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Flips, Scams Blamed in California Decline

Bhaviesh and Varsha Shah bought their dream home in a new development east of Los Angeles two years ago, planted flowers around an emerald lawn and picked out wicker furniture for sitting outside on cool afternoons.

Today the view from their porch is a street pocked with boarded windows and dead lawns -- homes now repossessed after buyers failed to make mounting mortgage payments.

The Shahs live on a street with 10 large homes of 3,000 square feet or more, four of them now in foreclosure.

Although they are surviving the mortgage meltdown, their dream development -- like many in this arid corner of Southern California known as the Inland Empire -- is an early casualty.

"We're not surprised. We had a feeling it was coming," said Varsha Shah.

They found out which way the wind was blowing about a year ago when several families moved into some of the homes and never bothered to water the grass or pick up beer cans. Unlike the Shahs, they didn't seem to be in Towne Square and its 49 Spanish-style and 1920s-inspired Craftsman homes for the long haul.

The Inland Empire, 50 miles east of Los Angeles, was a latecomer to the housing boom in California as buyers squeezed out of high-price coastal Los Angeles and Orange counties found large homes going up on the region's vast supply of vacant land.

And it has been one of the most hard hit by foreclosures.

The Inland Empire's combined Riverside and San Bernardino counties reported the fourth highest number of foreclosure filings of any of the nation's 229 largest metro areas in July, behind Atlanta, Los Angeles and Detroit, according to market tracker RealtyTrac.

Survivors of Towne Square find themselves not only with unsightly, empty properties next door, but also with home values plummeting amid the fire sales on foreclosed homes.

So selling and moving to a better neighborhood is not much of an option because many owe more on their mortgage than they would get for the sale -- what the industry calls "upside down."

And real estate agents note that California's market is likely to rebound as it has in the past, underpinned by high population growth.

"Everything goes in cycles. I think we'll be OK if people don't panic," said Patricia Patton, who has been a real estate agent in the area for over 14 years.

Joe and Mary Gordon don't feel much like sticking around, but have little choice.

They bought an approximately 4,000 square-foot home on the street behind the Shahs for $741,000, thinking it would be their last home after moving from Orange County, just west of the Inland Empire.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.