Quickly realizing how California foreclosures have affected the Golden State of late might be important when considering investing in property out in California but also anywhere else where people are considering getting back into the housing market. Why someone should look at California in order to draw lessons mostly has to do with the fact that whatever happens out in California inevitably has an effect on the rest of the country, meaning good lessons can be drawn.

By now, just about everybody knows that the economy finally took its inevitable dive late in 2008. It’s less well-known, though, that the Golden State went into its own recession a couple of years before that. At that time, the housing markets out in California had been contracting steadily, with some in the state ignoring the issue while others began to attempt to sound the alarm, if only to warn other states that a storm was coming.

It’s also the case that the rate of increase in CA foreclosures could have served as a precursor to foreclosures elsewhere in the country. The rate can also be traced back to certain defects in the way the state manages its housing inventory. In a way, California is like an early warning system though it doesn’t seem as if too many people heeded the warning as early enough as they should have this time around.

Much of this problem that confronts California and other parts of the country (especially in cities like Las Vegas and states like Florida) owes its genesis on the fact that a goodly amount of real estate speculating had been occurring for quite a while out in California. Additionally, many people chose to ignore the fact that an economic boom will inevitably be followed by an economic bust. Many people were unrealistic about real estate, it seems.

Over time, the traditional way in which people looked at homes as more of a place to live rather than an investment vehicle was overtaken by a kind of myopia when it came to the supply and demand model. Demand was raging and was stoked in part by very lax lending standards which led people to mistakenly assume that real estate prices would continue increasing forever. This push by government to relax lending standards misled quite a few supposedly smart people.

As any economist will say, though, it is a fact of life that a recession is always somewhere down the road and becomes more inevitable for longer and economic boom goes on. This one was set off by the collapse of many types of mortgage-based securities, all of which rested on a great many shaky home mortgages. With the recession and an increase in the rate of CA foreclosures, many of these securities turned out not to be worth the paper they were printed on.

There was no possible reaction other than for the rate of CA foreclosures to shoot up. Many communities in the state have seen declines in home values of more than 50% in some areas and the recession has contributed to a steep drop in state-collected revenues from loss of property taxes, for one. For another, keep in mind that those revenues propped up schools and other services across the state.

What the Golden State can do about forcing down the rate of CA foreclosures remains to be seen, of course. There are hopeful signs and an investor who has a penchant for risk could do well in the market as long as it’s certain that real estate has stabilized. Whether that’s true in California is a question worth exploring.

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