Scott Newton strides barefoot over the hardwood floor of his new central Seaside home. His girlfriend, speech therapist Ky Merriman, whips together a salad while he gives a short tour of the almost 1,000-square-foot ranch.

Each room evokes a story of major fixing-up. Although the place came with artsy drywall and double-pane windows, Newton says the electrical and plumbing systems were a mess. There was also an illegal addition, which he’ll have to build a foundation under to bring up to code.

Since buying the house in late February, Newton has transformed it. He and Merriman applied six coats of paint, repaired the roof and siding, excavated an old water heater buried in a foot of dirt, dug in a proper gas line and overhauled the plumbing. In the bathroom they installed a new vanity, scoured the scummy tub and scraped out four inches of mushrooms growing on the floor.

The house has been through a series of speculating owners, Newton explains. “They did a good job on some stuff, and others it’s like, ‘What were they thinking?’ This wasn’t livable. It took a long time before we spent a night in here.”

Nonetheless, he feels like he got a deal. Six months into his home search, and after losing four bids on other houses, Newton nabbed the foreclosure for $190,000—$5,000 below asking price and $515,000 less than it was sold for in 2005. After $10,000 in materials and countless hours of labor—“Two trips to Home Depot every day for two months straight,” he recalls wearily—the home is cozy and bright.

Chart: Data are from the end of March of each year. Horizontal points: years 1999-2009. Vertical points: $200k-1.2mil. Prices are rounded to the nearest thousand. Source: MLSListing, Inc., and Monterey County Association of Realtors.

Newton, a locksmith, says he changed the locks on roughly 200 local foreclosures over the past year. It’s made him somewhat cynical about real estate speculators: “I saw a lot of people trying to make money and getting burned on it.”

He, on the other hand, is planning to root in his new house. “I like being in the center of Seaside and feeling a real sense of community,” he says. “It seems like a place in transition. I’d like to see it grow in a way that’s good for working-class people and artists and people who couldn’t otherwise afford it.”

Count me in that last group. When I moved to the area in January 2007, one glance at the market told me I’d never be able to buy a house here—at least, not as an altweekly reporter with an artist boyfriend. At the time, the average Seaside home sale hovered around $700,000, down from a 2006 peak of more than $800,000.

Since then Seaside’s real estate values have tanked, with average sales diving to just over $400,000 in spring 2008 and less than $300,000 now (see chart, pg. 19). The crash can be blamed largely on inflated home values at the top of the market, compounded by bad loans and job losses spurred by a national recession—producing a glut of foreclosures, or Real Estate Owned (REO) properties.

This is the flip side of the national economic meltdown. For the first time in recent memory, real estate bargains are fairly easy to come by in Seaside—at least, for the lucky few who haven’t lost their homes and don’t mind gentrifying what has historically been, along with neighboring Marina, the Peninsula’s most affordable and diverse area.

The local REO boom started in mid-2007, says Marina Camacho, administrative services officer for the county assessor’s office. The number of Seaside foreclosures stayed under 10 per month through most of 2007, then doubled and tripled through most of 2008, reaching a high of 32 last August. From June 2008 to March 2009, according to the city’s data, banks took over 122 single-family Seaside homes.

That doesn’t include short sales, which allow homeowners to sell for less than they owe without ruining their credit. If their lenders allow them to go through with it, they walk away debt-free, but with no equity. The bank, for its part, absorbs heavy losses but is spared the extra costs of repossession. Short sale prices are often on par with foreclosures, but the escrow process takes longer and involves more bureaucratic hoops.

Realtors see the REO boom as a bright spot on an otherwise bleak industry. “From an investor’s standpoint, it has not been this attractive anywhere on the Peninsula in decades,” says Dorothee Crawford, a Carmel-based broker-associate. “I would urge anyone to jump.”

In 2009, Seaside’s foreclosure market calmed somewhat, hovering between nine and 15 REO sales from January through March. With inventory levels finally stabilizing, some local realtors predict this cycle of Seaside real estate has hit bottom. That means great deals for people buying on the low end.

Of course, there are hitches. Aggressively priced homes tend to fetch multiple offers, which means many bidders are repeatedly rejected before they land a home—often at or above asking price.

But the numbers speak for themselves (see chart, pg. 19). Monthly mortgages on foreclosed Seaside homes, after factoring in tax deductions on interest and an $8,000 federal tax credit for this year’s first-time homebuyers, can pencil out to less than market rent—a state Crawford calls “positive cash flow.” That’s driving a lot of Peninsula renters, including me, to buy.

Several friends around my age and income level—young, educated professionals with modest salaries—are thinking the same way. A Weekly colleague in his 30s recently bought his first home in Seaside. A friend who freelances for the paper snapped up another Seaside foreclosure, and two other staffers are scoping the market.

Most of the houses I looked at needed more TLC than I was willing to give. Pet-pee-soaked carpets, torn-out furnaces and illegal units were common features of properties in my $175,000-$225,000 price range. Some houses evoked images of meth labs and grow rooms. Some were tagged with graffiti. The rare cute, clean properties were snapped up before I could even ponder an offer.

Location is also limited. The bulk of Seaside foreclosures are in what realtors refer to as the city center—east of Fremont Boulevard and west of Yosemite Street, on slight slopes that afford peeks of blue rather than panoramic bay views. Bargains are harder to come by in the more desirable neighborhoods along Seaside’s perimeter, where homes can fetch $100,000 more than their central city counterparts.

The neighborhoods with the highest foreclosure rates are characterized by small lots with tiny concrete slab yards on one-way streets. In the mid-1990s it was rife with gang violence, with a per capita homicide rate higher than present-day Salinas, according to Seaside Chief of Police Steve Cercone. But these days it has mellowed out—the entire city saw only one homicide per year in 2007 and 2008.

“We have calls for service that are slightly higher than other areas, but not at an alarming rate,” Cercone says. “The difference now compared to five, 10 years ago is dramatic, and I would consider it a safe neighborhood.”

Inspired by the deals, I bid on a central Seaside short sale the day after its asking price was reduced. It was my first offer after barely six weeks of scoping; to my amazement, the sellers accepted it. After two months of seemingly endless inspections, piles of papers to sign and demands from the bank—I’m surprised Wells Fargo didn’t ask for a vial of my blood—it looks like a done deal. The sale closes on the day this article hits the streets.

Of course, one homeowner’s bargain is another’s scuttled dream. While the bank is absorbing the $230,000 difference between the seller’s loan and my buying price, the sellers walk away with nothing, despite the tens of thousands of dollars they’ve poured into the place over the past five years.

Countless other low- and moderate-income families are in a similar position—particularly those who took variable-interest-rate loans on homes with inflated values around 2005-06.

“Prices were high, the market was hot and everyone wanted to get in because they thought they’d make money,” says Sandy Haney, CEO of the Monterey County Association of Realtors. “People didn’t realize they were at the top of the market.”

Sloppy lending practices allowing sales with no down payment or proof of income set the stage for the crash of 2007-08, she explains: “It was either predatory lending putting people into homes they shouldn’t have been put in, or now, they’re losing their jobs.”

Neither the county nor the city tracks the demographics of who’s foreclosing and buying. But an unscientific approach suggests local Latinos—who comprise 43 percent of Seaside’s residents, according to the U.S. Census Bureau’s 2005-07 estimate—may be losing their homes at nearly double the rate of the general population.

Christian Viollaz of Chez Christian Real Estate in Seaside shows me an April 14 spreadsheet from the Santa Cruz Record, detailing 52 pending foreclosures in Seaside. Forty of the listed homeowners, or 77 percent, have Latino last names. “Most of the bad loans were done to first-time homebuyers in the Hispanic community,” Viollaz says.

A ForeclosureRadar.com report dated April 22 tells of Seaside homeowners deep underwater. A 1,200-square-foot Broadway Avenue home has $520,000 in loans, but a February appraisal pegged its value at $232,000. A 2,000-square-foot house on Trinity Avenue, with $972,000 in loans, is valued at $321,000. And a 1,600-square-footer on Noche Buena Street, with a staggering $1.2 million in loans, is now worth $325,000.

“Everyone’s pointing fingers at the nasty lenders who did these loans, but the government had no problem allowing these loans to be done,” Crawford says. “Interest rates cranked up 17 times in 15 months. Who checks and balances the feds? Nobody.”

Charles Coleman of Monterey Peninsula Properties has a litany of stories of local homeowners who fell victim to bad timing. They bought at the top of the market, or experienced medical emergencies when the stocks tanked, or lost their jobs. Some have seen their home values decline by up to 65 percent, he says: “A lot of people who are losing their homes have been humiliated. They’ve been degraded by the lenders, and they haven’t done anything wrong. When they call on their loan to try to modify it, then they get hell.”

As the market’s invisible hand rubs the scuffed-up local housing market, it polishes out a bright spot: REO bargains are jump-starting realty activity in an otherwise sluggish economy.

As foreclosures drove the market down in 2007-08, home shoppers became more receptive to REO properties. At the same time, government incentives and low interest rates sweetened the pot.

“For some folks, it’s a decline and setback,” says Barbara Nelson, City of Seaside planning services manager. “But those declines are giving opportunities to people who have been priced out of the market.”

Beat-up Seaside homes listed in the $200,000 range began fetching seven or eight bids, to the surprise of local realtors. “There’s been a lot of buying going on,” Haney says. “This inventory is dwindling rapidly. In a relatively short time in what was a depressed market, we have turned around.”

That may signal the final days of Seaside’s real estate clearance sale. At the end of last December, 110 Seaside and Sand City foreclosures were on the market, but by the end of March the inventory had shrunk to 88. In the past six months, Haney says, the countywide real estate market went from a freakish 30-month to a more typical two-and-a-half-month supply.

Fewer local foreclosures in the first months of 2009 also reflect recent state and federal laws requiring roughly eight months between a homeowner’s first default and the bank’s repossession, affording some time to refinance.

Meanwhile, Haney says, lenders have returned to the stricter standards of the 1990s: requiring buyers to have good credit and prove they can make their mortgage payments before approving loans. “People say, ‘It’s so hard to get a loan,’” she says. “Well, it was too easy to get a loan.”

But we’re in an unusual marketplace, she warns: “We’re not gonna be out of this for awhile. None of this is stable.”

Despite the slowdown in foreclosures, lower-end real estate is still hot. In Seaside’s market, where more than half the properties are under $500,000, 58 percent are pending sale, according to an April 13 Multiple Listing Service report. Salinas isn’t far behind, with 53 percent pending.

But in Carmel by-the-Sea, where four out of five homes on the market cost at least $1 million, fewer than one in 10 are selling (see table pg. 22).

On the other hand, Carmel’s high-end homes haven’t lost nearly much value as the low end. Average home prices have dipped from a peak of $2.1 million in 2005-06 to $1.9 million this year, though they tend to remain on the market for more than five months.

By contrast, Seaside homes were on the market for an average of 59 days in late March, well below the countywide average of 90. “It tells me that things are going fast,” Haney says. “Everybody waits for the bottom, but you don’t know when you’ve hit bottom. It’s cyclical. You buy on the low side, it will go up.”

Viollaz predicts Seaside homes now selling for $200,000 will bounce back to $400,000 within several years. He sees two main demographics taking advantage: first-time homebuyers, and investors who plan to fix up and rent out the properties until the market rebounds.

But there are buyers who don’t fit into either category, such as Bakersfield bookkeeper Marty Davis, who spent much of her childhood in Carmel and Pacific Grove and looks forward to retiring on the Peninsula.

Davis bought a 1,600-square-foot Seaside foreclosure in December for $360,000. She anticipates putting about $50,000 into improvements that take advantage of its sweeping bay view. “Hopefully it’s a chance for the area to be upgraded,” she says. “It seems like a very friendly, mostly quiet community—just a very comfortable place to be.”

That’s exactly the sort of attitude that cheers Assistant City Manager Jill Anderson, who’s optimistic Seaside’s depressed realty will bounce back. “In light of our spectacular position on the Monterey Peninsula,” she says, “the value is there.”

Sachin Gahlaut holds a tiny pink bundle in his arms, fussing over his one-month-old daughter while his wife, Asha, fixes a tray of tea and cookies in kitchen.

“Everything new,” Sachin says with a smile as he gazes down at the tiny, peaceful face. “New baby, new house.”

The Gahlauts just moved into their first home, a handsome three-bedroom ranch in central Seaside, and they are still glowing. With Sachin’s folks across the globe in India, it was important to buy near Asha’s family: She’s lived in Seaside her whole life, and her parents, originally from the Fiji Islands, are just five minutes away.

Sachin, lanky and shy, works 80-plus hours per week at Safeway and Chevron. Asha, curvy and talkative, is a certified nursing assistant. Until recently they lived with Asha’s parents, saving what they could. But just a few years ago, with average Seaside home prices at more than half a million dollars, they had dim hopes of ever owning.

Then real estate prices in Seaside began falling. Dramatically. By spring 2008, the average house was selling for half its 2006 value. As a market opened up in the Gahlauts’ limited price range, they began looking in earnest. But the demand for bargain Peninsula homes was competitive, and their first several offers were turned down.

Last August, just when they learned Asha was pregnant, the bank surprised them by accepting their $270,000 bid on the foreclosed central Seaside home, which had sold for $709,000 in 2005. The Gahlauts liked the fundamentals—a granite fireplace, ceramic floor tiles in the living room and hallway, three bedrooms, one and a half baths, and a back patio big enough for a barbeque.

With a little one on board, they appreciated that the house was almost move-in ready. The biggest problems were a leaky garage roof, funky electrical wiring and a lot of residual dust.

Pooling their savings, gifts from their parents and a $50,000 low-interest down payment loan from the city of Seaside, they bought the house, collected the keys on Diwali (the Indian Festival of Lights), and moved in just after their daughter was born.

“She’s our lucky baby!” Asha says, beaming at her sleeping infant.

Sachin squints at the ground. When he moved to America, he says, he never expected to buy a house. Flipping real estate for a profit is not a part of his culture, he adds: He plans to keep the house “forever.”

Asha’s favorite room is the kitchen, with its generous wooden cabinets, granite countertops and gas range. That’s where she was, preparing lunch with a friend for their husbands, when the reality of her new home sunk in.

“My friends were here, and it was my house,” she says dreamily. “It just felt good.”

FORECLOSURE INVENTORY

Ttl active sales | Foreclosures/short sales (% of ttl) | Avg days on market

North Salinas | 192 | 176(92%) | 64

Marina | 28 | 19(68%) | 80

Seaside/Sand City | 37 | 24(65%) | 59

Monterey | 79 | 7(9%) | 7

Pacific Grove | 76 | 6(8%) | 05

Carmel-by-the-Sea | 185 | 10(5%) | 57