Housing sector won't recover in 2008, experts predict: foreclosures expected to peak in the fall.

Undermined by the mortgage crisis, which are still wreaking havoc, the housing market will not be saved in 2008, analysts say.

Foreclosures from adjustable rate subprime mortgages are expected to peak in the fall and continue through the end of the year, dragging prices and saturating the market with foreclosed properties.

Though good news for bargain hunters and contrarian investors, difficult times will continue for most homeowners, especially those paying a premium on recently purchased homes and now face historical high prices for gasoline, said economist Alan Gin with the University of San Diego.

"It just compounded things. It makes it more difficult for some people to make payments," Gin said. "High gas on top of a mortgage hurts in terms of spending. People are spending money on gas instead of going out to eat."

Gin predicts further declines in home prices by 5 to 10 percent through the year.

"I think prices will continue to edge downward. We may see the bottom in 2009. I actually think most of the damage has already been done," he said.

A recent report from UCLA's Anderson School of Business predicted the housing sector will begin recovery in early 2009--helped by the precipitous fall in prices.

Meanwhile, commercial real estate appears relatively sound compared to the residential carnage.

Demand for space, however, has not kept up with new supply coming on line, said George Gramm, vice president of research for Grubb & Ellis BRE Commercial.

Job losses in the residential real estate sectors are also leaving office space empty.

Trickle-Down Effect

"The overall general economy is not projected to be good and that trickles down into commercial real estate," said Gramm.

May numbers published by the state Employment Development Department showed construction jobs were down 10 percent on the year and real estate jobs were off 7.9 percent.

"If we see in three months or six months from now the job growth numbers start to jump back up from all industry types, we're right back in," he said.

In submarkets Carlsbad and Rancho Bernardo, which have seen lots of new construction, vacancy rates are higher. Carlsbad's vacancy rate of 23.7 percent in the first quarter is "an area of concern," said Gramm.

Second quarter statistics should be available in early July.

Looking at the first quarter, Gramm said, "Overall San Diego County is 12.8 percent, which is not anything to be too concerned about. We're pretty close to the 10. We were at 8 percent in '04 and '05."

Unleased, landlord-controlled office space was 15.1 percent countywide in the first quarter, according to CB Richard Ellis.

Taking the long view, a recent survey by the UCLA Anderson Forecast and real estate firm Allen Matins reported upbeat expectations for the office market by 2011.

Investment in commercial real estate is a little trickier.

Until the larger investment banks, like Bear Stearns, Washington Mutual and Citibank stabilize themselves from the residential mortgage debacle, analysts expect lower institutional lending and soft investment demand.

"As we continue to hear about large investment banks having trouble--like Morgan Stanley profits being 60 percent off--it's not a good outlook from the investment market," Gramm said.