Mortgage defaults in California will surge by the second quarter of 2005, according to Foreclosures.com, a real estate investment advisory company that focuses on distressed properties.

“Employment, or the lack thereof, is no longer the primary cause of foreclosure activity,” said Alexis McGee, president of Foreclosures.com. “The problem now is that too many households are overloaded with debt.”

During a long period of below-normal interest rates, consumers continued spending and financed their purchases with adjustable-rate home equity credit lines, she said.

“Homeowners got addicted to a combination of low interest rates and double-digit price appreciation every year,” McGee said. “Now that combination has reversed itself.”

The company also is predicting that the rapid cooling of the Las Vegas housing market could lead to a rise in foreclosure activity next year.

“Throughout much of 2004, the Las Vegas market was distorted by out-of-state speculators buying new homes to flip for fast profits,” McGee said. “Sales volume was inflated by houses selling two or three times in a matter of months.”

McGee said that Las Vegas’ year-over-year price appreciation of more than 52 percent is unsustainable and that the price correction now happening there was inevitable. As interest rates rise, downward pressure on prices will increase and many who bought at the top of the curve with adjustable-rate mortgages will find themselves owing more than the house is worth and facing increasing payments, McGee said.

“That’s when you’ll see defaults start to rise,” McGee said.

She said her company has always seen a correlation between rising interest rates and rising levels of foreclosure activity.

***

Send tips or a Letter to the Editor to samantha@inman.com or call (510) 658-9252, ext. 140.

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