RIVERSIDE, California - On the surface, a glimmer of confidence is returning to the battered U.S. housing market, after more than three years of gut-wrenching defaults, price slumps and foreclosures.

But investors and homeowners in California, the most populous U.S. state and a benchmark for housing across the country, are bracing for another fall as emergency government support measures fall short or expire.

All that has been achieved is to put off the real pain until later on, said Mark Jacques, a mortgage broker in Corona Del Mar, California. I'm hunkering down for the storm.

California led the United States when housing prices soared early this decade, spurred by an array of public policy incentives to encourage home ownership. The boom fueled a frenzy of lending and spending that drove the U.S. economy.

But California proved to be the epicenter of reckless lending that pushed housing throughout most of the United States over a cliff in 2007, triggering a credit crisis that plunged the world economy into recession.

The sobering view now from ground zero of the U.S. property market underscores the problems faced by President Barack Obama as he tries to fix the U.S. economy.

Washington is trying to stem rising numbers of homeowners who cannot afford their mortgages as job losses mount.

Housing prices have fallen to levels not seen since 2003. But even investors pouring millions of dollars back into real estate say it may take up to four more years for California's housing market to settle.

The reasons why -- rising foreclosures, joblessness and tight credit -- are not unique to the state and may have already slowed a recent recovery in places like Florida.

A first test of the U.S. housing rebound could come with the scheduled November 30 expiry of an $8,000 tax credit for first-time buyers.

The plan has resulted in 357,000 home sales so far in 2009, out of a total 3.88 million, according to a survey of realtors by research firm Campbell Communications Inc.

Ending the credit will likely cause a drop-off in buyers, or a false peak of the budding housing recovery, according to John Burns Real Estate Consulting in Irvine, California.

In a sign of concern in Washington that the housing market cannot yet stand on its own feet, administration officials say they are considering an extension of the credit.

Helped by government measures and a sense that the worst of the price slump is over, U.S. home prices have risen nearly 4 percent from their low point in April. But the bounce was preceded by a 33 percent slide since the peak in July 2006.

BIDDING WARS, WEAK OUTLOOK

The nascent housing recovery has combined with stronger data in other sectors to suggest the U.S. recession is over. This has helped thaw credit markets that are the lifeblood of the economy.

Bidding wars are breaking out in some areas. Sales are now routinely above asking prices in California, from wealthy Orange County towns like Irvine to harder-hit San Bernardino County in the high desert east of Los Angeles.

The number of people around with cash right now is unbelievable, said Janice Konkol of FirstTeam Real Estate in Irvine, showing a foreclosed home on the market for nearly $650,000. Business cards littering the kitchen counter told of frequent visits by realtors. The house sold for $890,000 in mid-2007 -- and when new in 2002 for $461,000.

But the underlying picture remains weak.

Efforts by the government and by banks to help struggling homeowners cut payments and stay in their homes are outpaced by mortgages going bad. The mortgage-modification programs risk being swamped by rising unemployment.

Whether we put a dent in it is hard to say, said JC Ferebee, manager of Wells Fargo & Co.'s team at a mass modification event in Los Angeles.

The event drew 50,000 people over five days, hoping for mortgage-reduction deals to help keep them in their homes, according to the organizers, the Neighborhood Assistance Corp. of America. It presses banks to avoid foreclosures.

When you look at the whole culture right now and the economy with the jobs situation ... it's a domino effect, said Ferebee.

The U.S. jobless rate in September hit a 26-year high of 9.8 percent and is likely to head into the double-digit levels already suffered in California.

The jobless rate is usually considered to be a lagging economic indicator because employers are slow to hire after a recession as they wait to be sure a recovery is for real.

Economists fear that a protracted and high unemployment rate this time will deter Americans from spending more again on houses and goods, raising the prospect of a slow recovery.

If the economy continues to lose jobs, demand by consumers becomes inhibited even if you have very low (interest) rates, said Mohamed El-Erian, chief executive of Pacific Investment Management Co., the world's largest bond fund manager.

Aware of the risks posed by unemployment to the economy, the Obama administration is considering extending unemployment benefits as well as the first-time homebuyer tax credit.

JOBS GONE, BUSINESSES IDLE, HOMES LOST

The swift downturn in California's economy and the ensuing wave of job losses cost Sue and Nabil Boctor their house.

They own Sue's Cafe, a small diner near downtown Riverside, California, a thriving business center just 15 months ago.

This place was crowded every day, Sue, 59, said, sitting in her deserted cafe, scanning a newspaper for apartments to rent. We had three people helping to deliver food and even then we couldn't keep up.

Many of the one- and two-story office buildings nearby carry large for lease banners and the parking lots are all but empty. A local shopping mall stands more than half vacant, its liquor store the only one still doing a roaring trade.

Until recently, the local construction industry strained to meet demand for new homes. Warehouses were full of consumer goods arriving from Asia via U.S. West Coast ports to meet the seemingly insatiable appetite of once free-spending Americans.

Most of the Boctors' customers have lost their jobs or their work hours were cut so much that they no longer eat out.

The Boctors' story is not the usual cautionary tale of the housing crisis.

Unlike many borrowers who took out mortgages without having to put any money down and then borrowed further still against the value of their homes, they put down $100,000 and took out a $440,000 mortgage with a stable, fixed rate of interest.

But the sudden collapse of the local economy, and their business along with it, meant they could no longer afford the mortgage payments. Their house, their dream home for their retirement, was due to be auctioned off on October 13.

Nearly 18 percent of working-age Californians were either officially classed as unemployed, working part-time because they could not find full-time work or had given up looking for a job in the second quarter of 2009, according to official data, compared with nearly 14 percent nationally.

I do think we've come into a new cycle of defaults, said Ron Faris, president of Ocwen Financial Corp, a servicer of 280,000 subprime mortgages.

He has noted a shift in the causes for debt delinquency from rising loan costs to joblessness.

Standing on his sun-baked driveway in Moreno Valley, a small town 12 miles from Riverside, Nabil Boctor, 65, pointed to four houses on his block that have been foreclosed on and now stand empty.

The crisis is everywhere and it's growing, he said. This will take a decade to work itself out and by the time it's over everyone is going to have to feel some pain.

Around the corner, a family was loading a trailer with their belongings, ready to move on.

FORECLOSURE BACKLOG

What banks do now with properties their occupants cannot afford is the biggest unknown factor in the housing market.

Economists fear a repeat of the flood of foreclosure listings that scared all but vulture buyers -- specialized in assets few others want -- and sped the 2008-09 price slump.

More than half of house sales in southern California in late 2008 and early this year involved distressed properties, accelerating price drops, according to Thomas Lawler, founder of Lawler Economic & Housing Consulting in Leesburg, Virginia.

In response to the slump, banks slowed foreclosure sales to seek other solutions for homeowners and help shore up prices.

At the same time, the Federal Reserve's emergency slashing of interest rates to near zero has helped encourage buyers to take advantage of the lowest prices in decades and a rush by the Federal Housing Administration, a U.S. agency, to guarantee more loans is also helping would-be home owners find credit.

But the emergency steps by the government and the Fed will be overrun by economic forces, according to many analysts.

We are far from persuaded by a little summer upturn in a sector that the government had endeavored so mightily to support, Deutsche Bank said in a report last month.

In California's Inland Empire -- a 27,000 square mile (69,900 square kilometers) region made up of Riverside and San Bernardino counties, prices will likely fall 15 percent from June for a peak-to-trough drop of 66 percent, the most for the biggest 10 U.S. metropolitan areas, Deutsche Bank predicted.

Local buyers rely not only the scheduled-to-expire tax credit but almost entirely on funding from the FHA, which in response to rising taxpayer losses may soon tighten access to its credit. One bill would require bigger down-payments.

Furthermore, in a worrying sign for the plans to help struggling homeowners across America, modifying loans -- rather than foreclosing on homes -- often does not work.

Nearly 43 percent of homeowners whose mortgages were modified in the first quarter fell behind on payments within three months, data from the U.S. Office of the Comptroller of Currency shows. For older modifications, the re-default rate is above 50 percent.

Postponed foreclosures have created a backlog that banks may have little alternative but to dump onto the market.

Foreclosures being processed surged nearly 80 percent in the second quarter from a year earlier to nearly 1 million. But completed foreclosures fell nearly 10 percent to 106,007, the OCC says.

Brokers in California bemoan what they say is just a delay in the inevitable pain of people losing their homes and the follow-on boom in sales of cheap properties, something for which there is no shortage of demand today.

Bruce Norris, president of property investment firm The Norris Group, said inventory levels are completely artificial, completely baloney ... The delinquency rate (in California) has exploded, but inventory levels have gone down. In many of these cases the banks have simply avoided foreclosure.

Amherst Securities, a broker-dealer specializing in residential mortgage-backed securities, calculated a mountain of 7 million U.S. housing units is likely to end up on the market -- equivalent to 135 percent of a normal year's supply.

It's going to drip on the market, said broker Fred Arnold in Stevenson Ranch, California. We don't have the state and federal government that will let the natural supply and demand market occur which is pushing the real estate problem into 2012.

(Editing by William Schomberg and Philip Barbara)

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