MERCED: GHOST TOWN, USA

MERCED: GHOST TOWN, USA

The housing crisis is creating ghost towns of once-bustling communities like Merced. In largely abandoned neighborhoods, paved sidewalks and driveways lead to empty lots strewn with utility coils. Unfinished frames with rotting rafters and rusted hinges sit alongside occupied homes. Roughly 40% of the homes in Merced are considered distressed, meaning owners are behind on their mortgage payments or can't make them at all. The toll is expected to rise, even though California extended its moratorium on foreclosures for another 90 days.

Merced, situated in Central California's San Joaquin Valley, is an extreme example of what's happening across the country. As the economy tanks, foreclosures are soaring. Roughly one out of four subprime mortgages nationally is in trouble. Even so-called prime borrowers, who had good credit when they got their loans, now are having trouble keeping up; about 5% of these loans are in foreclosure, up from less than 1% in 2007, according to the Mortgage Bankers Assn. Rates are even higher in cities like Merced, Fort Myers, Fla., and Bakersfield, Calif., where the bust has been brutal.

Such markets will continue to suffer as they work through the inventory of foreclosed properties. In Merced, property values have dropped 70% in some cases. With banks and borrowers dumping distressed homes, prices could fall by 30% more, according to Karen Weaver, a Deutsche Bank analyst. Merced, say analysts, will hit bottom by mid- to late 2010--after the rest of the country. In places like Bloomington, Ind., and Fayetteville, N.C., where homeowners are in better shape, the markets should be more resilient.

Foreclosure does present opportunities: Buyers and investors are scooping up distressed properties at cut-rate prices. Those purchases are helping jump-start sales in hard-hit states like California, Nevada, and Florida--the first signs of life in otherwise moribund markets. Jillian Mendoza, a high school teacher in Merced, bought her first home out of foreclosure in September. She paid $143,000 for the three-bedroom home, which the previous owner had bought for $325,000 several years ago. "I never thought I'd be able to buy a house at 25," says Mendoza. "I got such a deal on it that I'm not that worried about it losing value."

Like many former boom towns, Merced is paying the price for unsustainable growth. The University of California announced in 2001 that it would open its first new campus in more than 40 years on 84 acres in northern Merced. In anticipation of the potential demand, builders flocked to the area, and real estate investors bid up prices.

But they were overly optimistic. The school projected only modest admission rates and faculty hires--and housing supply far exceeded demand. Now the market lies in ruins, as unemployment tops 20%. Says Janet Young, assistant chancellor at UC Merced, which opened in 2005: "The housing boom was a huge surprise to us."