Phoenix Underwater Mortgages Show Housing’s Threat to Recovery

04-27-2011 • Bloomberg.com

Further home-price declines this year -- expected by analysts such as Robert Shiller of Yale University -- would push several million more Americans into negative equity. Home prices dropped 5.7 percent in February from year-earlier levels, according to the Federal Housing Finance Agency, the fourth consecutive month of backsliding. In Phoenix, the problem is especially acute. Nearly 202,000 individuals are 50 percent or more in negative equity, according to a Corelogic Inc. analysis prepared at the request of Bloomberg News. More than one in every five Phoenix-area mortgage holders would need their homes to double in value just to break even. “The mortgage drag and negative equity? I think it’s a serious problem. It’s the elephant in everybody’s room and nobody quite knows what to do about it,” says Jim Lundy, chief executive of Alliance Bank of Arizona, an eight-year old business lender in Phoenix. Rebound Hampered Housing is hampering the state’s economic rebound. Arizona’s 9.5 percent unemployment rate in March was above the nation’s 8.8 percent figure. Over the past year, the state, with 303,000 unemployed, has added just 1,700 jobs, according to seasonally-adjusted figures from the Bureau of Labor Statistics. Nationally, the housing industry led recoveries from previous recessions, typically contributing 1 percentage point to GDP growth at this stage of a recovery, says Paul Dales, an economist with Capital Economics Ltd. in Toronto. This time, the sector’s dead weight impedes the economy’s advance.