SAN DIEGO - San Diego County's housing market will continue to be flat for at least another year, and it could get worse before it gets better if spiking foreclosures dump a large number of properties on the market, an UCLA economist said Tuesday.

In the middle of 2008, however, the market is expected to rebound, said economist Ryan Ratcliff, who specializes in regional forecasts for the closely followed UCLA Anderson Forecast.

"I think you'll start seeing light at the end of the tunnel next year," Ratcliff said.

Ratcliff made the remarks while delivering the UCLA economic team's second annual forecast for San Diego County to a crowd of 350 real estate and construction industry professionals at a downtown San Diego hotel.

In a report released with the address, Ratcliff predicted that new home construction will decline more, sales of all types of houses will continue to be weak and home values will stay flat or decline slightly across the county, as tightened lending rules keep first-time buyers out of the market.

But while Ratcliff sees light ahead, he cautioned that the future is murky because of a troubling development that has the potential to ripple through the market and the region's strong and diverse, but slowing, economy.

"The bad news is that a new source of weakness has started to emerge: Default and foreclosure rates in San Diego are nearing levels not seen since the darkest days of the 1990s," Ratcliff wrote in the report.

During the first three months of the year, the foreclosure rate reached 10 for every 10,000 households in the county - a small fraction indeed, but one that matches the highest level recorded in 1997, at the end of last decade's extended recession, the report showed.

Meanwhile, notices that people were behind on mortgages went out to nearly 40 families for every 10,000 households in the first quarter of this year, compared wtih 50 per 10,000 households at the depths of the recession in early 1996.

The rising foreclosure rates have stoked fears that home values could tumble.

"Does '90s-level foreclosures mean '90s-style depreciation?" Ratcliff asked the crowd. "So far the answer is no. But it's too early to tell."

Ratcliff said that, because the regional economy is stronger today than it was in the 1990s, many who are in trouble will find a way to refinance loans or make up late payments because they are still employed. By contrast, the recession in the 1990s was characterized by the worst job losses ever seen in Southern California.

Ratcliff said economists should know by summer whether or not a "tidal wave of foreclosure sales" is going to trigger a price collapse. That, he said, is when many of the adjustable loans home buyers took out during the height of the housing boom will reset to higher interest rates and hence monthly payments.

Orange County real estate analyst John Burns, who delivered a companion address to the crowd, said 70 percent of homes bought in San Diego County in the last two years had adjustable mortgages.

During the boom, Ratcliff said, lenders told buyers they needn't worry about resetting loans because they could plan to refinance before the first payment adjustment.

"That sure works in a market where homes are appreciating by 10 percent or more a year," Ratcliff said. "But it doesn't work in a market where prices start to flatten out."

According to the report, the median price for houses and condominiums countywide reached a peak of $513,915 in the first quarter of 2006 and declined 5 percent to $485,789 in the first quarter of 2007. The forecast predicts the median will continue to decline, bottoming out at $478,000 in the second quarter of 2008.

The median is the midpoint of the market, meaning half of homes sold for more and half sold for less.

In March, the median price for all homes in North County was $565,000, according to the latest HomeDex report of the North San Diego Association of Realtors.

Meanwhile, total sales countywide are projected to decline from 10,796 during the first quarter of this year to a low of 9,200 in the fourth quarter. In 2008, sales will gradually rise back to 10,800 by the end of the year, the forecast said.

Ratcliff said lenders' moves to tighten rules for issuing loans will continue to have a chilling effect on the housing market.

"The credit crunch is going to take a bite out of first-time buyers and keep home sales weak," Ratcliff said.

The weak housing market is having a profound effect on the regional economy.

For example, the number of construction jobs fell 9,000 from the June 2006 peak to 86,600 during the first three months of this year, the report stated.

The slowdown in construction rippled into the retail sector, which lost 2,600 jobs between the first quarter of 2006 and the first quarter of 2007.

Still, the county added 17,800 nonfarm jobs last year, largely on the strength of the leisure/hospitality and health care industries, which combined for half the increase, the report showed. That compared to a net total of 21,500 new jobs in 2005.

Ratcliff said the recent spike in foreclosures is different from previous ones because it comes during a strong economy.

In the past, sharp upticks were signs of distress and job losses. Today, economists and real estate officials say, the increase is the result of families stretching more than ever to purchase homes that under traditional guidelines would be considered out of their reach.

Prices are out of reach for a number of reasons.

Burns, the industry analyst, said it all started in 2001 when the Federal Reserve sought to head off an approaching recession by slashing interest rates to historical lows. That made homes more affordable to a wide range of people, who began buying in droves, he said. As home prices began to rise, profit-hungry investors started aggressively buying properties. And prices shot through the roof.

Had that chain of events not occurred, Burns said, the county median would be between $380,000 and $400,000 today.

But don't look for a return to that level. Burns said prices likely will decline, but only modestly.

"Those who say the prices are going to go down 50 percent are just yahoos who are not looking at the whole picture," he said.

- Contact staff writer Dave Downey at (760) 740-5442 or ddowney@nctimes.com.