Phoenix-area real estate collapse echoed troubles

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Phoenix-area real estate collapse echoed troubles
Foreclosure wave's path marks how economy fell
by Catherine Reagor, Matt Dempsey and Ryan Konig - Oct. 9, 2011 12:00 AM
The Arizona Republic

A look at metro Phoenix's foreclosure crisis over the past five years shows an economic crash moving through time and space.

The collapse started in new-housing areas on the fringes and then swept inward, hitting more established areas as the unemployment rate climbed. Now, as the stock market struggles and speculation swirls about another recession, foreclosures are flaring in the Valley's luxury-home neighborhoods.

A new Arizona Republic analysis, which maps out every home in default in the region over the past five years, is the first comprehensive look at the wave of foreclosures that has swept the Valley since the market began its steep decline in 2007.

The analysis, based on data from Phoenix foreclosure-information service AZ Bidder, plots individual foreclosures and overall trends by year.

It shows how the Valley's foreclosure crisis was more than one crisis. Foreclosures arose in waves, driven first by problematic mortgages, then by the job woes of the recession and now by lingering economic effects being felt in expensive neighborhoods.

The data also hints at where some homeowners may see the long-declining values of their homes begin to rise.

Some areas already are seeing their annual number of foreclosures decline. With that, a few now see slight increases in home prices, or at least much smaller decreases. In other areas, foreclosures persist, lingering chapters in the ongoing story of the crash.

"In most cases, all you have to do is follow the foreclosures in the Phoenix area to understand where the area's housing and subsequent economic problems began and then how far-reaching the problem is now," said Arizona economist Elliott Pollack. "It started in 2007-08 with people on the peripheries who bought homes they couldn't afford, and then, as the unemployment rate climbed, the foreclosure problem spread."

Sub-prime woes

Communities on metro Phoenix's edges sprawled outward during the first half of the past decade, adding swaths of new homes as prices soared. To own these homes, many buyers used subprime mortgages and loans with small down payments.

In some cases, these buyers were aspiring homeowners who didn't have enough income to buy the houses through traditional loans. In other cases, buyers were investors, who simply wanted to snare a profit on rising home values while putting little money down.

The high-risk loans came with adjustable interest rates, and rates began to climb about the same time home sales and prices began to fall. Homeowners couldn't sell or refinance because they already owed more than their now-declining home values. Foreclosures ensued.

Many investors walked away from their mortgages because they had put only a few thousand dollars down. Many of the homes in these new neighborhoods were never occupied before they went into foreclosure.

An analysis of foreclosures shows a sudden spike in late 2007 and early 2008, concentrated in fringe areas: far north Phoenix, the far southeast Valley at the edge of Pinal County, and far western areas including Peoria, Surprise and Buckeye. A few affordable areas closer in also saw foreclosures spike, including Maryvale in west Phoenix, where borrowers also took out high-risk loans.

Four years later, in some of those areas, foreclosures are falling and home prices are beginning to stabilize or even climb.

"Many of the outer edges of the Phoenix area have quietly been recovering," said Tom Ruff, analyst with the Information Market, a Phoenix real-estate data firm. "Foreclosures started first in those areas, and now either homeowners or investors have purchased the houses for prices that will allow them to hold on for a while."

Rising joblessness

As Phoenix's foreclosure crisis crept inward from the fringes during late 2008, it was being driven not just by subprime lending but also by the economy at large.

The state and the nation had fallen into a recession. Hundreds of thousands of jobs, many in the construction industry, were lost in Arizona.

As metro Phoenix's unemployment rate climbed, so did foreclosures. The number of borrowers losing Phoenix-area houses to lenders hit a record in 2009.

Foreclosures began to affect communities closer in, where less speculation and new building had taken place. Chandler, Gilbert and Glendale, as well as central and north Phoenix, began to see foreclosures climb and home values fall.

"There are too many homeowners in many of the Valley's older neighborhoods who had been making their payments for many years, ignored the housing boom but now can't afford their mortgage because one of the breadwinners has lost their job," said Michael Trailor, director of the Arizona Housing Department. "These are some of the saddest foreclosures."

Households that needed two incomes to pay their mortgages began to struggle as one person lost a job.

High-end gets hit

Areas with the priciest houses have been some of the last to see the big increases in foreclosures. It has taken longer for the economy to catch up with most of these homebuyers, through job losses, disappearing bonuses or stock-market plunges. Some homebuyers in high-end neighborhoods, including in Paradise Valley, also stretched and took out risky loans to buy more house than they could afford. But unlike on the fringes, these loans took longer to go into foreclosure.

Mortgages for very large amounts - above a varying threshold that has never been higher than $500,000 in metro Phoenix - aren't insured by Fannie Mae and Freddie Mac. With these large loans, rather than simply passing along their losses to the federal mortgage agencies, lenders suffer the losses themselves. So lenders have been slower to foreclose on these high-end homes.

Foreclosures did not begin a serious climb in metro Phoenix's priciest neighborhoods until late 2009.

"The luxury market has been last to be hurt by foreclosures," said Paradise Valley real-estate agent Walt Danley. He said in some cases homeowners with multimillion-dollar mortgages haven't made their loan payments for many months but lenders have acted more slowly, focusing on lower-priced homes first.

Foreclosure future

Metro Phoenix foreclosures have been declining slowly since early 2010.

When foreclosures slow, an area's home prices should start to rebound or at least stabilize, real-estate analysts say. Some metro Phoenix neighborhoods are starting to see signs of a recovery.

The housing market is too big to follow just one trend, and the location of the neighborhood has at least as big an effect on prices as does the foreclosure rate. So not all areas are seeing the foreclosure decline translate into higher home prices.

Still, "the age of the foreclosure is starting to come to an end," said Michael Orr, publisher of the Cromford Report, an online daily real-estate analysis publication. The region's overall median price, he said, "will almost certainly rise as a result" in the next year.

Metro Phoenix foreclosures fell in September after climbing for the first time this year in August. The median price of a resale home in the region fell to $112,200 in August, its lowest level in more than a decade. But in September, the median price showed signs of rebounding and climbed back to $116,500, its second-highest level this year.

"I think we are about 80 percent through this foreclosure mess," Ruff said. "Some parts of the Valley are definitely farther ahead in the recovery process than others. . . . The worst of foreclosures should be behind metro Phoenix."