Housing slowdown causes problems

Arizona's lagging housing market likely won't recover until next year and will continue to hinder job growth until it rebounds, state economists said this week. Although houses continue to sell, inflated prices and stockpiled inventory will cramp the industry a while longer.

"Most buyers, I think, now realize that housing prices are not declining, they've simply leveled off," said Marshall Vest, director of the Economic and Business Research Center at the University of Arizona's Eller College of Management. "Houses are still selling, they've just come off of those peaks that were driven by the mania that ripped the market there for a while," added Vest, who gave his midyear economic report on Wednesday to business leaders in Tucson.

Vest's comments were underscored by Dennis Hoffman, a Valley economist who said the amount of money changing hands in real estate sales has dropped about 18 percent, to $6.9 billion, from the first quarter of 2006 to the first quarter of 2007. Hoffman is a professor of economics at the W.P. Carey School of Business at Arizona State University.

Nationwide, about 50 percent of economists agreed it will be the end of 2007 or beyond before the market recovers, according to a survey by the National Association for Business Economics Outlook.

Still, it is possible Arizona could take longer because its prices were so overinflated, Vest said.

Sales of existing homes have stabilized, and 10 months' worth of housing inventory is stocked up, Vest said. Normally, inventory is about four to five months' worth.

Sellers are cutting prices to move homes, but that process needs to continue a while longer before the market can rebuild, Vest said.

"We'll clearly see a recovery, but it's not going to go as quickly or surely as high as it did," he added.

The slowdown in the housing industry, Vest and Hoffman agreed, will continue to create a drag on Arizona's employment and retail numbers.

While non-farm employment grew by about 108,000 jobs in metro Phoenix in 2006, Vest projects it will grow only by 66,000 in 2007. His prediction for 2008 also is grim: just 36,500 jobs being added.

In recent years, the construction industry created about 25 percent of new jobs in the Valley, Vest said. Removing that major source of growth has had a ripple effect on everyone from real estate agents to mortgage bankers to inspection crews, he said.

Hoffman said the loss didn't have as much of a negative impact as expected.

He said that people still view Arizona as an attractive place to live and to open businesses, which will help the economy in the long run.

"The challenge," Hoffman said, is to figure out how this downturn in residential real estate "will affect the rest of the Arizona economy and how long-lived those effects will be."

Vest said retail sales also slumped, showing essentially no growth since last year.

"The slowdown in sales has to do certainly with high debt levels," Vest said. "We've been using our houses as an ATM machine, extracting large amounts of cash to support our spending.

"That door is closing."

Wages, which are increasing about 4 percent, and small gains in job growth still can drive consumer spending, Vest said. The difference is that spending will have to track current income more closely instead of relying on external sources of wealth, he said.

On a national scale, about 40 percent of economists surveyed by the National Association for Business Economics Outlook say they believe a 25 percent to 33 percent chance exists that the United States will go into a recession within the next year.

Although a recession would further strain Arizona's economy, the losses probably wouldn't be severe, Vest said.

"If a recession does develop, most people think it will be short and mild," he said, "and it will be followed by a strong rebound."