Record foreclosures in '07 -- Real estate wave ebbs, leaving thousands of homeowners washed up and in debt

By: CHRIS BAGLEY - Staff Writer | Monday, December 31, 2007 10:30 PM PST ∞

Record numbers of Southwest County homes fell into foreclosure in 2007, and the growing stock of bank-owned houses hammered at prices that had already begun to fall from eye-popping highs.

Homeowners in Riverside County defaulted on more than 26,000 mortgages between October 2006 and September 2007, with the numbers rising higher in each three-month period, according to one research firm.

Lenders have continued to seize houses at an alarming rate; banks own nearly 1,900 houses in Southwest County, representing about 28 percent of the houses listed for sale locally, according to one statewide database of foreclosure properties.

In the last six months, agents say, those lenders have grown more willing to cut prices to recoup some of the loans they made. That has helped to push the median sale price in Riverside County from more than $430,000 in the summer of 2006 down to less than $360,000, a level most neighborhoods hadn't seen since late 2004. Lenders are selling hundreds of houses for much less than that.

"If there's a silver lining, it's the fact that you can get a single-family home now in the high 200s," longtime real estate agent Gene Wunderlich said. "That's hopeful."

Reviews of real estate databases and interviews with agents suggest those prices are drawing a mix of first-time buyers, buyers who are trying negotiate their way out of much larger loans on much larger houses, and investors. Such buyers ---- aided by sellers' resignation to lower prices ---- have begun helping to keep most houses from languishing on the market for more than two months, in contrast to the three- and four-month waits that were common among sellers in 2006 and early 2007, agents said. The pace of sales has picked up in the last three months, too.

Still, the housing slump of 2007 left thousands of unemployed construction workers and thousands of underemployed real estate agents in its wake. Builders started just 11,400 homes in Riverside County in the first 11 months of the year, compared with 23,700 in the same period of 2006 and 31,900 through November 2005, according to industry data. Chris Thornburg, a Los Angeles-based economist, said he expects related layoffs to continue well into 2008.

Agents and economists have called the foreclosure wave a massive hangover from overly generous home loans and lax lending standards that persisted into 2006. Economists, particularly, have pointed to buyers' growing tendency to stretch their finances to get into the most expensive possible houses and then hope that rising values would allow them to refinance into safer loans after two or three years. The flattening of sale prices since late 2005 has rendered that strategy disastrous for many who bought since then.

And a habit of refinancing mortgages to buy swankier cars and bigger trucks also has left many families washed up, economists say.

That has already begun to change, with local cities noticing significant declines in taxable sales at home-improvement warehouses, furniture stores and new-car dealers, three of the largest contributors to their budgets.

"We as a nation are in this massive savings hole," Thornburg said. "Consumers are spending beyond their means in large part because they feel rich, and that's in large part due to the housing market."

In that respect, Thornburg said, a recession in 2008 could actually be a good thing. Still, he said, he doesn't expect one. Unemployment in Southern California has remained below 6 percent even amid massive losses in the real estate and construction industries.

Rather, Thornburg said he expects the region's real estate bubble to continue deflating over the next two years, with prices remaining stagnant for another couple of years before heading back up in 2011 or 2012. Economists have generally pointed to the giant disparity between Southern California home prices, which have risen by 80 percent to 100 percent over the last five years, and incomes, which have risen by only 10 percent to 40 percent. To some extent, economists say, prices will just have to wait for incomes to catch up.

The current foreclosure wave contrasts with past waves in that it hasn't followed mass layoffs on the scale of those that followed the downsizing of the region's defense industry in the mid-1990s, economists have said.

Foreclosures have been concentrated somewhat among modestly priced houses aimed at first-time buyers, though large and elegant houses have hardly been immune to the epidemic. Funded by taxes, mosquito-control specialists regularly toss handfuls of pesticides into 230 green, murky swimming pools in the southwestern and central sections of the county, including many located behind houses that last sold for $400,000 to $700,000.

Wunderlich said many in the real estate industry are on edge over the number of recent home buyers whose monthly mortgage payments are due to rise in the next few months. Depending on how large that number turns out to be, many more families could end up losing their homes next year. Wunderlich said he hopes the market will pick up after that.

"Thank God, this year is wrapping up," Wunderlich said. "It can't wrap up soon enough."

Contact staff writer Chris Bagley at (951) 676-4315, Ext. 2615, or cbagley@californian.com.

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