Housing Crisis Casts a Cloud Over Sun Belt
In Once-Booming Areas, Help Could Be Too Little, Too Late

By Michael A. Fletcher
Washington Post Staff Writer
Tuesday, February 5, 2008

PHOENIX -- When residents of Maricopa, Ariz., south of Phoenix, vote in the presidential primaries Tuesday, it will be against a backdrop of vacant storefronts and sprawling, terra-cotta-roofed subdivisions that are studded with for-sale signs as far as the eye can see.

The state government is staring at a billion-dollar shortfall in its $11 billion budget. Forecasters expect a region that grew 7 percent in 2006 to contract this year. Retail sales, which rose 16 percent in 2006, are dropping. Dennis Hoffman, an economics professor at Arizona State University, said he had never seen such a sharp turnabout in 25 years studying the local economy.

To many residents of the Phoenix area, which has long been one of the nation's sunniest economies, the solutions being offered by Washington may be too little, too late.

Formerly booming Sun Belt cities are the epicenters of this economic downturn. Many economists believe that the likes of Phoenix, Las Vegas, Miami and San Diego are already in recession. A Washington Post-ABC News poll released Monday found that the economy and jobs are now the foremost issue in voters' minds nationally. A McClatchy-MSNBC poll released Sunday found that the same was true of likely voters in Arizona's Democratic primary Tuesday. A trip through the suburbs of Phoenix shows why people in these cities, reeling from the popping of the housing bubble, are so anxious.

Within these regions, the pain is concentrated among people who overextended themselves on mortgage debt to take advantage of housing prices that seemingly did nothing but rise. Because many of those people are facing massive debt, the tax rebates of $500 to $600 per person contemplated by Congress would offer little solace.

"We're in so deep that it doesn't seem like anything will help," said Rebekah Ao, 33, a pregnant homemaker who lives in a new four-bedroom home in Avondale with her husband, Otto, a truck driver. The Aos, with $50,000 in income, owe a total of $607,000 on mortgages for two houses they bought since they moved to the Phoenix area about two years ago.

Housing prices in Phoenix have dropped by double-digit percentages in the past two years. A steep decline in construction jobs caused the record-low unemployment rate to spike by a full point, to 3.9 percent, from May to December. Population growth has slowed by half, and retail and office development are also ebbing.

Rival stimulus plans being considered in Congress promise a cash infusion of as much as $1,200 per couple and $300 per child. The Senate plan would increase funding for food stamps and extend unemployment benefits. The House measure, which is supported by President Bush, would allow government-sponsored mortgage-funding companies Freddie Mac and Fannie Mae to back larger loans, which may temper the decline in the housing market by freeing up more money.

Supporters of the stimulus packages say rebate checks will help families hit by sharp increases in gasoline prices or help them hold on even as adjustable-rate mortgages reset higher. The hope is that the stimulus package will stave off, or at least moderate, the kind of recession that seems to be taking hold in Phoenix.

The Aos would be happy to have the money. But for them and millions of others whose financial problems are rooted in decreasing housing values, it will not make a lasting difference, according to many analysts. The reason: The stimulus package, and even the deep interest rate cuts made by the Federal Reserve in recent weeks, cannot quickly reverse plummeting home values and make bad investments good.

"It is tough," said Joann Hauger, executive director of the Community Housing Resources of Arizona. She sees 20 to 30 people a month in need of housing counseling because they can no longer afford their mortgage payments. "I don't know if Bush's $300 or $600 will make a difference," she said.

In Maricopa County, which encompasses much of the Phoenix area, there are about 13,000 homes in foreclosure, which is more than a sixfold increase over two years ago.

"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."

View all comments that have been posted about this article.

© 2008 The Washington Post Company