UNREAL Estate : Foreclosures Are Up, Interest Rates Down; Sales Up, Prices Down. But The Real Estate Bust Is About More than Dollars and Cents. It’s a Window Into the Soul of California.

JILL DIETCH COULDN’T AFFORD A THERAPIST TO HELP HER COPE after she and her irregularly employed husband, Tom Hindy, stopped making the $2,500 payments on their West Hills home last April. So she has drawn on her network of friends to share her troubles and has devised her own stress-reducing method.

Once a day, Jill shuts her eyes and calls forth a mental image of her bank. She can see the walnut desks, the crisply attired loan officers, the great mound of paperwork. But what’s that, on top of the pile? It’s the dreaded foreclosure notice for her home. Suddenly, a breeze wafts through, and the notice is carried by some invisible Mary Poppins across the room, where it falls innocently into the trash. Jill allows herself a small smile.

Tom Hindy has his doubts about the technique. But the bank has not foreclosed even though the Hindys are nearly $30,000 past due. Last summer, the bank asked the couple to sell their house, a four-bedroom ranch just a short drive from a lovely bird preserve. Appraisers said it would have fetched $308,000 during the heydays of the ‘80s, but now the Hindys’ asking price of $250,000 just draws yawns.

“We’re not irresponsible people,” says Jill, and one can see plainly that they are not. The house abounds with special touches like the black-and-white tile bathroom straight out of Metropolitan Home. Daughter Jillianne, 4, is fresh-scrubbed and admirably behaved. Tom drives to construction sites and begs strangers for work. A cabinetmaker, he has bid on dozens of jobs. But, he says, “where there were five guys bidding before, now there are 150.”

Last fall, Jill swallowed her pride and admitted to her friends that she and Tom faced foreclosure. That’s when one of Jill’s best friends admitted that she was actually in foreclosure. Incredibly, another couple confessed that they were not homeowners at all, as they had told everyone in the ‘80s, but were just renters. “People really opened up after I did,” Jill says. “I think we all felt a lot better. Something happened to us, and now we have to play it out the way it lays.”

What happened to the Hindys happened to thousands of others in Southern California who based their lifestyles in part upon the belief that their real estate would continue its march toward the heavens. More than any other urban Americans--besides Manhattanites, of course--we seemed captivated by the notion that our huge mortgages somehow proved we were the best people, living in the best place, on Earth. Angelenos suffered loudly but proudly as prices escalated an average of 60% between 1986 and 1989. (New York prices jumped 40% during their boom from 1985 to 1988.) The number of people who could afford a modest home was slashed in half, and ownership became a goal of the Angeleno elite.

Perhaps that’s why, in the fourth year of the region’s painful about-face, it feels more like a lover’s betrayal than an economic downturn. Our blossoming bride of the ‘80s is looking like the bloated hag of the ‘90s. While the national economy appears to be reviving, reports for California predict yet more layoffs, especially in aerospace. Last year alone, the state chalked up a 30% collapse in housing starts, a 40% jump in business failures and a loss of 295,000 jobs, most of them in Southern California. Over two years, 21,550 agents simply vanished from membership lists at the California Association of Realtors.

Even for those not trying to sell a home and for owners who bought low before the boom, the impact has been enormous; economists say the loss of paper profits caused by the real estate slump has turned Angelenos into budget-conscious tightwads fearful of what lies ahead. It’s no wonder real estate agents are working double duty as therapists for distraught sellers, and the actual psychologists, weighing in from their gravitational center in Beverly Hills, are swamped with well-heeled patients suffering “real estate anxiety” and the concomitant “loss of self-worth.”

“Clients come to me, devastated, and say, ‘Do you know I’ve spent six months working to get refinanced and meeting with these people and I didn’t get it?’ ” says Brandi Roth, a Beverly Hills psychologist. “For a long time, I have observed that people could live paycheck to paycheck in Los Angeles and it worked OK, but when real estate crashed they didn’t have the luxury of the strong economy. They’re in trouble and they have a home that is dropping in value and they need to talk about it. There’s severe, unrelenting stress out there.”

The emotional grip the real estate slump has on Los Angeles leads to endless guesswork about when the downturn will end. David Hensley, director of the UCLA Business Forecasting Project and the region’s leading bear, issues a report every three months to repeat that Los Angeles is stuck mid-chapter in Bleak House, with no rescue any time soon by the lord of the manor or the helpful townspeople. So far, he’s been right more often than hordes of more upbeat economists, making him the E.F. Hutton of bad news.

“What is eye-popping is the significant drop in actual prices,” says Hensley, who agrees with popular estimates that area real estate prices have tumbled 25% to 40% since 1989. “Californians almost had a right to think the price run-up was permanent, and now the psychological power, the revision in expectations, has been tremendous. Our home prices went from parity with the nation 20 years ago and ramped up through the ‘70s and the ‘80s. . . . But 1993 will be in the dumper, and I’m not convinced this is temporary.” Near blasphemy, such talk. But shellshocked homeowners are taking heart in buyers’ renewed interest. With prices still dropping and interest rates at a 20-year low, renters see a rare chance at homeownership--if they can wade through the stiff lending reviews that have tightened up money since the savings and loan crisis. Even some so-called “contrarians”--those vaguely irritating people who insist that investing in real estate is too risky (industrialist Armand Hammer, who lived in a modest home, was one)--smell a bargain. The fallen rich are trading down, swapping their million-dollar homes with owners who’ve prospered but can’t seem to unload their half-million-dollar homes. And platoons of re-educated sellers at the low end have finally figured out that if they cut their asking price by 25%, they can sell quickly and “buy up” to more expensive homes whose unlucky owners are taking hits of 30% or more.

Hensley calls the modest sales increases (ranging from 1% to 6% a month) in Southern California from October through December, 1992, “a real mystery,” but the bulls say the activity proves we are on the doorstep of recovery. Real estate honcho Jon Douglas, who has the largest volume of home sales in Los Angeles, believes that the year will be marked by stronger sales and low prices, followed by surging appreciation starting in mid-1993.

“Most people have been through a recession before and they know what’s happened to home values at the end of a recession, which is they go higher than they have ever been, and I think that’s going to happen again,” Douglas says. “And there’s a bunch of people, academicians and those a little more cynical than me, that can make an argument that it won’t. But you know what? It will.”

Hensley, however, says there is no parallel in recent times for what has happened here. Not since 1926, a few years before the Great Depression, has Southern California real estate taken a deep dive in value. The ‘20s bust hit right after a five-year boom. Historian Carey McWilliams wrote: “Millions of dollars in new income poured into L.A., undermining the social structure of the community, warping and twisting its institutions, and ending in a debacle that was to shake the city to its foundations . . . financiers jumped from office buildings, blew their brains out, and took poison.”

Nobody knows whether Hensley or Douglas will be the guy everyone quotes at year’s end. But there is one truism that can be plucked from the drama still unfolding. We have peered deeply into the echoing bottoms of our checking accounts and we have learned some disturbing things about ourselves.

The Wake-Up Call That Didn’t

IN SAN PEDRO, STUART TIELENS HAS HOISTED UP A BILLBOARD-SIZED sign offering his 180-degree-view home to the first person with $10,000 down. Tielens says he will trade the 1,500-square-foot house for “a boat or anything of value.” Every day for two years, 30,000 motorists on the Harbor Freeway have zipped past his sign, and thousands surely must have noticed his phone number in two-foot-tall digits. But Tielens’ phone isn’t ringing off the hook. “This city is never bouncing back,” he says. “Never, never, never.”

Never. That’s what everybody said about the chances of a Southern California recession. Even after the real estate slump hit in 1989, newspapers heralded “sales increase predicted” and “European excitement” over Los Angeles property. The boom had been so powerful that savvy real estate mogul Fred Sands, the No. 2 home seller in Los Angeles, began wondering if a fundamental change had occurred.

Real estate is cyclical. Up, then flat or down. Up, then flat or down. “But maybe,” Sands remembers thinking back in 1988, “this is just the way things are going to be.” Every time he prepared a red-ink budget for his company to live by, he ended up tossing it out and hauling more piles of money to the bank. The cocktail-party talk in Bel-Air and Brentwood--”buy now before prices really go crazy”--actually started to get under Sands’ skin. But in June of 1989, a handful of Sands’ agents reported the first instances of “buyer price resistance.” Sands sent a letter to customers. If you really need to sell your home, he wrote, “this is the time to do it.”

Stuart Tielens didn’t hear. He was living the salty life on his 40-foot sailboat in Redondo Beach when the constant yammering about buying a house for profit finally prompted him to act. In 1989, Tielens and thousands like him thought it was “a deal” to pay $280,000 for a view house, even if the street wasn’t paved and the freeway was only a stone’s throw away. He made a $50,000 down payment, sunk in $20,000 for paving, then waited in vain for a buyer with $350,000. Tielens was forced to sell his beloved boat and move in. In 1991 and 1992 he lowered his price several times and wrote to 1,500 brokers in places like Hawaii and Colorado. “But everyone I talked to said, ‘No one wants to live in Los Angeles.’ That was the biggest answer. ‘Anywhere but L.A.’ ”

But Tielens is stuck here. “The windows are double-insulated, so it’s absolutely quiet and you can see the boats far out in the harbor from all the windows,” he says. “It’s a great place to own, but I don’t want to own it.”

In real estate circles, Tielens’ pickle was dubbed the “Bigger Fool” phenomenon--the wide-eyed belief that no matter how much one paid, a buyer would always come along to pay more. But by 1990, rumors were flying in some neighborhoods that the Johnsons had accepted the same price that the Ortegas did the year before. (Those Johnsons were such fools, the neighbors all agreed.) Or that the Wongs were asking only $350,000, and they weren’t even getting the looky-loos. (Strange, the neighbors all said, maybe they shouldn’t have painted it peach.)

“Two things happened in mid-1990,” says Fred Cannon, Bank of America’s senior economist in California. “The economy turned and people began to realize they hadn’t had any appreciation in a year. Boom! The reaction was psychological. It seems outrageous, but if it’s a $3,000 mortgage, and if a home appreciates at, say, $2,500 a month, the homeowner thought: ‘OK, I’m really only out $500 a month, which is cheaper than paying rent.’ When appreciation vanished, people realized they were no longer paying $500 but the full $3,000. ‘My God,’ they said, ‘I gotta get out!’ ”

Truly desperate sellers began taking cuts of as much as 20% in mid-1990, says USC real estate expert Richard Peiser, though most held out for better times. Few accepted that L.A. consumers were placing themselves on a Pritikin diet of material denial. William Lyon, California’s leading home builder, predicted an upsurge. “In business, as in religion, you have to believe in something,” he said in a speech in late 1990. Two years later, the company, like many home builders, faced severely declining land prices.

Buoyed by a short buying spree in 1991, the California Association of Realtors, which insinuated that at least some of the slump should be attributed to negative press coverage, trotted out its hapless economist, Leslie Appleton-Young, to announce that the market had finally bottomed out: “The train is finally leaving the station.” But it was just a temporary bump in consumer confidence caused by Operation Desert Storm. Sales stalled and prices fell up to 15%.

Then the L.A. riots came. Foreign investors saw the images on CNN. Middle-class blacks, sensing heightened intolerance from whites, talked about moving. Middle-class whites complained openly about immigrants. “For Sale” signs created small forests in riot-adjacent neighborhoods such as Ladera Heights. USA Today reported a run on U-Hauls by families fleeing to Las Vegas, Seattle, Denver and San Bernardino. And, says real-estate expert Peiser, home prices slid an additional 10% to 20% that year.

Doris Horne, an agent for Prudential California Realty in Culver City, says that “of 10 homes that I list for sale, six or seven are leaving the inner city since the riots--Las Vegas or out of state entirely. A lot of the comments I get is that for what housing costs, and what you have to encounter, and with the loss of jobs, they can leave and live for much less.”

Last November, Fred Sands pored over home listings trying to make sense of it all. He concluded that owners were blithely ignoring the most bracing wake-up call since 1926. They were asking for too much money. Sands promptly mailed his infamous second message to clients, known in the industry as The Letter. Either “forget about selling your property for the next three years, or reduce the price and get it sold,” Sands wrote. His act was seen by some as traitorous. But Sands, who acknowledges that he lost a few clients, but helped far more, defends it as “a badly needed dose of reality.”

Following the Market Down

HERE IS A BIZARRE IRONY IN THE WORLD OF HOMEOWNERSHIP. Thousands of usually careful people sign their names to loans of $150,000 or even $1 million without learning any more about the tides of change that affect their home prices than they do about the firing order of the spark plugs that start their cars. Today, owners with homes for sale are giving a lot of grief to their real estate agents, those rascals who keep trying to prevent them from tacking an extra $50,000 or $100,000 to their asking price. The slump, the sellers reason, is my agent’s fault.

But like a lenient baby-sitter who finally lays down the law to a spoiled child, agents are getting tough. At Jon Douglas in Brentwood, one agent refused to represent a well-known contractor in Playa del Rey until he lowered his price. Odette Peters, a Dilbeck agent in Glendale, shows her clients a videotape that calmly rips apart the fatal strategies that sellers cling to: “We can always come down later”; “they can always make an offer.” Says Peters: “The video helps put some distance between the bad news and the person bringing it-- me.”

Not many sellers are jumping into the icy waters voluntarily. But those who must sell their homes are learning to bite the bullet. Andy and Lisa Robinson, who have moved to San Francisco, waged a near-war with their Dilbeck agent, Jennie Manders, before Andy finally listened. They dropped the price on their attractive Pasadena home from $339,000 to $324,000, finally accepting an offer of $283,000. “He actually said some pretty awful things to me, worse than I think I’ve ever heard,” Manders says. “But my job was to push the facts. I was really proud of them when they came around.”

Thousands of owners are snared in a maddening spiral known as “following the market down.” Realtors say such sellers have jinxed themselves by putting a home on the market at too high of a price, leaving it there too long and freezing the idea in the minds of realtors and buyers that their house is overpriced.

That’s what happened to Albert Hernandez, a veteran investor who has bought and sold many homes. In 1990, he paid in the high $200,000s for a foreclosed house in the Elysian Park hills. He spent thousands restoring it and listed it for $375,000, $325,000 and finally $295,000. “I didn’t get a single serious offer. It was ridiculous,” he says.

Hernandez even paid nearly $6,000 for newspaper ads to promote the three-bedroom stucco home with its separate first-floor apartment. During one of his many open houses, four owners trying to sell their homes came by, “just wanting to compare notes.” A neighborhood woman stopped in, and Hernandez found her using his rowing machine. He even got calls from bottom-feeding “seminar groupies” wanting to take over his $2,500 payments if he would walk away with nothing. Last summer, Hernandez touched up the front lawn with green paint used by cemeteries, hoping that the poly-coated greenery would add a little dash. It didn’t. “I’m close to giving up,” he says, “so I thought up a new ad I might run: Must sell due to illness. Sick of this house.”

This year, Hernandez cut the price to $285,000. A few weeks ago he got his first nibble, for a measly $200,000. L.A. buyers, Hernandez says, have “become positively predatory. That’s the word for it. Predators.”

L.A. real estate resembles a pond in Death Valley, seemingly without much life. But give the pond a stir, and odd little creatures go rushing about, the kind that lie dormant in harsh climes and blossom when the time is right.

At dozens of foreclosure auctions held across the city each day (mortgage foreclosures nearly doubled statewide last year), one can find a gaggle of investors, ears glued to cellular phones, note pads in hand, trying to find the juiciest value. Long known as the 40 Thieves, they drive from auction to auction as their mobile fax machines print title information on a given property. Ed Marsh, president of First Independent Trust Deed Services, one of the region’s largest foreclosure services, calls them “the ultimate bottom feeders.” They buy below market, then either sell quickly to another investor or fix up the property and put it on the market.

One recent day outside the Pasadena Courthouse, where a daily auction starts at 11:15 a.m., 15 of the 40 Thieves materialized in BMWs and Mercedes-Benzes, hot after a house that a bank was unloading for dirt. The auctioneer asked bidders to show proof of ability to pay. One silver-haired guy removed a dog-eared bunch of papers from his pocket, unfurling cashier’s checks totaling $300,000 or so.

First up was a house in Arleta for around $139,000. A cheerleader type asked, “I suppose this is the one everybody is interested in?” None of the other 40 Thieves said a word. She bid $1 over the bank’s asking price. Sold. Next was a house in the San Gabriel Valley for $98,000. A Brentwood yuppie-type bid a penny above the bank’s price. A Wayne Newton look-alike bid another penny. Brentwood bid a penny. Wayne bid $1. Brentwood bid $1.

The auctioneer clucked her tongue. “C’mon, you guys,” she admonished. So Wayne upped his bid $100. At $103,000, Brentwood dropped out. An Elvis Costello look-alike pulled on his pierced ear and entered the bidding. They pushed the price up in $50 and $100 mini-bites, finally ending at $109,000. Elvis Costello prevailed and everyone else left.

The auctioneer, now alone, read out loud to the empty sidewalk a long list of remaining homes. The banks were asking current market value, so nobody wanted them. The lenders next must offer them to the public and pay a real estate agent thousands of dollars. Some will sell for below market, like those bought by the Thieves. And that will drag down the prices of surrounding homes.

“We sold a $1.1-million foreclosure that a bank got stuck with, and since nobody wants million-dollar homes, the bank accepted an offer of $500,000,” says Leon Riley, manager of Dilbeck Realtors in Glendale. “The bank sure won’t want its name in the paper about that one. The neighbors are going to have a fit.”

Much of the money to be made in bad times is at the expense of someone else. But some who are profiting are also providing a service. For instance, construction giant Kaufman and Broad, headquartered in Westwood, has bought about 2,000 empty lots across Southern California at a real bargain from builders wiped out by the construction bust. In turn, the company is fueling the affordability trend.

“Our price four years ago for a first-time buyer was $200,000,” says Bruce Karatz, president and CEO of Kaufman and Broad. “This year our average price is under $160,000”--even in developments as close-in as desirable Glendale. “We are focusing on the first-time buyer living in an apartment--the fence-sitters who need assurance that buying now is a smart thing.”

Steve Moses, who invests in apartment buildings, is a believer in the silver-lining philosophy, which says that the city’s troubles can be turned in its favor. Eroding home values will draw businesses, he says, and smog and crumbling infrastructure will attract high-tech problem-solvers and new technologies. Thousands have taken advantage of low interest rates to refinance, Moses notes, freeing up cash to pump back into the economy.

“We’ve taken so many hits that we’re not so sure about ourselves as a city any more,” Moses says. “But in fact, it’s going to come back to us, because we are a tremendous market for talent and we are still a place where that talent wants to live. We just need to believe again.”

The Brave New Bargain-Hunters

ALL EYES SEEM turned to first-time buyers, those persnickety passbook perchers who hold the cards. If more of these neophytes buy the low-end homes, then low-end owners can move up to mid-range homes, and mid-range owners can move up to luxury homes, and so on. But first-timers, sensing their enviable position, are in no hurry.

Apartment dweller Meredith Croft knew it was a buyer’s market, so she took her time, looking off and on for a full year. Last fall she became that rarest of L.A. statistics: a single schoolteacher able to afford her own Westside home without a cent from her family. With her savings, the Belmont High School teacher bought a park-side home in Culver City for $243,000 that she couldn’t have touched for $300,000 before.

“It’s hard to believe that I moved from a Mar Vista gang area where people got robbed in the middle of the day to a beautiful neighborhood where people walk their dogs and kids play baseball,” Croft says. “I absolutely love my new home.”

Robert Fyvolent, a downtown loft-dweller, looked for months for something he could afford on a young lawyer’s salary. To his delight, home prices fell so steadily last year that view properties in Silver Lake suddenly fell into range. He bought a home for roughly $60,000 less than what it sold for in 1988. “I actually offered $26,000 less than what I paid,” Fyvolent recalls with a laugh. “The neighbors were in shock after I talked to them. They were aghast. But I can tell you I felt pretty great about it.”

Fyvolent doesn’t view himself as someone who rolled over a vulnerable owner. In fact, he’s worried that the market may drop and that he paid too much. But he’s not looking to make a profit. He survived six years downtown and plans to stay a long time in attractive Silver Lake. “I’m looking at interior paint colors, I’m thinking window treatments,” he says.

Linda Dove and her husband, whose kids were badly rattled by the riots, are moving from Venice to Santa Monica--a short distance as the crow flies, but a long way when you measure by street crime, graffiti, litter and the quality of the schools. “We’ve got this little cardboard dream house you can change around to build any way you like, and I had a nightmare of the dream house slowly sinking into the mud and slime,” Linda recalls. “The next day I said, ‘Why are we building our dream home in the city of my nightmares?’ ” She and her husband are looking for a home in the $500,000 range. Says Linda, “We’ve been amazed to find houses north of Wilshire that we can actually afford. But we know we’re in the driver’s seat, so we found ourselves saying, well maybe we don’t like north of Wilshire, where everyone feels they must have a Spanish maid.”

So they fan out across the city, these picky buyers who insist upon looking under the hood and who hold no delusions about fat profits or quick turnarounds. They are a different breed, proceeding cautiously and staying more within their means.

David Hensley, UCLA’s bear, is not surprised. For the economy to revive here, “that core group of people sitting on their hands are going to have to start spending some money,” he says, “but frankly, they’re still hearing ugly things about layoffs.”

Jon Douglas prefers to focus on consumer confidence polls that surged after the presidential elections, and he hopes that President Clinton’s economic package will further drive down interest rates. At Christmas, Douglas threw his Brentwood agents a luncheon at Michael’s in Santa Monica. The rare lamb slices and warm mushroom salad were outmatched only by the gobs of pearls and diamonds worn by his mostly female agents, who had an upbeat year selling $3-million Westwood condos and Bel-Air spreads to those untouched by the recession.

“This is a confidence recession,” says Douglas. “I haven’t seen such a combination of low interest rates and low prices in my 30 years of business, and I’m telling my customers I’m not sure they’ll have a chance like this again.”

And therein lies the crux of the inner battle we Angelenos are waging. Those who’ve made the leap of faith versus those who still flinch over the latest economic news. Right now, the flinchers outnumber the faithful.

The economic bears could have had a field day with the news last month about Dean and Linda Marie Thomas of Granada Hills. The Thomases, hopeless over having to resort to credit cards to pay their mortgage and despairing of ever finding work in the troubled megalopolis of Los Angeles, sold their home of eight years for $183,000--$60,000 below its value at the boom’s height.

They rented a truck, sold the furniture and drove to robust Las Vegas, where Dean had a good job waiting. “We got our piece of the pie and then it burned,” Linda says. “But once we accepted that, we felt like we’d been released from prison.” As they sat one night on two chairs that made up their sole furnishings, Dean and Linda agreed: “Leaving L.A. was the best thing we have ever done.”

It was so utterly fitting, the way things went after that. In February, Linda won the world’s biggest quarter slot-machine jackpot, a $1.88-million payoff at the Aladdin Hotel and Casino. The message, rising as it did from God knows how many depressing reports about Southern California’s economy, seemed symbolic: Dump this burg and your luck will change. Get out of Los Angeles and win back your life.

Or as Linda put it the other day: “In L.A., they pump you from the beginning that you have to own a home and if you don’t, you’re not good enough, you’re just not accepted. A home, a car, and money in the bank, and credits cards that you are able to pay. And if not, you are just not a part of. “

Now they are looking, but just looking, at grand homes in Las Vegas’ suburbs--five bedrooms, two fireplaces and a three-car garage for $200,000. “We can have a virtual palace,” says the cautious Dean, “but we’re not sure we want to spend the money after what we’ve been through.”

It seems that $200,000 sounds like a lot of money during uncertain times. Even to a jackpot millionaire.