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What is Stockton, California, Alex?

According to RealtyTrac, California was home to six of the leading 10 foreclosure cities in April 2007. 

These cities were (with ranking):

#1 Stockton
#2 Vallejo-Fairfield
#4 Riverside-San Bernardino
#6 Modesto
#7 Sacramento
#8 Merced

Stockton -- as leading foreclosure city in the nation -- registered one foreclosure for every 131 households. 

That is six times the national average.

Now, let's flash back to homestore.com's Top 5 Home Buying Spots story from 2001. 

Using home appreciation as its guide, the story highlighted the five fastest growing cities in the nation.

Recognize any of these city names?

#1 Stockton-Lodi (23.5%)
#2 Modesto (21.4%)
#3 Salinas (21.2%)
#4 Santa Rosa (18.3%)
#5 Vallejo-Fairfield-Napa (17.4%)

I cannot say for sure if there is a direct correlation between the two data sets because they are six years apart, but it's probably more than just a coincidence.

Appreciation starts when demand outpaces supply.  Maybe folks flock to an area because it's affordable versus its neighboring towns/cities.  As values rise, builders recognize the shortage of abodes and they begin to build.

With new supply (and news of demand), investors buy homes in hopes of turning a profit.  Sometimes, they'll hold the property to collect rent; sometimes they sell the home shortly after closing for a small profit.

The investor money incents builders to add more homes.  With higher demand comes higher prices and the original inhabitants are now priced out of their neighborhood.  A large percentage of buyers are now investors. 

Many of the investors are a different type of investor called a speculator.  This is when danger sets in.

Meanwhile, carrying multiple mortgages can be a strain on a person's cash flow and investors are all about cash flow.  Enter the low-payment mortgage that can (a) negatively amortize, or (b) adjust in a period fewer than 5 years.

Over time, the appreciation slows down as an area saturates.  There is little left to borrow against for the investors and the market for selling is extra soft.  It's even tougher because builders still have brand-new homes to get off the balance sheets. 

A "used home" can't possibly sell for as much an identical "new home".  Can it?

Suddenly, investors are maxed out and can't pay their home loans.  Speculators walk away from their properties entirely.  Foreclosures begin and with each foreclosure, of course, the relative value of the neighborhood can decrease. 

More foreclosures follow.

And then, six years after the initial boom, the same area that led the nation in growth is leading the nation in foreclosures.  It's not that far of a stretch.

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Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.