Minnesota is headed toward a record number of foreclosures again this year, and while most of the homes are concentrated in Hennepin and Ramsey counties, outstate counties posted the highest foreclosure rates, according to a report released Tuesday.

The study, by Housing Link and commissioned by the Greater Minnesota Housing Fund, predicts 28,000 homes will be foreclosed on in 2008, a 39 percent increase from a year ago. If those projections are accurate, that means that one in every 31 households statewide will have gone through the foreclosure process from 2005 to the end of 2008.

"The situation keeps looking more dire," said Warren Hanson, president of the housing fund, a nonprofit aimed at creating and preserving affordable housing in Minnesota. "We're worried that home prices are in a downward spiral and that this economy is getting worse."

Concerns about home values have been blamed, in part, for the nation's sputtering economy. Economists predict rising foreclosures will continue to be a drag on home prices for years to come and will impede the broader market's recovery. Wells Fargo senior economist Scott Anderson said that, on average, a house will automatically lose about 25 percent of its value when it goes into foreclosure and that the pervasiveness of the problem throughout the state will drive down prices everywhere.

"It's a problem that's going to hang over the consumer for some time to come," he said.

The Housing Link report shows that the eight counties that are projected to have the highest rates in the state surround the Twin Cities metro area. Overall in 2007, when one in every 100 households was in foreclosure, the counties with the highest rates of foreclosure were Sherburne, Isanti, Mille Lacs, Pine, Wright, Chisago, Le Sueur and Kanabec.

Those once-rural farm towns were popular with overzealous home builders, speculators and homeowners who overextended themselves and found that the equity they once had in that real estate was nothing more than vapor fueled by the steepest runup in home prices in more than a generation.

"It's the 'drive until you qualify for a mortgage' idea," said Colleen O'Brien, Housing Link president. "People drive until you can get to a place that's far enough away that you can afford the house you want."

Now the state is facing one of the most severe declines in the housing market since the Great Depression, and several outstate Minnesota communities are seeing dramatic declines in home prices. That's in large part because the overhang of new houses on the market and the rising number of vacant homes has made it difficult for those with existing houses to sell. And that means that homeowners in those communities are more likely now to be stuck with a larger mortgage than their house is worth, Anderson said.

"Those counties are also packed with a lot of recent home buyers that overstretched their finances to buy a new home," he said.

Rising gas prices aren't going to help the situation, because the higher cost of commuting to these largely bedroom communities is likely to reduce the demand for those houses and make it more likely that the homeowners will walk away from their mortgages.

"With gas prices rising, those properties aren't as cheap as they once were," Anderson said.

At the same time, Anderson cautions against relying too heavily on the projected 2008 data because they are based solely on first-quarter data and the reliability rate on the 2007 data. The data don't take into account other important factors, such as resets on variable-rate mortgages and home price trends, which could make the numbers even worse.

The data were released Tuesday at a St. Cloud meeting with more than 200 representatives from public and private organization and agencies concerned about the foreclosure epidemic.

Hanson's group will continue to fund the report because of concerns that data from RealtyTrac, a national data-gathering company that is widely reported, underestimates the number of foreclosures in the state by about 50 percent even though the numbers include defaults and foreclosures at three stages in the process.

Accurate data is an essential ingredient for policymakers and organizations that are trying to solve the problem, Hanson said, particularly when it comes to distributing state and federal resources to the areas that need it the most.

Helping foreclosed homeowners is particularly challenging in some outstate communities that don't have the staff or resources to mitigate the impact of the damage.

"The silver lining is that homes are becoming more affordable," Hanson said. "But until the market correction is more complete and home sales start up again, it seems like we're going to be in a downward spiral."

Jim Buchta • 612-673-7376