With nearly a decade of dropping foreclosure activity leveling off, more buyers being priced out of the market and some pockets where home values are already unable to recover, California's housing bubble is springing leaks.

Big ones.

Several recent reports suggest dire conditions may lie ahead for the Golden State.

First, default notices went out to 12,408 California home owners during the second quarter this year, down 14.4 percent from 14,501 during the first quarter, but almost equal the 12,520 notices sent out during the second quarter in 2004, according to DataQuick, a La Jolla, CA-based real estate statistics compiler.

Year-to-year comparisons are a better reflection of trends than shorter, adjacent periods, statisticians say.

Default notices peaked in California in the first quarter of 1996 at a whopping 59,897, but the low was 12,145 more recently, during the third quarter of 2004, indicating the trend for falling numbers of foreclosures may be over, but also that the market has plenty of room for more foreclosures without major calamity.

Foreclosure properties dragged down property values by almost ten percent in some areas nine years ago, but the effect on today's market is negligible. Only about ten percent of homeowners who default on payments actually lose their homes to foreclosure, DataQuick reported.

"We have to remember that a certain level of foreclosure activity is normal in any market. Current foreclosure rates are unnaturally low and we expect them to go up during the rest of this year as appreciation rates ease back," said Marshall Prentice, DataQuick president.

Nice place to visit

If cost was no object, California would be the No. 1 state where adults would choose to live, according to a recent Harris Poll.

But the cost of housing is a major stumbling block of an object in California, making the survey's results little more meaningful than wistful thinking.

Fewer than two in 10 households can afford the median priced home in the Golden State, according to the California Association of Realtors' August 11 press release, a release that's already outdated by more than a month.

Only 16 percent of California households (2 percent less than last year) could afford a home in June, based on the $542,720 median price, an average 5.71 percent interest rate from June and a 20 percent down payment. Not only can't most households afford nearly $110,000 down, six weeks of consecutive interest rate hikes since June may have knocked others out of the market.

"Until this week, Californians were $70,480 short of the income necessary to purchase a home. Now that has increased," says Stephane Grenier, of Ottawa, Canada, who provides property management software support for real estate investors and blogs about his clients' market conditions.

Even if home prices don't rise, an unlikely scenario for now, Californians get dinged $100 or more a month each time rates rise 1/4 of a percentage point -- which amounts to more than $200 in before-taxes income, Grenier says.

The calculation doesn't even consider the growing impact of what could be the latest "unforeseeable event" that wrecks California's housing market -- rising energy prices. Californian's pay as much as 50 cents more per gallon of gasoline than residents of some other states.

"Many people are already financially stretched to their very maximum. If interest rates keep climbing, the real estate market is in for a lot of problems," Grenier said.

What's that popping sound?

The housing bubble has already arrived at the doorsteps of some Silicon Valley homes where home price appreciation has stalled for several months at the three-quarter million dollar mark.

A San Jose Business Journal analysis of thousands of public property tax records in Santa Clara County, "Gravity Hits Home Values, Thousands Still Await Break Even," shows that more than 6 percent of the homes in Los Gatos (506) and 4 percent in Saratoga (426) are not worth what their owners spent to buy them.

The two cities yield some of the most expensive homes in the county (Silicon Valley) and countywide, the percentage of homes worth less than what their owners paid is only 1 percent.

"Even at that tiny ratio, however, nearly 3,000 home and condo owners in Santa Clara County, most of whom bought in 2000 and 2001, are holding properties not worth what they paid -- all during what is likely the nation's most robust housing boom with home prices leveraged by historically low interest rates and liberal mortgage-lending practices," writes the report's author, Sharon Simonson.

While most homes suffering slack values were purchased for more than $1 million a growing number of them cost less.

"Homes sold to people considered middle-income buyers in the South Bay -- those with purchase prices well below $1 million -- show up in sizable numbers on the assessor's list from every city from Morgan Hill to tony Monte Sereno," Simonson writes.

Published: August 17, 2005

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.