Housing Crisis Casts a Cloud Over Sun Belt

"I think we're on the wrong track with the stimulus," said R.L. Brown, publisher of the Phoenix Housing Market Letter. "From the housing perspective, what would help is some kind of program that would permanently mitigate the resets. But who is going to make the difference up to the investors? It is a real dilemma."

It is an abrupt shift for a city that has long been one of the nation's boomtowns. Phoenix has a large tourism industry, highlighted by the Super Bowl on Sunday in suburban Glendale. The game alone was projected to generate $400 million in economic activity for the area.

And while the region counts the aerospace company Honeywell International and computer chipmaker Intel among its largest employers, housing is the biggest component of the local economy, with construction accounting for nearly one in 10 jobs, or about 50 percent more than the national average.

"Our economy out here is based on residential growth. That's our engine," said William A. Gosnell, a principal in Lee & Associates, one of Phoenix's largest commercial real estate firms. But with housing inventories and foreclosures up and prices down, residential construction slowed to a crawl, crippling the overall economy in the process.

"We're in recession because of the large concentration of resources in our economy devoted to construction," said Marshall J. Vest, director of the Economic and Business Research Center at the University of Arizona.

The decline in residential activity is leading to downturns in retail and commercial construction as well. While long-planned projects in close-in communities are being built, many economists expect few to come in behind that construction for several years.

The cooling market has prompted Martin DeRito, owner of DeRito Partners, a retail developer and brokerage firm, to back out of a couple of development deals, leaving hundreds of thousands of dollars in earnest money and pre-development expenses on the table.

"When the consumer is hurt because his home value is hurt, then that boomerang affects everybody," DeRito said. "Everybody is going to take a hit."

Sales of expensive items, including upscale cars and furniture, have declined, retailers said. As a result, unemployment is projected to climb this year in retail jobs and in some manufacturing sectors.

Many business people and economists here do not expect things to pick up until the area works through its inventory of about 37,000 unsold homes, which could take three or four years.

"All the stimulus can do is make the recession a little less severe than it would have been," said Jim Rounds, senior vice president of Elliot D. Pollack & Co., an economic and real estate consulting firm. "But it is not going to prevent it."

The struggles of Rebekah and Otto Ao in dealing with a crushing mortgage debt show how deep the problems go.

They bought their first home in 2005, for $269,000. They paid for it using an Option ARM, which allowed them to make a monthly payment of $850, which was less than what they paid for rent in Los Angeles. Only later did they realize that meant that their loan amount would grow over time, not shrink, as would their payments.

"When we saw the payments were so low we decided to buy another house," Rebekah Ao said. "With the market going crazy, we figured we could sell the other house in a couple of years."

They now owe $287,000 on the first one and $320,000 on the new home, which they are renting. Their credit card balances, which they once kept at zero, have ballooned to more than $14,000 as they struggle to make ends meet.

"It hurts to know that you are on a road that leads to a dead end," Rebekah Ao said. The Aos are weighing their limited options. Foreclosure? A sale that takes in less than they owe? "But right now," she said, "we're just throwing our money away every month."