside area were left unfinished and essentially abandoned in hopes of a better time when the market was able to recover.
The Fresno residential market had overextended itself and in the process perpetuated urban sprawl and left agricultural land unusable for the foreseeable future. Real estate generally lags behind in demand and the central valley lags behind other expensive markets and thus unfinished developments were the outcome for the Sunnyside area. For an area that once had mostly older housing mixed with large lots of crops, the undeveloped lots were a big eyesore.
Michael Lewis rails against those banks and investment firms that perpetuated the idea of the American Dream. Individuals were led to believe that they could somehow own homes that were far beyond their means. Cities and communities were driven to accept this idea as well. The Sunnyside area of Fresno, a once harmonious mix of agriculture and older but classic housing, succumbed to these same market pressures. Overbuilding and urban sprawl created a desolate landscape that disrupted the once scenic area. The area will recover but it will be interesting to see if history will repeat itself in another 20 years as has been the pattern that Lewis explains in his book.
Advameg, Inc. (2010). City Data - 93727. Retrieved December 2, 2011, from City-Data: http://www.city-data.com/zips/93727.html
City of Fresno. (2008, July 8). Fresno Southeast Growth Area. Retrieved December 1, 2011, from City of Fresno Web Site: http://www.fresno.gov/Government/DepartmentDirectory/PlanningandDevelopment/Planning/SEGA/default.htm
Lewis, M. (2010). The Big Short. M. Lewis, The Big Short. New York: W.W. Norton & Company.