North County's foreclosures strike older neighborhoods

Aug 23, 2008 (North County Times - McClatchy-Tribune News Service via COMTEX) -- NCBH | Quote | Chart | News | PowerRating -- Aug. 23--Francisco Lopez will soon join the growing number of former homeowners. But last week, he looked on the brighter side. "Before, whenever you looked for a parking spot, you couldn't find one. Now, there are spaces everywhere," he said.

San Marcos' cluster of bank-owned houses represents the toll a foreclosure crisis has taken on some of North County's older neighborhoods, a trend that stands in contrast to trends in Southwest Riverside County and much of California.

In the foreclosure bust that began about a year ago, analysts have noted that many of the foreclosures have come in new developments where many of the houses were purchased by investors.

But on Hollencrest, the trend is reversed. Most of the foreclosures here were owner-occupied residences, and now investors are snatching up houses because prices are so low that they can rent the properties for enough to cover the mortgage payments.

"That's an anomaly," said John Karevoll, an analyst with DataQuick Information Systems, a research company based in La Jolla. "The more we drill down into the foreclosure activity, the more we see the ground zero is new housing stock."

Older neighborhoods from Oceanside to Escondido have likewise seen foreclosures overwhelm the housing market, as banks have seized about one out of every 30 houses because of foreclosure, according to data from ForeclosureRadar and the U.S. Census Bureau. Still, the prototypical overdevelopment-caused housing bust of Southwest Riverside County has been more severe, with one out of every 12 houses in Murrieta foreclosed upon.

However, several analysts said that older, well-established neighborhoods across the nation have turned into foreclosure clusters.

Rather than overbuilding houses, the real estate bust in such areas were caused by a run-up in prices that encouraged homeowners to pull money out of their house's equity, they say. When housing prices began to drop, banks froze the equity lines and homeowners struggled to keep up with payments.

Or, as in Lopez's case, they purchased at the wrong time with a low, introductory teaser rate with the expectation that they could refinance before payments increased. Because he owes more than the value of his house, refinancing is impossible without a cash infusion of hundreds of thousands of dollars.

Lopez purchased his house for $379,000 with no money down in November 2005, the exact month real estate prices in the county peaked, according to Standard & Poor's Case-Shiller Home Price Index. He calls it his "lucky month," with a wry smile. He missed his first payment in March after his loan payment jumped beyond what he could afford.

Nearby houses of the same size are listed for as little as $149,900, a drop in value of 60 percent, according to Trulia, a real estate listing Web site.

Lopez said he expects to rent a house for years because his credit is ruined.

Such a tremendous drop in prices led some analysts and real estate agents to worry that foreclosures will continue as homeowners realize their mortgages do not make financial sense because their mortgages exceed what the house is worth, often called being "underwater" or "upside down."

"Even if you don't have a bad loan, you're upside down on your equity. If you are $50,000 underwater, you could ride that out. But when you're $180,000 upside down, you're not going to see that come back in your lifetime," said Donna Steward, a real estate agent in San Marcos.

And more foreclosures loom, according to Nathan Moeder, an analyst with The London Group, a real estate firm in San Diego. One problem, he said, is that homeowners severely underwater do not have much incentive to remain in the house.

Foreclosures are "only a six-year credit hit," Moeder said. "People are saying, 'Where is the housing market going to be in six years? It might be even, so we can just buy then.'"

A leap in sales numbers for July have led some analysts, including Karevoll of DataQuick, to say that the housing market has hit bottom.

But while the sales jump has been significant ---- San Diego County sales increased year over year for the first time in 48 months ---- foreclosures have yet to decline in either North County or Southwest Riverside County.

Further, both Riverside and San Diego counties are in the midst of a recession, several economists say. That could exacerbate foreclosure numbers even further, considering that most foreclosures so far have been the result of exotic mortgage products or price declines.

More similar foreclosures could be in line as more higher-risk mortgages across the state are expected to see payments jump over the next year, according to data from the Federal Reserve Bank of New York.

Further, recessions tend to cause foreclosures because of job loss.

"This pickup in sales is an indication that we're getting to a regular market," said Raphael Bostic, a real estate professor at the University of Southern California. "But it doesn't mean that we're not going to see more of the distress that we have already seen."

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