Via the Wall Street Journal, Zillow has just published their latest real estate survey including data for the Inland Empire.  Zillow reports that home prices in the area are down 36.0% since their peak in the second quarter of 2006.  A majority, 62.1%, of homeowners in the Inland Empire who have purchased their homes in the last five years are under water — that is, they owe more than their house is worth.  Sixty five percent of homes sold in the IE in the second quarter of 2008 were sold for a loss and, amazingly, more than half of the sales were of foreclosed properties.  (The average foreclosure transaction rate for the past five years was 8%.)

Redlands home prices are down 7.7% quarter-over-quarter and down 26.1% year-over-year.

The Journal estimates that housing prices in the region need to drop an additional 24% to restore the pre-boom price/income ratio, a measure of affordability.  Clearly, there’s an imbalance in the kinds of jobs available in the region and the relative cost of housing, but I’m not sure if their measure of historical affordability (the average ratio of home prices to household income for the period 1985 – 2000) is accurate.  But here’s a real-world example of the problem:

Assume a family of four with a household income of $28,000/yr.  With the absurd mortgages on offer at the top of the market in 2006, they were able to qualify for a $410,000 loan, the annual payments for which are greater than their gross income.  They were able to pay for it with an $80,000 line of credit, taken out at the same time as their mortgage.  With their house deep under water, it’s a perfectly reasonable economic decision for them to just walk away from house.  They had expected to ride the wave of rising housing prices but they had bad timing and got caught as the wave broke.