New crisis threatens healthy banks

by David Cho - Jun. 22, 2008 12:00 AM
Washington Post

WASHINGTON - Increasing struggles by consumers and businesses to make payments on a variety of loans, not just mortgages, are setting off a new wave of trouble in the financial sector that is battering even institutions that had steered clear of the subprime-home-loan debacle.

Late payments on home-equity loans are at a record high, according to fresh data from the Federal Deposit Insurance Corp. The delinquency rates on loans for cars, small businesses and construction are spiking to levels not seen in a decade or more.

Unlike last year, when soaring mortgage defaults sparked a crisis of confidence in the financial system, the root of these problems is the downturn in the broader economy. Simply put, consumers and businesses are strapped for cash with job losses growing and retail sales falling, economists said.

"We are not finished with the mortgage problem, but you are starting to see increased delinquencies in other forms of consumer debt," said Paul Kasriel, an economist at Northern Trust Securities. "We are in the eye of the hurricane. We had the first wave of the credit crisis, and it was quite damaging. But there's another wave coming, and it's likely to be as destructive."

The institutions most at risk in this new phase of the credit crisis are regional and local banks, many of which stayed away from subprime mortgages. These firms are key drivers of economic activity in communities across the country.

Without them, consumers would lose a source of personal loans. Small businesses would struggle to stay afloat. Construction companies often can't finance local projects without these banks.

Because they have fewer options than big Wall Street firms for raising emergency funds, these regional and local banks tend to be more vulnerable in a crisis.

In the Washington area, the stock prices of several local banks have already plummeted, with shares of Virginia Commerce Bank falling nearly 50 percent and Alliance Bank dropping about 45 percent since the beginning of the year.

Others swung to a loss in the first quarter after remaining profitable through last year's financial turmoil. The Federal Reserve put at least one, Millennium Bankshares of Reston, Va., under close scrutiny this month out of concern for its financial condition.

The market values of some of these banks have fallen below their book value, or what accountants say the firms' assets are worth minus their debts. This is a sign that investors expect more losses this year.

The market value of Virginia Commerce is about $142 million, below its book value of about $175 million, while Alliance's market value has dwindled to $18.4 million, compared with its book value of $44 million.

The situation is worse in the Southwest and Midwest, where several community banks are teetering and a few have already collapsed.

Even as this second wave erodes the stability of the country's banks, it is already taking a heavy toll on ordinary borrowers. Vanessa Chavez and her family took out a home-equity loan in 2003 to pay for some remodeling of their District of Columbia home and for the medical bills for her pregnancy. Their monthly payments, once the new loan was added to their mortgage, jumped from about $2,000 to $3,700.

Chavez had hoped to help pay the bill by getting a high-paying job. But the economic downturn sabotaged her plan, and she finally took a job as an assistant manager at a Domino's Pizza. Late last year, her mother declared personal bankruptcy, hoping to get the house payments lowered.

"We're doing everything we can to stay in the house," said Chavez, 21. "We've been going through tough times, so we're trying to do as much as we can, even if it is killing us."

For lenders, there is little recourse when a home-equity loan defaults or a homeowner declares bankruptcy. They can seize the collateral for the loan, in this case the house, only after the primary mortgage is paid off.

From October to March, $6.7 billion in home-equity loans became delinquent, increasing the total by 45 percent, according to SNL Financial. The delinquency rate is now 2.24 percent, according to the FDIC, which began tracking the data in 1991.

Losses at banks are going up as a result. JPMorgan Chase absorbed $450 million of home-equity-loan losses in the first quarter, up from $248 million in the previous quarter. It said its total home-equity losses could double by the end of the year.

Smaller banks have even more exposure to such loans. Overwhelmingly, the institutions that hold the most home-equity loans are regional banks, such as SunTrust Banks and National City, according to Fitch Ratings.

Late payments and defaults in every other major category of consumer debt also rose in the first quarter, the American Bankers Association reported. Auto loans issued through car dealers have a delinquency rate of 3.13 percent, the highest since at least 1990, according the ABA.

Foreclosure indicators continued rise in May

Catherine Reagor
On real estate
Jun. 22, 2008 12:00 AM

The housing market continues to search for a bottom as foreclosures continue to climb across metropolitan Phoenix.

In May, 3,402 homes across Maricopa County went into foreclosure, according to the Information Market. Almost all of those homes went back to the lenders. May's foreclosure figure is up from the 2,969 foreclosures, or trustee deed sales, filed in April.

Don't expect foreclosures to slow this month either. The number of pre-foreclosures, or notice of trustee sales, filed also climbed in May. Last month, there were 6,384 pre-foreclosures filed in Maricopa County, compared with 6,143 in April.

Everyone tracking the Valley's housing sector is looking for that key indicator that will show the first sign of a market rebound, or at least an end to the downturn. When pre-foreclosures fall, foreclosures will fall as well.

Fewer foreclosures mean fewer bank-owned properties selling for below-market prices at auctions. It also means fewer listings that people trying to sell their homes have to compete with, and, one hopes, fewer people just struggling to hold on.

May home sales

Another key indicator, home sales, showed a slight improvement last month.

New and existing Valley home sales ticked up in May, according to analyst RL Brown's Phoenix Housing Market Letter. Building permits were up slightly.

There were a total of 7,202 new and existing home sales in May, compared with 6,636 in April. Home-building permits totaled 1,552 in May, up from 1,473 in April.

The median price of a new Valley home has dropped to $218,861, down from $267,934 a year ago. That's an 18 percent drop, but Brown said it improves the market's affordability, which will draw more buyers.

More real-estate talk

If you are near Biltmore Fashion Square in Phoenix today and want to chat about the real-estate market, please stop by Borders at 1 p.m. I will be there to discuss the big issues facing the Valley's housing market and signs that may indicate recovery.

May Valley home resales up over April, report says

J. Craig Anderson
Jun. 19, 2008 08:50 PM

Valley home resale activity increased in May over the previous month but still lagged behind the pace of a year earlier, according to the latest Arizona State University Realty Studies report.

There were 4,265 home resales in May, compared with April's total of 3,760 sales, ASU reported. Both figures exclude foreclosure transactions.

Home resales totaled 4,915 in May 2007, according to the report. Realty Studies Director Jay Butler said May is typically a strong month for home sales.

Still, he said factors such as job losses and layoffs are weakening the economy and likely will add further stress to the housing market.

Investor Report: Anti-Flipping Rules

by Kenneth R. Harney – Realty TImes

Here's some really good news for anyone involved in acquiring, rehabilitating and reselling foreclosed houses: The Federal Housing Administration is temporarily waiving its "anti-flipping" rules and will now insure mortgages on properties that have been owned by the current seller for less than 90 days.

The policy change opens up a potent resource -- the red-hot FHA fixed-rate mortgage program -- to investors and property disposition companies looking to move houses quickly off their books at a profit.

The idea, according to FHA Commissioner Brian Montgomery, is to help get rid of the "glut of foreclosed and abandoned homes" now burdening large numbers of neighborhoods around the country.

FHA's 90-day policy slowed the process down. But at least until June of 2009 -- when the temporary waiver expires -- it should no longer be an impediment.

HUD had adopted the 90-day rule at the height of the housing boom, after it found that scam artists were buying up central city and suburban foreclosures at rock bottom prices, then flipping them at inflated resale prices within days to home buyers using low-downpayment FHA-backed loans.

The buyers frequently were unsophisticated, unaware of the artificial increase in the price, and couldn't afford the high mortgage amounts. They defaulted in large numbers, ended up in foreclosure, and lenders hit the FHA insurance fund for claims.

Under the revised policy, FHA will require purchasers to be financially capable of handling the mortgage, and underwriters will look hard at appraisals. But the agency no longer will rule out insuring a mortgage simply because title to the property had changed hands within the previous three months.

Investors and property disposition firms who work with lenders' "REO" departments can play key roles in returning abandoned and damaged houses back to productive use.

But without dependable financial takeouts -- affordable mortgages for buyers whose credit histories may be imperfect -- their jobs are much tougher.

FHA's return to the foreclosure resale market segment through its waiver of the 90-day anti-flipping rule should give those investors an important resource to start using - now.

Remember: FHA says the policy change is temporary. Even with a new administration, that June deadline just might be for real.

Published: June 27, 2008

Amazon expands to Goodyear

Fulfillment center for online retailer could bring 1,300 jobs

J. Craig Anderson
The Arizona Republic
Jun. 19, 2008 12:00 AM

Online retailers promise to make 2008 a better year for Goodyear by bringing nearly 2,000 new jobs to the house-poor city.

Amazon.com azdc Inc., a subsidiary of Seattle-based Internet retailer Amazon.com Inc., announced plans Wednesday to open a 500,000-square-foot order-fulfillment center in Goodyear, adding more than 600 full-time jobs to the local economy.

The company expects to fill another 700 temporary positions during the holiday season.

Amazon.com's announcement comes just a month after Cincinnati-based Macy's Inc. opened a similar facility for its e-commerce businesses, hiring a workforce of 150 with plans to expand that number to at least 500.

Amazon.com officials said the company has leased a warehouse at 16920 W. Commerce Drive. It would be the second Valley facility operated by Amazon.com, which opened a fulfillment center in Phoenix in the fall.

Goodyear officials say Amazon.com, a Fortune 500 company with more than $10 billion in annual sales, could provide a significant boost with its jobs and tax revenue.

"This is a huge deal for Goodyear," city spokeswoman Nora Fascenelli said.

Goodyear economic-development Director Harry Paxton said city officials are working hard to bring in new employers and broaden the community's economic base, which is heavily skewed toward the now-struggling housing industry.

"It's important to be balanced," Paxton said.

Amazon.com spokeswoman Patty Smith said the West Valley is a good fit for the company because of its proximity to Southern California and abundance of skilled workers.

Smith did not know the pay range for jobs in the planned Goodyear facility but said wages would be competitive with what similar businesses in the market are paying. She said that Amazon.com offers company stock and health-care benefits to all employees.

Amazon.com has dozens of fulfillment centers all over the world for faster delivery of its products, which include books, music and software.

Arizona State University economist Tom Rex said Arizona has become an attractive location for companies that ship products to the West Coast because of its lower costs and growing population.

"Because of California being such a large target for their shipments, it makes the West Valley more sensible," said Rex, associate director of ASU's Center for Business Research.

Goodyear officials are expecting an additional 400 jobs later this year with the planned opening of a for-profit hospital operated by Cancer Treatment Centers of America Inc., a medical and alternative-therapy business based in Arlington, Ill.

Greater Phoenix Economic Council President and chief executive Barry Broome said Goodyear is bucking the trend in a year when few major corporations are opening job centers in the Valley.

"Especially in today's economy, several hundred jobs is a good thing for Arizona," Broome said.

Lower prices, new residents boost home sales

June 17, 2008 - 6:37PM

Misty Williams, Tribune

The Valley saw a slight boost in home sales last month even as thousands more homeowners fell into foreclosure and worries about the struggling economy spread.

A total of 1,845 new homes were sold in May, up from 1,832 sales the previous month, according to the latest Phoenix Housing Market Letter by analyst RL Brown. The number of existing home sales jumped nearly 12 percent from April, the report shows.

It might not be as strong as last year, but “we’ll look back on (2008) as the bottom of the marketplace,” Brown said.

Still, experts say, any recovery is sure to be slow.

Lenders foreclosed on nearly 3,400 Valley homes and issued another roughly 6,370 foreclosure notices last month alone, according to local data firm Information Market.

Builders have finally sold off many of their excess speculative homes, but now they’re competing with foreclosure properties at discounted prices, Brown said.

“We’ve got to clean all of this stuff up before we get totally healthy,” said Karl Stauffer, an agent with Sonoran Properties GMAC Real Estate.

And the trends are steadily heading in the right direction, Stauffer said.

More than 5,000 existing Valley homes were sold in May, the highest monthly total the agent has seen in two years. The number of pending homes sales has also been climbing since the beginning of the year.

The availability of financing has played a significant role in the improving numbers, he said. The use of Federal Housing Administration loans, which have less stringent credit score criteria and require smaller down payments, are surging among local buyers.

Empty feeling at Gilbert subdivision

Foreclosures spread to developers' vacant lots

by J. Craig Anderson - Jun. 18, 2008 12:00 AM
The Arizona Republic

Residents of Cooley Station North awoke Monday to 493 signs of more trouble for their half-empty subdivision.

Process servers had blanketed the Trend Homes community in east Gilbert with foreclosure notices, targeting 493 vacant lots owned by a Scottsdale "land bank," which has fallen behind on its loan payments.

The pending foreclosures are among many recent indications that communities on the fringes of suburban sprawl are likely to face more hardship before economic trends shift in their favor. Residents worry about the ghost-town effects of the half-built subdivision on their falling home values and what might happen if a developer were to come in with a new approach.

Cooley Station homeowner Krista Anderson said those empty lots, now scheduled for auction in late August, represent the future of her neighborhood, southeast of Higley and Warner roads.

"We're living in a subdivision that's half-full," Anderson said. "My main concern is what's going to happen to the subdivision."

The delinquent landowner is Taro Properties Arizona, a so-called land bank based in Scottsdale. Trend Homes had contracted with Taro Properties to purchase individual lots as needed for new-home construction.

When new-home sales in the area ground to a halt, Trend Homes no longer was able to meet its purchase schedule of lots from Taro Properties. In February, Trend Homes filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.

Like many other land banks that had contracted with home builders during the real-estate boom, Taro was left with hundreds of vacant parcels.

"They ended up saddled with all these empty lots that nobody wanted," said Mesa real-estate analyst Zach Bowers of Ion Data.

Bowers said he believes more developers and land banks are approaching the brink of foreclosure. Home builder Randall Martin Homes walked away from its Higley Park subdivision in Gilbert in February because of stagnant business and plummeting home values.

Trend Homes did not fare any better during the market downturn that began in early 2006, though the builder recently emerged from bankruptcy proceedings and was purchased June 5 by Phoenix investment firm Najafi Cos.

Reed Porter, Trend Homes' chief executive officer, said his company is trying to work out a deal with Taro Properties to acquire the remaining Cooley Station lots.

"We're working cooperatively with Taro, although we haven't finalized an agreement," Porter said.

According to the foreclosure notice, also known as a notice of trustee sale, Taro Properties defaulted on a $31.2 million mortgage agreement with Bank of America to finance the land purchase.

Bowers said the land bank faces foreclosure on three separate land holdings, two in Gilbert and the other in Phoenix, totaling 1,251 parcels and $75.3 million in mortgage loans.

Ray Howe, a Taro Properties principal, said his company is negotiating on two fronts in its efforts to save the Cooley Station lots from foreclosure.

It is talking with Trend Homes about a possible purchase and with Bank of America to preserve a loan agreement.

"We are very concerned about the situation and are doing everything we can to rectify the situation with the bank," Howe said.

He said that discussions are in the early stages and that there are no guarantees.

"As to how that will turn out, I couldn't say and don't want to say," he said.

Bank of America attorney Craig Williams did not return calls seeking comment.

Land banks all over the country are struggling, Howe added, but said he still believes Taro Properties has the staying power to survive until property values recover.

"It's a matter of holding on," he said.

The foreclosure notices were the latest reminder that all is not well at Cooley Station, where owners say they are increasingly concerned that Trend Homes has abandoned the development.

Construction activity ceased suddenly early this year, and more than a half-dozen unfinished homes stand in various stages of completion, sun-faded and coated with dust. Weeds have reclaimed many of the graded dirt lots.

"They haven't done anything in months," Cooley Station resident Adam Hingley said.

Porter said Trend Homes was unable to finish the homes because, when it entered bankruptcy proceedings, its construction lender, Bank of America, stopped funding the projects.

"We are still trying to work out terms for Bank of America to move forward with completing these homes," Porter said.

Meanwhile, property owners looking to sell not only face a slumping market but questions about the community's future.

Gilbert resident Mark Voss, who has been trying for three months to sell his former home inside Cooley Station, said he bought a townhome there two years ago because Trend Homes was offering incentives that greatly reduced the first year's payments on his $262,000 purchase.

Now, Voss is asking for $199,000. He still hasn't received any offers.

"I'm probably going to take a $70,000 loss," he said.

Construction loans' rate of delinquency hits 13.5%

Andrew Johnson
The Arizona Republic
Jun. 18, 2008 12:00 AM

More real-estate developers fell behind on their loan payments in the Valley in the first quarter, a sign that the local real-estate market still has not hit bottom.

Metro Phoenix's construction loan delinquency rate of 13.5 percent was the second-highest of the largest 100 metropolitan areas in the country, according to Oakland-based Foresight Analytics LLC.

The research firm's data includes both commercial and residential construction loan data that lenders report to the Federal Deposit Insurance Corp., which insures banks.

Only metro Cleveland, at 14.8 percent, had a higher rate than the Valley.

Metro Phoenix's delinquency rate was 2.7 percent in the first quarter of 2007 and has continued to rise since then, to 3.1 percent in the second quarter, 5.3 percent in the third quarter and 8.8 percent in the fourth quarter.

Foresight Analytics Partner Matthew Anderson attributed most of the delinquencies, which include loans on which a borrower is at least 30 days late paying, to housing.

"The story with high construction delinquency rates in general are mostly related to the residential sector deteriorating," Anderson said. "Even though there's been a big pullback and a sharp drop in prices across the U.S., including in the West, I think it's just to some extent those weak market conditions catching up with residential construction projects."

While woes in the housing market may be the primary culprit, commercial developers also contribute to and feel the repercussions of higher delinquencies.

Lenders have tightened their financing standards for residential and commercial developers, requiring borrowers across the board to put down more money on projects while charging higher rates.

They also pay closer attention to the type of projects they finance.

"They really want to see heavy pre-leasing, and they really want to see a . . . great location," said Gregory Miskovsky, managing director of the Phoenix office of Cohen Financial, a commercial real-estate lender.

Foresight's data includes some evidence that commercial real-estate developers and investors are having more financial trouble than in past quarters.

Commercial mortgage delinquencies remain relatively low throughout the country but have ticked up in some areas, including Phoenix, where the average rate increased to 1.6 percent in the first quarter over 0.9 percent a year ago.

Part of the problem is the general downturn in the economy.

Developers of new speculative projects and landlords of current properties are having more difficulty attracting and keeping tenants as businesses downsize or hold off on expansion plans to save money.

Those conditions have also caused lenders to become skittish about financing projects that lack a certain amount of pre-leasing.

Another challenge for developers stems from how they usually finance their projects.

Typically, developers first get a loan to pay for the construction of a project, then they seek a permanent mortgage when the project is completed, said Scott Holland, a managing member of Phoenix-based Keystone Commercial Capital. The company originates and manages loans that are financed by life-insurance companies, banks and other financiers.

Construction lenders make loans based partly on how much they believe the project will be worth when completed, along with leasing and rent projections from the borrower.

Once construction is complete, the developer seeks permanent financing from a mortgage lender, which it uses to pay off the construction loan.

But economic changes can cause mortgage financiers to lend less money than they would have in prior years. That leaves developers scrambling to come up with more money to pay back their construction loans.

The situation could worsen in the short term as investors try to refinance commercial mortgages that are close to maturation, Holland said. Banks may be unwilling to lend as much as they did five or 10 years ago on commercial mortgages because liquidity has dried up.

Rob Curtis, a broker with Scottsdale-based development firm VP Commercial LLC, said his company has started shopping around for new lenders after relying mostly on First National Bank of Arizona for its construction financing over the past several years.

VP Commercial, which builds mostly smaller office and mixed-used projects in the Valley, has noticed that banks want more details about projects up front before agreeing to finance them, Curtis said.

"Now they run a tighter ship," he said. "They really keep an eye on where you're at with your loan extensions."

First National has been one of the lenders hardest hit by the real-estate downturn.

Foresight's data shows that 24.6 percent of the Scottsdale-based bank's construction loans were delinquent and 5.6 percent of its commercial mortgages were delinquent as of the first quarter.

Project to help revive neighborhood

Erin Zlomek
The Arizona Republic
Jun. 17, 2008 12:00 AM

A 50,000-square-foot professional-office project is nearing completion at Surprise's original town site, signaling further turnaround in what has long been the city's most economically depressed area.

The Surprise Crossroads Lake Offices are under construction near Bell Road and Smokey Drive and are scheduled to open by the end of the year.

The city's original town site is a square-mile area bounded by Bell, El Mirage, Greenway and Dysart roads that previously was plagued by subpar housing and shuttered buildings.

City incentives given to new businesses that move there, coupled with a handful of new building projects, continue to spur economic growth in the area.

Surprise Crossroads will house seven office condominiums for lease or purchase on a campus of about 5 acres. Individual units range in size from about 1,200 to 9,400 square feet.

The property sits across from the R.H. Johnson Boulevard entrance into Sun City West.

Other recent development projects at the original town site include Habitat for Humanity of the West Valley's Johnson Townhomes and LAZ Auto Rental & Sales, a family business based in Peoria.

Johnson Townhomes is a 48-unit complex slated to open this summer. LAZ Auto opened its second West Valley facility at the original town site last year.

Valley office market hurting

Rising vacancies, slower rent growth mean perks for tenants, report says

Andrew Johnson
The Arizona Republic
Jun. 17, 2008 12:00 AM

A report released Monday paints a bleak picture of metro Phoenix's commercial-office market, highlighting continued softening in the Valley's downtown and suburban areas amid a weak housing market and a persistent credit crunch.

Stalled job growth in the financial and professional-services sectors have translated to less demand for office space, according to the second-quarter PricewaterhouseCoopers Korpacz Real Estate Investor Survey.

That, combined with recent cutbacks in businesses tied to the housing market, has resulted in rising vacancy rates and slower rent growth in Phoenix and other cities.

Tenants stand to benefit from the conditions.

"Lackluster tenant demand has passed the leasing advantage back to tenants, reintroducing free rent, liberal tenant allowances, and even parking abatements," the report states.

Phoenix's suburban markets, which saw the delivery of 1.1 million square feet of speculative office space in the first quarter and is expected to add 2 million square feet more by the end of 2008, has been hit hardest.

The report said that downtown Phoenix, which historically has had some of the lowest vacancy rates for Class A, or high-end, office space in the country, is "better positioned to withstand economic adversity over the short term" because no new buildings are expected to come online for at least a year.

Two downtown office towers currently under construction, One Central Park East and CityScape, are pegged for completion in late 2009 and are expected to add a combined 1.1 million square feet of space to the area.

Real-estate projects boom near light rail

Valley corridor attracts condos, hotels, offices

Andrew Johnson
The Arizona Republic
Jun. 17, 2008 12:00 AM

Light rail is six months from operation, but the transit system's impact on the Valley's real-estate market has been in full swing with new condos, office buildings and mixed-use developments rising throughout metro Phoenix.

Transit officials estimate that since 2004, developers have spent close to $6 billion on public and private projects on and around the future light-rail line.

Critics, however, say that the transit system has put a burden on taxpayers and that construction of the line has shut down businesses.

The $6 billion figure is based on information Metro light rail routinely gathers from planners in Phoenix, Tempe and Mesa, the three cities in which the 20-mile system will operate beginning in December.

The number includes projects already completed, developments under construction and announced projects within a half-mile radius of the line that officials from those cities say will likely come to fruition, according to Ben Limmer, a Metro light rail planner.

Light rail is not the sole reason why projects in the transit system's vicinity have developed, real-estate analysts note.

But the future system has definitely been a catalyst prompting developers to pay higher prices for property adjacent to the line for condominiums, office buildings and retail centers.

Economic factors, including soaring fuel prices, have caused developers like Eugene Marchese to focus attention on transit-oriented projects.

Marchese's San Diego-based company, Constellation Property Group, bought about 2 acres near Sun Devil Stadium in Tempe on which it intends to develop Stadium Tower.

Current plans for the project, on which Marchese expects to break ground in early 2009, include a 20-story residential building, a 17-story hotel and retail space.

As gas becomes more expensive and drive times grow longer, public transit becomes more attractive, said Marchese, who added that's why developments built with commuters in mind fare well.

"What we find is there's a higher demand for the product because of the location (near light rail)," he said.

Developers also expect the arrival of light rail to deliver a boost to property values in certain areas surrounding the line - a phenomenon that has happened in other cities that have built their own systems.

In metro Dallas, median values between 1997 and 2001 increased nearly 25 percent for office buildings and about 32 percent for residential properties near light-rail stations, according to a University of North Texas study.

That compares with an 11.5 percent increase for comparable office buildings and a 19.5 percent hike for residential properties not located near light-rail stations.

Phoenix-based Equus Development Corp. currently is putting the finishing touches on Century Plaza, a 15-story office tower in midtown Phoenix it has converted into a 17-story condo building.

Equus bought the building at the southeast corner of Central and Lexington avenues in December 2004.

The property's location just south of a future light-rail station was one factor that enticed the company to develop there.

"We were very specific to select right around a light-rail station," said Douglas Edgelow, president of Equus.

Equus also is drafting plans to build four new high-rise towers that could include a five-star hotel, office space and more residential units.

The condo project has seen a significant amount of leasing activity. The company has received down payments on about 80 percent of Century Plaza's 145 units, which are currently priced from about $370,000 for a one-bedroom unit to $2.5 million for a two-floor penthouse, according to Michael Webb, a sales representative for Equus Realty LLC.

Webb and Edgelow say the project's location on the light-rail line, which cuts down Central Avenue to downtown Phoenix, has helped spur demand, along with proximity to office buildings and downtown's entertainment venues.

Commercial real-estate brokers say light rail also has become an attractive selling point for non-residential projects.

Marcus Muirhead, an associate vice president in Colliers International's Phoenix office, said the transit system has even helped spur interest in older office properties that are within a stone's throw of the line.

There is "strong interest" among investors for Class B and C office properties, older buildings that do not include the latest amenities and need improvement, that are located within a few blocks of Central Avenue, Muirhead said.

Muirhead and his colleague, Charlotte Christian, say they expect to see properties within a half-mile of the line to get a boost in value down the road.

"It has created demand and I think it will create more price increases when the rail is in operation," said Christian, a senior vice president with Colliers International who specializes in mixed-use projects.

Christian represented Marchese, the San Diego developer, in his purchase of land for his proposed Stadium Tower project.

Marchese said he paid $6.5 million for the approximately 2 acres about two years ago.

As the Valley's office market struggles to retain and attract tenants during the economic downtown, light-rail proximity also could be an effective marketing point for landlords trying to lease space.

Mindy Korth, an executive vice president with CB Richard Ellis Inc. in Phoenix, recently highlighted the presence of light rail in a marketing package for Meridian Tower, a 21-story office building at 3550 N. Central Ave. that she is marketing on behalf of its owner.

Light rail also could benefit retail centers, which have taken a hit because of the general downturn in the economy.

Mike James, deputy transportation director for Mesa, pointed to the Tri-City Pavilions at the end of the current light-rail line.

The neighborhood retail center, which is anchored by a Safeway, could fare well from people who don't want to drive to do their shopping, said Greg Greenstein, president of JG Management Inc.

The Westlake Village, Calif.-based real-estate investment firm bought the center in 2006.

"Our feeling is that (its location) will add trips to the shopping center because of the adjacent park and ride station," said President Greg Greenstein.

Finances delay project near Chandler Fashion Center

Developer says he's 'reorganizing' financing

by Luci Scott - Jun. 16, 2008 12:00 AM
The Arizona Republic

A slow leasing market has halted construction at Chandler Piazza, an 18-acre mixed-use project at the southeastern corner of Frye Road and Ellis Street, east of Chandler Fashion Center.

Work stopped about a month ago on the retail portion, and the start of construction has been delayed on the two-story office building.

"We're reorganizing the financing," said E.J. Pospisil, CEO of Momentum Commercial Real Estate, the Scottsdale-based developer.

He had intended to lease the retail space, but is negotiating with three restaurants that want to buy space instead.

Pospisil predicted construction would resume within two to three weeks.

"Banks are a little nervous these days," he said. "They're holding back a little bit, and we're being cautious. . . . We don't want to extend more money on construction until we get new financing in place."

The start of the office building has been delayed because "leasing has been slower than we'd hoped," Pospisil said.

Once some preleasing is accomplished, construction will begin.

"Activities have picked up recently with people looking, and we have two large (office) tenants we are negotiating with to get leases in place," he said.

A hotel in the project will be an Element, a new luxury extended-stay brand that owner Starwood says was inspired by Westin.

Hotel construction was delayed because new city approval was needed after the flag changed from Marriott to Element.

The hotel had been expected to open early this year. Now groundbreaking is expected in 60 to 90 days, Pospisil said.

"It's a difficult market, but I think we're going to work right through it," he said.

Arizona's population projections were off due to housing boom

Estimates based on new homes hurt cities, schools

by Catherine Reagor - Jun. 15, 2008 12:00 AM
The Arizona Republic

Accurately tracking and projecting Arizona's growing population are crucial to financial and development plans across the state.

Taxes, freeways, commercial and residential projects all are based on how many people are expected to move here.

For decades, everyone assumed Arizona's population-projection figures were reliable. Turns out they are not.

Metropolitan Phoenix's housing boom of 2003-06 skewed the state's population numbers, leading to projections that planners, economists and government officials agree are inflated. As a result, cities and towns across Arizona, particularly in the Valley where most of the state's residents live, are struggling to figure out what's the real population base and how it might grow in the future.

Nobody can say how off the mark the state's population projections are. But some of the area's top economists and the Arizona Department of Commerce are now working on a better way to calculate projections without relying so much on housing.

"Population growth is the beginning of the food chain of Arizona's economy," said Ioanna Morfessis, founding chief executive of the Greater Phoenix Economic Council and economic development consultant for some of the Valley's new communities, including Maricopa. "But if the numbers are wrong, and I think the state's population numbers are inflated, it's going to be a house of cards for the economy."

During the height of the boom in 2005, state and census estimates showed a record 196,000 people moved to the Phoenix area. That startling figure led to projections for the Valley's population to more than double to 12 million as soon as 2030.

But those projections, based largely on housing permits and occupancy numbers, didn't accurately reflect how many people were moving to the Valley.

The large number of investor-owned properties inflated figures. And the number of building permits exceeded the number of houses actually sold. For example, a record 62,000 new homes went up in metro Phoenix during 2005 but only about 40,000 of those were bought by people who moved into them.

Then in mid-2006 the housing market started to slow. By early 2007, the economy had begun to contract. Municipalities began cutting services, schools started closing, home builders walked away from subdivisions, retailers closed stores, businesses laid off workers, and foreclosures started to soar. It became clear that Arizona would not grow at the expected pace. Attention turned to adjusting the state's population projections.

Six months ago, projection estimates showed 105,000 people moving to metro Phoenix in 2008. That figure recently was adjusted to 85,000.

The drop translates to about $24 million less in tax revenue for the state. Each Arizona resident contributes $1,200 in state income tax and net sales-tax revenue, according to an estimate from Marshall Vest, a University of Arizona economist.

Until accurate projections are complied, all types of financial and development plans across Arizona are in limbo.

Formula inflates total

For nearly 40 years, the Arizona Department of Economic Security has calculated the state's population projections.

State economists started with employment and Social Security data. They factored in new jobs and salaries to predict which industries were growing and how that would affect population growth. They tried to track undocumented workers and seasonal residents, including farm and construction workers and retirees. And they used housing data such as building permits, home prices and household size.

They paired all of that with census data, which included births, deaths, housing occupancies and permits and national migration patterns. They then arrived at a range for population projections.

"Up until a four or five years ago, the numbers were almost always right in range," said Vest, who has been counting the state's population since the 1970s and is working on the state's new model. "What happened in the housing market a few years ago inflated the population statistics. We are trying to figure out by how much, but it will probably take a decennial census count to do that."

Jay Butler, director of realty studies at Arizona State University Polytechnic, says part of the current formula for projecting Arizona's population assumes 1 to 2 percent of the state's homes are vacant.

"Now we know at least 10 percent of the new homes built during the boom were vacant, and foreclosures are leaving more homes empty," Butler said. "We have tried to go to door to door in the past to track vacant homes, but now with the Valley's size, it's a daunting task. No one really knows how many homes are empty."

As part of the new method to project the state's population, accurate occupancy data will be sought from local governments and utilities such as Arizona Public Service.

Depending on population

Problems from inaccurate population projections ripple through Arizona's economy and communities.

State government receives federal funding based on the number of new residents. Local taxes can be raised or lowered depending on how many people will be paying them. Municipalities receive their share of state taxes and other funds based on their populations.

"Arizona is very dependent on its population numbers because we have a revenue-sharing system," said Kent Ennis, deputy director of the Arizona Department of Commerce. "A municipality's growth determines how much they get of sales and income taxes and highway funds. Billions of dollars are riding on how much an area grows and how good population estimates are for that area."

The town of Buckeye on the far west side of metro Phoenix is one of many municipalities that bet on population forecasts.

When home builders and developers started buying land in the town in 2000, city leaders realized significant growth was headed their way. Based on forecasts, Buckeye had the potential to balloon from 30,000 residents to 2 million by 2030. The town sped up the annexation of tens of thousands of acres, beefed up its planning staff, formed its first economic-development group and looked forward to a bigger share of tax and other state government money to prepare for its population boon.

But growth slowed so much in Buckeye that some home builders who bought parcels in new developments have lost those holdings to foreclosure, shutdown or filed for bankruptcy. Investors who bought homes during the boom believed they could quickly flip them for a profit because so many people were going to move to the town. A growing number of those homes are now in foreclosure.

In the past few years, Buckeye's planning staff has been downsized. Though the city gets more state funds for the additional land it annexed, Buckeye has to pay to maintain its vast borders where fewer than expected taxpayers now live.

"DES has a history of underprojecting populations for fast-growing Arizona towns," said Elliott Pollack, a long-time Arizona economist and real-estate investor. "If you were Buckeye and saw the big forecasts for growth, you would see you had the most vacant land and could easily assume a large part of that growth would come your way."

Unless the projections are wrong and not as many people show up.

Concern over numbers

Concern over some of Arizona's population numbers began just as the housing boom did.

Maricopa Association of Governments, the regional planning group for metro Phoenix, began analyzing population numbers for a big transportation initiative. One of the things it found was that the population was growing faster than expected, which is another flaw in the projections. DES had projected in 1997 that Pinal County was expected to grow to 300,000 by 2030. But in 2002, Pinal County already had that many residents.

"We knew something was wrong with the numbers and encouraged the state to look at them," said Eric Anderson, transportation director with MAG. "In states like Michigan and Ohio, where growth is much slower, population projections aren't as important. But here, they are crucial to preparing the necessary infrastructure new residents need."

He said anyone dealing with the bumper-to-bumper traffic on Hunt Highway in Pinal County will see firsthand what happens when governments can't accurately plan for growth.

In 2006, based on MAG's findings and looming budget shortfalls, Gov. Janet Napolitano called for a state task force to investigate Arizona's population numbers. Inflated population counts and projections are most likely to blame for part of Arizona's budget shortfall. But so far there's no data to quantify how much that has impacted state revenue, officials say.

The task force included DES, the Arizona Commerce Department, MAG, municipalities and economists, and delved into the state's data just as the housing boom started to slow.

Called the Arizona Data Estimates and Projection Task Force, the group first looked to other states for better models to project population. But since few states besides Nevada have experienced the same rampant growth, there were none to copy.

Last fall, the group came back with its recommendations to create a new model for population forecasts. The model should:

• Move the state's population and job data collection and forecasting from DES to the Commerce Department.

• Collect much more data from state agencies, the federal government, state Indian communities, local governments and utilities.

• Gather better housing data.

• Hire the first state demographer.

"We can't emphasize enough how important good population projections are, which is why the state made it a priority to develop a new method for tracking them," said Shannon Scutari, the governor's policy adviser for growth and infrastructure. "If the population numbers aren't accurate, crucial growth decisions are made on faulty data."

The job to project the state's population was handed over to the Commerce Department at the end of last year. It is now working with the Department of Motor Vehicles to get data on driver's licenses; the Department of Education for school enrollments; the health department for statistics on hospital stays, illnesses and patient records; the U.S. Labor Department for more detailed job records and the Internal Revenue Service for tax-return data.

As for better housing data, the state agency is working with local governments to track how many homes were actually built out of all the housing permits issued. And to figure out many homes and apartments are vacant, it's working with utilities such as Arizona Public Service to gather information on new hookups and power usage.

The state will need a demographer to launch the new projection model. But because of Arizona's more than $1 billion budget shortfall, the Commerce Department can't yet hire one.

"Until we track population with this new model, population growth is just a wild guess," Pollack said.

Central Arizona Governments, which plans for Pinal County, can't wait. It has already hired Vest and other economists from UA and ASU to create the recommended new model. New population forecasts for Maricopa, Pinal and Pima counties are due out this fall.

"Everyone wants a population number they can count on, even if it's not the number we want to hear," said Morfessis of the Greater Phoenix Economic Council.

Govt. suspends property-flipping rule

Jun. 13, 2008 12:54 PM
Associated Press

WASHINGTON - The Bush administration is temporarily suspending a 5-year-old rule intended to deter property flippers as part of an effort to help speed the sale of foreclosed properties.

For one year, the Federal Housing Administration will no longer impose a 90-day waiting period before foreclosed properties can be sold and receive government-backed loans.

The policy was put in place in 2003 to deter property "flipping" schemes, in which buyers are overcharged for foreclosures or other distressed properties. But the surge in vacant properties resulting from borrowers who were unable to afford their mortgages has become a far more pressing concern.

"A glut of foreclosed and abandoned homes harms neighborhoods, frustrates homebuyers and delays a community's recovery," FHA commissioner Brian Montgomery said in a prepared statement.

The new policy "will allow homebuyers to purchase these homes in much greater numbers and ease the excess supply of unsold homes," Montgomery said.

Nationwide, 261,255 homes received at least one foreclosure-related filing in May, up 48 percent from the same month last year and up 7 percent from April, foreclosure listing company RealtyTrac Inc. said Friday.

Real estate agent boom over, too, in Arizona

Misty Williams, Tribune

In the past year, real estate school instructor John Dyer has watched class enrollments dwindle, as agents struggling amid the stagnant housing market fled the business.

Agents, homebuilders mend business relations

Many of those leaving got into the industry during the boom to make a quick buck, the Scottsdale broker said.

"When it came down to having to know what the heck you were doing, they didn't want to," Dyer said.

A growing number of Valley real estate agents are putting away their for sale signs and jumping into other jobs.

In June, the number of active real estate licenses fell to 69,771, down 5.6 percent from a year ago, according to the Arizona Department of Real Estate. Meanwhile, the number of inactive licenses has risen to more than 16,500, up from roughly 9,400 in 2002.

Some former agents are going back to school or teaching jobs. Others are bartending, waiting tables or selling cars.

Industry professionals say it's tough for inexperienced agents who haven't developed a client base to compete.

In 2001, an agent who wanted to make $100,000 needed to keep nine listings, averaging $250,000, at any given time, Dyer estimated. Now, they need to keep 27 listings to bring in the same amount, he said.

Dyer said his classes, which used to be at least half full with newer agents, are filled mostly with veterans now.

"It's the easiest business to get into. It's the hardest business to succeed at," said Mike Wasmann, president-elect of the Arizona Association of Realtors.

Agents who pushed themselves to become skillful in marketing, sales and other keys to the business are surviving, Wasmann said.

Those staying in the game are also scrambling to become experts in short sales, bank-owned properties and other niches. Dyer's classes on short sales - where a lender agrees to accept less than what a borrower owes - are standing room only these days.

"If you don't know short sales and foreclosures, you only have 20 percent of the market to deal with," he said.

Agents are taking classes on Federal Housing Administration, or FHA, loans, said Bill Gray, chief operating officer of the Arizona School of Real Estate & Business. The government-insured loans don't have specific credit score criteria and allow borrowers to put 3 percent down.

"That's the hottest market you will see today," Gray said.

Enrollment at the school has fallen to 2001 or 2002 levels, but Gray is optimistic.

More students have been signing up in recent weeks, he said.

Economists agree state is in recession

Ed Taylor, Tribune

Has Arizona entered a recession? Prominent economists who monitor the state’s economic landscape are answering with a firm “yes” these days. And they say it’s likely to be awhile before the state returns to its normal growth mode.

There is no government agency that officially declares recessions on a state level, but economists cite many Arizona indicators that are pointing in negative directions: jobs and employment, migration into the state, retail sales, sales and income tax receipts, housing inventories, apartment vacancies and bankruptcies.

Marshall Vest, director of the Economic and Business Research Center at the University of Arizona, thinks Arizona is one of nine states that has entered a recession. The others are states like Arizona that enjoyed a construction boom followed by a bust — Florida, California, Nevada — and others that have specific industrial problems like Michigan, hard hit by the auto slump.

“As I look at the Arizona data, it was one of the first to begin a recession,” Vest opined. “It started in the third quarter of last year.”

He noted that employment peaked last August and retail sales peaked in February 2007. The housing slump, which has resulted in the loss of construction, financing and real estate services jobs, was a major cause, he said.

Another indicator: the increase in the number of residential utility customers has slowed to less than 2 percent at an annual rate, which suggests that population growth is way down, he said.

“Virtually every measure you look at suggests Arizona is in a recession.”

Brian Cary, economist for the Salt River Project, is concerned about a drop in the number of jobs, which he sees as the key indicator of the economy’s health. In both March and April there were fewer jobs in Arizona than in the same months the previous year, an unusual occurrence for the normally rapidly growing state.

“In April there was a drop of about 4,900 jobs,” he said. “That’s on a base of 2.7 million jobs, so it’s only a couple of tenths of a percentage point. But still it doesn’t happen very often. The last time was in the early 1990s.”

Becky Holmes, economist for Cox Communications, sees the crisis in the housing sector as the key factor driving the state into a recession.

“When you live in a state that gets 20 percent of its growth from construction and related finance and retail around that, it’s not surprising,” she said. “We are not even seeing moves within the Valley. All the Realtors, furniture store owners, the pool and landscaping companies are really suffering right now.”

A panel of real estate experts expects the number of single family home permits will decline to about 17,600 in the Valley this year, which is a drop of 71 percent from the peak in 2005, said Elliott Pollack, a Scottsdale-based economist.

The group expects a 26 percent increase next year to about 22,300 units, but “even if that increase occurs, it would still make 2009 the second-weakest year since 1992,” Pollack said.

When the recovery does begin, probably late this year or in the first half of next year, it will be weak, most of the economists predict.

“Given that the real estate is driving it, and there is no end to those problems in sight, we will continue to have a bad economy for an extended period,” said Tom Rex, an economist at the W.P. Carey School of Business at Arizona State University. “A year from now we could still be seeing a recession.”

For the recession to end, the inventory of about 60,000 homes in the metro Phoenix area will have to be reduced to a manageable number, a process that will be slow because of the low in-migration to the state, Vest said. He also said the problems in the credit markets will have to be worked through so that banks will be willing to lend money again. And the final key will be to bring inflation – especially gasoline prices – under control, he said.

“Consumers are being squeezed,” he said. “The tax rebates will help growth in the third quarter, but it’s not enough to get the economy rolling. It will only limit the downside.”

Pete Ewen, chief economist for Arizona Public Service, doesn’t see the situation as very different from previous recessions the state has endured. Eventually the forces that attract people to Arizona will reassert themselves and population growth will resume, he said. But it could take as long as two years, he said.

“The long-term fundamentals are still there in the sense that Arizona is a relatively low-cost state situated next to a high-cost state (California) that is a huge market,” Ewen said.

Until growth picks up, economists advise residents to be cautious — reign in spending and get your finances in order.

“If you have deep pockets, there are some marvelous opportunities,” Vest said. “We’re already seeing foreclosed houses selling briskly. Clearly people are buying in the expectation that in five years they will be worth a lot more than they are now.”

Personal, business bankruptcy filings in Valley up 77%

Russ Wiles
The Arizona Republic
Jun. 12, 2008 12:00 AM

A weak job market, housing woes and other financial stresses took a toll last month, as 999 Valley residents and firms filed for bankruptcy - a 77 percent jump from 563 in May 2007.

Still, the latest figures showed modest improvement from April, when 1,104 consumers and businesses sought protection from creditors, according to the U.S. Bankruptcy Court in Phoenix.

"I'm seeing people filing to stop a foreclosure or modify the debt on their homes," said Diane L. Drain, a Phoenix bankruptcy attorney.

A bankruptcy filing can be used to remove a second lien for homeowners with two loans on a property, said Drain, who also cited job losses and big medical bills among the other catalysts driving up bankruptcy filings.

"We don't expect it to slow down anytime soon," she said.

For all of Arizona, 1,419 individuals and businesses filed in bankruptcy court last month, up 66 percent from 853 filings in May 2007 but down from 1,552 in April.

Chapter 7 filings, which essentially offer a fresh financial start, accounted for more than three-fourths of filings in metropolitan Phoenix and statewide. Chapter 13 filings, which create repayment plans for debtors with regular income, accounted for most of the rest.

So far this year, 4,593 consumers and businesses have filed for bankruptcy protection in the Valley, an 82 percent jump compared with 2,528 over the first five months of 2007.

The statewide total of 6,426 filings year to date represents a 73 percent increase compared with 3,724 for the January-May stretch of 2007.

The American Bankruptcy Institute is predicting more than 1 million consumer filings for the nation this year.

May filings of 91,214 were up nearly 31 percent from May 2007 but down 1 percent from April.

April home sales up; experts wary

J.W. Elphinstone
Associated Press
Jun. 10, 2008 12:00 AM

NEW YORK - Pending home sales unexpectedly rose in April to the highest reading since October, an industry group said Monday, but experts say the large proportion of distressed-property sales will continue to weigh down prices.

The National Association of Realtors' seasonally adjusted index of pending sales for existing homes rose to 88.2 from a March reading of 83.0, the lowest since the index was started in 2001. However, it's still 13 percent below April 2007's reading of 101.5.

Wall Street economists polled by Thomson/IFR had predicted the index would remain steady at 83.

A reading of 100 is equal to the average level of sales activity in 2001.

However, Global Insight economist Patrick Newport tempered his enthusiasm for the surprising increase in April's pending sales.

"It's good news, but . . . it's telling me that banks are dumping properties at fire-sale prices, spurring home sales," he said.

Newport noted that inventory remains at record highs and is growing, especially in the West where foreclosures and so-called short sales make up the bulk of deals. A short sale is where the house is sold for less than the amount owed on the mortgage.

Pending sales there climbed 8.3 percent from March and are 4 percent higher than a year earlier.

Real-estate funds can be house of returns

John Waggoner
USA Today
Jun. 8, 2008 12:00 AM

Real-estate mutual funds are faring surprisingly well in the worst real-estate market in decades. One reason: Real-estate funds invest in commercial properties, which march to a different drummer than the residential market. Will the commercial real-estate rally continue? Probably, but it wouldn't hurt to move in slowly.

Real-estate funds invest primarily in real-estate investment trusts, or REITs, which, in turn, invest in apartments, offices, storage facilities and other commercial real estate. Real-estate funds have gained an average 6 percent this year, vs. a 5.3 percent loss for the Standard & Poor's 500 stock index with dividends reinvested.

REITS have high dividend yields, which make them popular in uncertain markets like, say, this one. The average REIT yields 5.17 percent, according to the National Association of Real Estate Investment Trusts, a trade organization. In contrast, 10-year Treasury notes yield 4.04 percent, and the S&P 500 yields just 2.01 percent.

Dividends help cushion your portfolio in market downturns. And REITs, by nature, are dividend machines. REITs must pay out at least 90 percent of their taxable income to investors through dividends.

Inflation hedge

Inflation fears help REITs, too. The consumer price index, the government's main gauge of inflation, has gained 3.9 percent the past 12 months that ended in April. Food and energy prices have soared far more, raising fears of a burst of persistent inflation.

People tend to buy real estate, gold and other tangible assets when the value of paper money declines. "In the long term, physical property has offered a hedge against inflation," says Joe Rodriguez, lead manager of the AIM Global Real Estate Fund.

Finally, REITs are also doing well because Wall Street hit them with a wrecking ball last year. The average REIT fund fell 14.7 percent in 2007, according to Morningstar, the mutual-fund tracker. "The REITs' elastic band got stretched so far in one direction last year that there was nowhere to go but up," says Alec Young, strategist for S&P.

Apartment REITs have fared best this year. As banks have tightened their lending standards, more people have had to rent instead of buying their own home - and that helps apartment REITs. Continually falling home prices also spur rentals: People figure they can buy later at a lower price. And, with foreclosures going up, former homeowners have to rent. Associated Estates Realty Corp. (ticker: AEC ), is one of the top-performing REITs this year. The apartment REIT has soared 46 percent this year, including reinvested dividends. AEC's net rent rose 3.1 percent in the 12 months that ended in March, and 4.1 percent for its Midwest holdings.

Sensitive to economy

The biggest problem with REITs is that they're sensitive - that is, they fare best when the economy is roaring, office buildings are filled, and shopping centers hum.

Unfortunately, the economy is barely meowing at the moment, which is why Rodriguez likes health-care REITs.

S&P REIT analyst Robert McMillan likes high-end shopping-mall REITs, which sound like an economically sensitive sector if there ever was one. He argues that retailers sign long-term leases and tend not to shutter stores lightly.

For most people, a real-estate mutual fund is the best way to invest in real-estate securities. But there's a surprising amount of variety. For example, CGM Realty fund, run by star manager G. Kenneth Heebner, has rocketed to a 325 percent gain the past five years. In large part, that's because Heebner defines real estate broadly, including companies with large land holdings.

Expert: Downturn hitting Valley hard

Jane Larson
The Arizona Republic
Jun. 7, 2008 12:00 AM

Economic booms and busts are hitting metro Phoenix harder than other cities because of the Valley's large concentration of small and midsize businesses, the chief investment officer for UMB Bank says.

William Greiner, whom Business Week magazine named Stock Market Strategist of the Year in 2005, gave his outlook for the Valley and nation this week at the first in a series of educational events sponsored by UMB Bank's Scottsdale branch.

Other cities with more big businesses have been cushioned by growth in foreign markets and less affected by the United States' recent excesses in finance and real estate, Greiner said. The Valley's comparatively high levels of small-business employment make it unusual and make business cycles here more exaggerated, he said.

"Large organizations that tend to be multinational aren't suffering the same kind of slowdown in productivity and profitability as many small businesses, which tend to be very domestic-focused," he said.

Greiner forecasts that the national economy won't rebound until sometime in 2009, depending on how soon Wall Street debt markets and the housing market turn around.

To weather the slow economy, he advised business owners to plan inventories and hiring carefully over three-, 12- and 24-month horizons.

Watching competitors' moves will be important as everyone fights for a bigger share of a stagnant pie, he said.

Lenders slash prices on foreclosed houses

Jun. 6, 2008 02:41 PM
Associated Press

Lenders stung by the housing bust are slashing prices dramatically to rid themselves of an unprecedented number of foreclosed properties, sparking bidding wars in some places that harken back to the market's go-go years and may signal the bottom is near.

The trend is most dramatic in many parts of California, Florida, Nevada and Arizona, where prices skyrocketed during the housing boom and are now falling precipitously. Sales of foreclosures, vacant new homes and other distressed properties now dominate some markets, causing grief for individual homeowners who need to sell for other reasons, like a job in a new city.

Nationwide, one out of every four sales between January and March was a distressed sale, and that figure jumps to more than 50 percent in the hardest-hit areas like Las Vegas, Detroit and distant suburbs of Los Angeles, said Mark Zandi, chief economist at Moody's Economy.com. The number can be as high as 90 percent in some newly built subdivisions, where loose lending standards and speculation ran rampant, real estate agents say.

By setting prices at extraordinarily low levels, say, $175,000 for a house that sold for $350,000 three years ago, banks can spark multiple offers.

"It's not uncommon to have 10 to 20 offers on one house, and for the house to end up selling for more than its market price," said Erin Attardi, a Sacramento Realtor. The strategy, she said, allows the bank to be selective, picking buyers with solid financing or those able to pay in cash.

Over the past year, as the housing crisis accelerated, the number of properties turned over to bank ownership has more than doubled. As of April, there were more than 660,000 such properties in the U.S., up from 254,000 in April last year, according to real estate information company First American CoreLogic.

And there's a risk this isn't the bottom at all.

Investor demand could be swamped by the foreclosures expected to hit the market over the next year.

A record of almost 3 million American homeowners were at least one month late on their mortgages in the first quarter, the Mortgage Bankers Association said Thursday. And another record of almost 450,000 had entered the final stage of foreclosure.

Wherever the turning point, buyers are finding that the deep discounts on bank-owned homes can be a fabulous opportunity, but also a source of anguish. Sally Zuniga, 29, and her husband have been looking to buy their first home outside Sacramento and have been unsuccessful so far due to the intense competition.

"It's been aggravating, frustrating and emotionally straining," said Zuniga, a media buyer for an advertising agency.

This week, the couple put in an offer for a three-bedroom house with a pool that's listed as a "short sale," where the home is sold for less than the amount owed on the mortgage.

They've given the property owner until July 18 to respond - an indication of the longer period it commonly takes for such arrangements to be worked out. Their offer of $195,000 was $6,000 over the asking price, in an effort to make it stand out from competitors.

Some in the real estate industry see such competition as a sign that the housing market's gloom is lifting.

"It's actually stimulated the market," said Janice Ziesig, owner of Z House Realty Group in Orlando, Fla. "Things are moving now - more so than they were."

In the Orlando area, about a third of bank-owned properties receive more than one offer, Ziesig estimates. However, deals are more likely to fall through for foreclosures, she says, and properties often return to the market.

For would-be sellers who need to move soon, it's a particularly painful situation. In many cases, sellers whose houses are now worth less than their mortgage must bring cash to the closing table to pay off the balance of the loan. They can find renters or postpone their moving plans.

Leslie Jordan pulled her family's six-bedroom house outside Orlando off the market last month after listing it for nearly a year. She was willing to sell for $415,000, down from her original asking price of $565,000, but wasn't able to reach a deal.

While most of the foreclosures in Jordan's area are on smaller homes, the overall environment of soaring foreclosures and overbuilding has pushed prices down dramatically.

"The buyers, they just want a deal," said Jordan, who had hoped to move to a less-dense area with better schools. "We just have to wait until things turn around."

For real estate agents, helping banks sell off properties is one of the only flourishing businesses these days. But it's not for everybody.

Agents can easily pay hundreds of dollars a month on upkeep - including utility bills, cleaning and lawn care - and must go through the hassle of getting reimbursed by the bank. They sometimes have to evict homeowners, tenants or squatters. And in many cases, they have to deal with vandalism or theft of everything from copper pipes to appliances and air conditioners.

Jeff Dolfinger, a broker in Poughkeepsie N.Y., who specializes in managing and selling foreclosed properties, estimates that about 90 percent of those homes in his market are being bought by investors.

"To them, this is the best real estate market ever," he said. "They'll wait for this turmoil to end and they'll put the properties right back on the market again"

Inevitably, there are tensions between real estate agents and mortgage companies, particularly when a short sale or foreclosure gets tied up in a bureaucratic tangle.

"The lenders don't work on the weekends," which are the busiest time for house-hunters, said Cindy Jones, associate broker with Re/Max Allegiance in Lakeridge, Va. "If you make on offer on a Thursday, the earliest anybody's going to (examine) it is Monday or Tuesday of the following week,"

A quick way for a lender to dispose of properties is through an auction. However, lenders lose an average of 56 percent of a property's value through auctions, compared with a 40 percent loss for ordinary sales, according to a report last month by Fitch Ratings.

Nevertheless, the report found that the use of auctions has been rising as lenders try to cope with rising inventory.

Some are more hesitant to cut prices. Chris Bowden, vice president of HomeSteps, a division of Freddie Mac that handles foreclosure sales, says being too aggressive on price can affect the value of nearby properties, which sometimes are also owned by Freddie Mac.

"We want to make sure that we are getting back every dollar that we can and preserving values in neighborhoods," Bowden said. "Our goal is to try to get the highest value we can for the property, and yet we've got to remain competitive."

Still, with foreclosures continuing to rise, there may be no better option than to follow the market.

"We're reacting to market conditions very quickly," said Cary Sternberg, who heads IndyMac Bancorp Inc.'s bank-owned properties division. "We're in the business of making loans to people. we're not in the business of owning property."

Inflation rise worries Bernanke

Interest-rate cuts likely done as prices soar, dollar weakens

Jeannine Aversa
Associated Press
Jun. 4, 2008 12:00 AM

WASHINGTON - Worried about high prices for energy, food and other things? Ben Bernanke is, too.

The Federal Reserve chairman has moved inflation up on his list of worries, suggesting more pointedly than ever that the time for cutting interest rates is over in view of soaring oil and commodity prices and a weakened dollar.

Although the country's economic growth - bruised by housing, credit and financial debacles - is still fragile, Bernanke on Tuesday expressed hope for some improvement in the second half of this year.

At the same time, he sounded a loud inflation warning. To this end, he raised his biggest public concern to date about the slide in the U.S. dollar, saying it has contributed to an "unwelcome rise" in inflation.

The Fed chief's fresh assessment, delivered via satellite to an international monetary conference in Spain, appeared to mark a subtle shift in Bernanke's views. To help brace the economy, the Fed dropped interest rates in late April to 2 percent, a nearly four-year low, continuing a rate-cutting campaign that started in September. Many economists believe the Fed will hold rates steady at its next meeting on June 24-25 and probably through much, if not all, of this year. However, some believe that inflation could flare and force the Fed to begin boosting rates later this year or next.