CAPE CORAL COLLAPSE

As the minibus swings into the driveway, Janet Kenyon takes one look at the new three-bedroom, two-bath house and lets out a shriek. "Oh, my God. I hate yellow!'' The house is indeed very yellow, but the hour is getting late and Kenyon and husband Blu have yet to see any place they really, really like. So they head inside to a pleasant surprise. "Aw, this is nice,'' she coos, stroking the faux granite countertops. "Sweet, isn't it?'' he agrees, exploring a custom walk-in closet. Best of all, the price: $103,000.

Three years ago, a house like this might have gone for $250,000 as investors swooped into Cape Coral and transformed the sleepy waterfront city into one of the country's hottest real estate markets. Then demand dried up, and by February, the Cape Coral-Fort Myers area had a new distinction: No. 1 in the nation in foreclosures.

The area is still Florida's foreclosure capital, though it has dropped to fourth nationally. Sales are up as cut-rate prices attract buyers like the Kenyons, who are moving from Connecticut to be close to Janet Kenyon's parents in nearby Estero.

Cape Coral is once again affordable, but with such a plunge in taxable value that the city of 170,000 is laying off dozens of employees and cutting park programs and other services.

And with nearly 11,000 homes in foreclosure - 1 in every 31 households - it could be two years before all the distressed properties find buyers.

"There's always a wisdom in maintaining a sense of cautious optimism,'' said City Manager Terry Stewart. "You obviously don't want to go off the deep end and say some of the positive things you see happening are absolutely going to continue.''

'Feeding frenzy'

Cape Coral is one of Florida's youngest cities, the creation of brothers Jack and Leonard Rosen. In 1957, they paid $678,000 for Redfish Point, renamed it and began building their "affordable waterfront wonderland'' across the Caloosahatchee River from Fort Myers.

What Cape Coral may lack in historical charm, it makes up for in size and location. At 115 square miles, it is the third biggest city geographically in Florida, trailing only Jacksonville and Tampa. Even today, 50 percent of the land is undeveloped, giving parts of Cape Coral the look of a windswept Kansas prairie.

Among the city's selling points are 400 miles of canals, many with direct access to the Gulf of Mexico. That, along with cheaper housing prices than those in the Tampa Bay area or South Florida, attracted hordes of speculators as loose lending standards and low "teaser'' interest rates fueled a nationwide real estate boom starting in 2004.

"It was a feeding frenzy,'' recalls Suzanne Sherer, an agent for RE/MAX in Cape Coral. "People were flipping properties right and left. You'd see some homes in bidding wars the minute the sign went up.''

Teachers, police officers and others who had made Cape Coral a bedroom community of Fort Myers were priced out of the market as the average sale price soared to $309,000 in 2006. Then the inevitable happened.

"Prices didn't make sense anymore,'' Sherer said. "Anytime a market is driven solely by investors, it can't sustain itself.''

In March 2005, the city issued 848 permits for new single-family homes. This March, it issued nine.

Word spreads abroad

Somewhat surprisingly, commercial development has remained fairly strong even as home building tanked. Once ignored by national chains that instead focused on Fort Myers, Cape Coral has recently landed its own Lowe's, Target, Carrabba's, a Kohl's department store and Starbucks.

City officials see that as a sign of the cape's long-term appeal.

"Even at the peak, we were undervalued in comparison to many other places in the state, and a lot of those places are pretty much built out,'' said Stewart, the city manager. "Cape Coral still has great opportunities not only for developing but for baby boomers coming to retire.''

To reduce inventory and jump-start the market, prices on builder- and bank-owned homes have been slashed. The strategy appears to be working: Adams Homes sold 55 new four-bedroom houses in June for as little as $128,900 and may start building again soon.

Such deals are especially enticing to Europeans, whose strong euro makes a $128,000 home cost the equivalent of $82,000. Word of foreclosure-drivenbargains has spread so far that a German TV crew was recently in town to make a documentary.

Package deal

As foreclosures peaked in January, Marc Joseph Realty Inc. bought a 12-seat minibus wrapped in a green sign: Foreclosure Tours R US. Weekend tours of bank-owned homes for sale are so popular that all 12 seats are often taken.

"We realized that this is where our business would be,'' said Bill Mitchell, an agent who showed 14 houses to the Kenyons on a recent day.

Blu Kenyon, of Waterbury, Conn., has a freight delivery business so he likes Cape Coral's proximity to Interstate 75 and Southwest Florida International Airport. But the couple decided not to buy one house in Cape Coral.

Instead, they decided to buy three. Among them: an 1,800-square-foot home built two years ago for $314,500.

Today's price: $99,000.

Contact Susan Taylor Martin at susan@sptimes.com.