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How Low Can Prices Go in the Inland Empire?

Peter Viles is senior producer for Real Estate at LATimes.com. We asked him to join the conversation about the region's real estate market, and this the first of three entries Peter shared with us. Check back on Monday, September 29th, and Wednesday, October 1 for the next installments.

The free-fall in housing prices in the Inland Empire has created one of the most vibrant markets in America for a product no one wants to produce: foreclosed houses.

Roughly 2,500 previously foreclosed homes were sold in Riverside County in August, making up 65% of all home sales in the county, according to MDA DataQuick. But supply of foreclosed homes for sale appears to be rising -- banks seized roughly 3,400 foreclosed homes in the county in August, according to Foreclosure Radar.

Home prices in the county, and in neighboring San Bernardino County, are in a virtual free-fall, and the growing list of foreclosed houses for sale threatens to drive prices even lower.

In Lake Elsinore, for example, the median sales price for existing homes is down 47% over the past year; Prices in parts of Moreno Valley have fallen 52% in the past year. These price declines threaten to create a self-reinforcing cycle of decline, forcing more homeowners intoforeclosure and further flooding the market with foreclosed houses.

The result is that California's housing bubble -- which was particularly apparent in the Inland Empire -- is deflating at a rate that disproves the conventional wisdom that housing prices rarely fall as rapidly as they rise. Below is the median sales price for existing homes in Riverside County:

Although the current price declines have been dramatic, and to many, unexpected, they could continue for some time. If prices in the county had risen in lock-step with inflation since 2000, the median sales price would be approximately $206,000 -- or 17% below current levels. That's a crude analysis though -- housing prices usually appreciate at a rate slightly faster than inflation. But it's a reminder that the current price collapse is not an unforeseen, or isolated, event -- it is the second half of a boom and bust cycle.

Thoughts? Do you think the market has bottomed-out?

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