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Bank-owned and not improving until the economy does

Bank-owned…and not improving until the economy does

Subprime loans were problem, but overall, broader economic woes contributed to pain

Thursday October 15, 2009

Arizona Business Gazette
J. Craig Anderson

Home-foreclosure activity has spilled across every geographic and socioeconomic border this year, proving that no community was too cautious, clever or well-funded to remain unscathed.

Subprime lending gave the home-foreclosure crisis its initial push, but the problem could not have reached existing proportions without feeding on a host of broader economic problems, according to real-estate experts responding to the latest Valley Home Values data, provided by Information Market.

“It has nothing to do with the value of the home,” said Mike Wasmann, president of the Arizona Association of Realtors. “It has to do with people not having any money.”
The foreclosure rate has accelerated in more centrally located, often pricier neighborhoods while slowing down a bit in newer, more remote communities where the foreclosure floodgate burst in late 2007.

Job losses, salary cuts, unpaid work furloughs and failed investments were among the contributors to home foreclosures in communities with few first-time buyers and little subprime-lending activity, Valley real- estate analysts said.

They also pointed to home-equity loans as a major cause of foreclosures in older, more established neighborhoods, noting that many residents of those areas who face foreclosure today owed very little on their mortgages before the appearance of equity emboldened them to borrow against the home’s value.

“A lot of people got hung out to dry on homes that they’ve had for a long time because they refinanced,” said Jay Butler, Arizona State University professor and realty-studies director.

Role reversal

The ZIP code 85007 in central Phoenix, which houses more than its share of Arizona bluebloods and political insiders, was largely unaffected by area foreclosure activity in 2008, even as neighboring ZIP codes saw home values lopped in half.

But this year, the median home price in 85007 collapsed, falling 76.5 percent in the first eight months, according to analysis by The Arizona Republic using data from the Phoenix-based Information Market.

Median home-price comparisons only examine changes in value among homes that were bought and sold during the comparison period. They do not indicate the median value of all homes in the area.

Phoenix was the biggest overall home-value loser in 2009, with the city’s median home price dropping from $229,000 to $82,000 from September 2008 to Aug. 31.

A year earlier, Phoenix was among the best-performing Valley cities and towns, with a one-year median home-price drop of about 15 percent.

In contrast, Queen Creek experienced a much steeper decline of nearly 24 percent from September 2007 to August 2008. In the past 12 months, the decline has eased to slightly more than 9 percent.

Queen Creek homes have held more value than even the mansions of Paradise Valley, according to sales data.

The Valley’s most expensive community posted its first double-digit, one-year drop in median sale price since before the housing boom.

However, Paradise Valley is still the breakaway winner in a survey of median-home prices in Maricopa County over the past five years. No other community could touch its five-year median price increase of more than 56 percent, from September 2004 to August 2009.

Outlying ZIP codes generally have seen home values begin to level off, while price drops in more centrally located ZIP codes have gathered momentum.

Foreclosure activity also has shifted toward the urban center, Valley Home Values figures show.

For example, less than half of this year’s home-sales transactions in Queen Creek have involved foreclosures, while they have accounted for at least 60 percent of sales in most Phoenix residential areas.

Not every local housing market changed dramatically this year, according to the data.
Tempe and Scottsdale housing markets have enjoyed two consecutive years of relative stability, while El Mirage and Glendale have suffered relatively high foreclosure rates and sharp price declines two years in a row.

Local experts offered a variety of theories to explain the reversals, but they share a common theme: Foreclosures are becoming a bigger problem for the upper-middle class and even the previously wealthy.

One reason is loss of income, they said, especially among those households in which the primary source of wealth was real estate. But the threat of luxury-home foreclosure has not been limited to residents with stalled careers in home building and property sales, experts said.

Jumbo problem

In some respects, higher-priced neighborhoods have been playing catch-up with the less expensive areas, where rapid-fire foreclosures first began around late 2007.
Butler said the foreclosure wave appears to have run its course in starter-home communities such as Buckeye and Queen Creek.

“You sort of run out of things you can foreclose on,” he said.
It’s far less clear where the Valley is overall in terms of working through troubled “jumbo” mortgage loans, which are difficult to refinance because they are too large to secure a government guarantee of repayment.

It’s likely foreclosures on more-expensive homes, those priced above the Federal Housing Administration limit of $346,000, will take longer to purge from the housing market, in part because they will be much harder for lenders to sell.

Butler said he expects to see another post-holiday foreclosure surge in early 2010 that undoubtedly will include more high-end homes.

He pointed to the surge in foreclosures in February – about 4,300, a record at the time – as evidence that struggling homeowners had resolved to make it through the holiday season before ceasing payment.

Butler said many households have lost any financial cushion they might have once had, which means even the slightest financial setback could lead to foreclosure.

“Those that stretched their income to get the home, they’re in trouble,” he said.

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