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Buying at the bottom?

Tumbling prices and interest rates drag bargain hunters off the fence. But experts warn of a new wave of foreclosures.

September 13, 2008|Peter Y. Hong | Times Staff Writer

With mortgage interest rates edging down and the price of homes a good 30% below their peak in Southern California, Ryan Ratcliff made a decision on the minds of many: He decided to buy a house.

Ratcliff, a University of San Diego economist who makes his living forecasting the housing market, hopes to close escrow next week on a three-bedroom house in a northern San Diego neighborhood known for its good schools.

"I may not have exactly timed the bottom," said Ratcliff, who paid 25% less than what the foreclosed house sold for in 2006, "but I think we're close enough that I'm comfortable."

Slowly, excruciatingly, buyers are beginning to return to the housing market.

Home shoppers report competition for the cheapest foreclosures, and agents say business is picking up.

But is the crisis over?

Far from it, experts and economists say.

Any market recovery "will be long and bumpy," said Leslie Appleton-Young, chief economist of the California Assn. of Realtors. There probably will be false starts -- periods in which home prices flatten or even rise for a month or two, and then fall again.

Many point to the last time the housing bubble burst in the early 1990s, when real estate lost 20% of its value in the first three years but then continued to bleed for four more years before beginning to rise.

Still, there is no denying that activity has picked up in recent weeks and months. In July, the number of homes sold in Southern California was up from the same month a year ago, the first such increase in three years.

Some industry watchers, as a result, are becoming positively boosterish.

"Home prices are about to bottom," cheered Barron's magazine in a recent cover story. Popular business commentator Jim Cramer said much the same thing late last month on his CNBC television show.

But whether the recent activity is a one-time spike driven by fire-sale prices on foreclosed houses or the beginning of a bottom can't be decided in a month.

The rash of foreclosures, for example, may have created an opportunity for a mini-bubble of sorts, in which speculators and others rush in to buy homes that are perceived as very cheap.

But the overall pressures on the economy and the housing market are serious -- and remain very much in place.

A key problem is that despite the crash, prices remain historically high when compared with people's incomes. So even though home prices have come down, people can't afford to buy them. And the exotic mortgage products that made it possible to buy expensive houses in the past are no longer available.

Low interest rates can make pricey properties more affordable, but that's meaningless if you can't get a loan, and most lenders have tightened their requirements so much that even people with good credit often don't qualify.

Supply is another key factor affecting home values. When there are too many homes on the market, there is downward pressure on prices.

And as of July, there were so many houses on the market in California that it would take 6.7 months to sell them all, according to the Realtors association.

That's better than a year ago, when there was a 10-month supply, but far from the four-to-five-month supply that is more typical in a healthy market, said John Burns, an Irvine real estate consultant.

With inventories still high, prices will have to drop more for those houses to sell, said Thomas Davidoff, a UC Berkeley economist who studies housing markets.

Declining home values mean that more current homeowners will become "upside down," owing more on their homes than they are worth, which also means foreclosures are likely to continue in the coming months, Davidoff said.

"I don't see logically why we would be done with that vicious cycle," Davidoff said.

One reason is that the ranks of borrowers who can't pay their loans are growing, meaning that there could well be more foreclosures and more attempts to sell houses that people can no longer afford.

That's because the mortgage mess is spreading from people with poor credit records who took out subprime loans to people with good credit. These well-heeled borrowers are increasingly unable to pay their mortgages, thanks to rising interest rates on their adjustable-rate loans, lower home values, job losses and other troubles.

Davidoff said price declines "are moving up, not down, the quality chain" as prime loan defaults rise. In the lower-priced inland areas where prices have fallen most, "maybe we'll start to see a floor. But no way are San Francisco, Los Angeles or Beverly Hills at the floor," he said.

Loose mortgage lending standards did much to inflate the housing bubble, and the extent of damage as borrowers default on those loans is still unknown.

Along with subprime mortgages given to poorly qualified buyers, a large number of mortgages were issued in 2006 and 2007 to borrowers who did not document their incomes, or agreed to a low, temporary interest rate that would later reset to a much higher rate and monthly payment.

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