“Even with the drop-off here and in other parts of the country and in other parts of Arizona, it’s still better than elsewhere where it has just basically died off,” said Jim Herrewig, community development director for Sierra Vista. “I think it is certainly reflective of the trend nationwide. The contractors certainly talk about it, and you read newspapers nationwide and it’s pretty much everywhere.”
Herrewig said the fairly steady Sierra Vista economy is reflective of the demand for housing, interest rates, jobs in the community, and it seems to be why the national housing market crunch appears less pronounced here than in other parts of the United States.
Still, there has been a significant downturn here, Herrewig said: “I think the market here is a microcosm of how it is nationwide.”
The “speculative housing boom” has subsided, which took place in recent years in the greater-Phoenix metropolitan area and, to a lesser extent, in the Tucson-metro area, fueled by profit-motivated fast-paced sales of property in inflated real estate markets.
“Phoenix and the valley cities have had a drop off, but again, not as bad as elsewhere,” Herrewig said. “There are still people moving to the U.S. Southwest.”
The nature of the business of real-estate development has its ups and down, and real-estate professionals in the private sector know to keep that in mind, Herrewig said.
Rick Coffman, vice president of developer Castle & Cooke, also talked about the end of greater-urban Arizona’s speculative-housing boom.
“They tend to be those on the far outlying areas of Phoenix that were developing when the market was hot. When it slows down, people decide they don’t want to live that far and they don’t want to drive that far,” Coffman said. “In more difficult times there is always a flight to quality, and that happens in the stock market, and it happens in the housing market.”
Real estate professionals must anticipate that the market will be a ride, as is the nature of the business.
“I think they understand the housing market has its ups and down, but they’re planning ahead for the market coming back,” Herrewig said.
However long that may take.
Coffman said he sees the market slump continuing for another couple of years, though there is still a pulse. Perhaps as many as half of the 159 residential-construction permits last year issued by the city were for Castle & Cooke houses, he said.
“We’ve been steady but it’s more difficult. It’s certainly slower, but it hasn’t disappeared,” Coffman said. “We’re less than a third of what it was the year before.”
Castle & Cooke’s 2,000-acre Tribute neighborhood east of Highway 92, which was approved by the City Council last year, waits on the east side ready to accommodate the next 20 years of Sierra Vista’s housing needs.
“Certainly with the slowdown in absorption, I expect some of the urgency for getting Tribute started is diminished, but we’re still working on it,” Coffman said. “I think we’re in a downturn that will last through — certainly through — most of 2008 and probably into 2009.”
Coffman’s leads Castle & Cooke’s development interests in Southeastern Arizona, but he talked about the company’s projects in other states as the U.S. market correction endures.
“Florida’s a little difficult to measure at this point because we’re just in between projects (in the Orlando area), and that’s still going pretty well — particularly some of the high-end sales,” Coffman said. “For Arizona, some of the higher-end stuff in Phoenix is doing just fine. California is pretty ugly, really for everybody. California always sees a big run up in prices, and it kind of has a tendency to become completely unaffordable.”
The local market has been spared the worst of the correction, he said.
“Sierra Vista is still relatively affordable, so that’s an advantage that we have now. We’re also not a high-income area, so it needs to be affordable because many of our purchasers are on a limited income,” Coffman said. “It’s not so much that we’re insulated, but that we’re independent because the market factors in Sierra Vista are somewhat independent of the overall economy. Some of those have to do with the fort and its adding missions — even changing missions — and its use of contract workers. And of course, the other is the U.S. Border Patrol, though we’ve seen some of that slow down recently.”
But like the housing market that has its political and economic drivers, the Border Patrol’s training accommodations and needs are cyclical, too, Coffman said.
“There is always a correction. The thing to keep in mind is housing in Sierra Vista is still very affordable because interest rates are still quite low,” he said. “But qualifying criteria to get a loan has become more restrictive than it was six months ago.”
In response to the market turn, Castle & Cooke is working with its subcontractors and suppliers to make things more affordable, Coffman said.
Number crunching and market analysis continues from an academic perspective at the Cochise College Center of Economic Research.
Robert Carreira, the center’s director, said that since the beginning of the city’s fiscal year 2008 on July 1 through the end of August, construction permits are down about 75 percent in Sierra Vista, in contrast with a slightly lower decline in Cochise County and a statewide decline closer to 50 percent.
But the scope of the markets must be considered along with those percentages as it amounts to a much bigger decrease in actual permits for big regions such as metro Tucson and metro Phoenix than the actual permit numbers at hand in Sierra Vista.
“I think what we’re seeing is a reflection of that now, and I think Sierra Vista’s drop in new construction in the first nine months of this calendar year dropped a little bit more than what we’ve seen in other areas,” Carreira said. “I think that’s because we saw a bigger boom than in other areas.”
Carreira attended a conference last week in Tucson attended by economists and members of the banking industry throughout Arizona, and there was a lot more talk about numbers.
“Sierra Vista’s drops are also steeper than what we’ve seen elsewhere in the county, which is more in tune with the state’s 50 percent range,” Carreira said. “And that’s because some of the other areas, even though construction has been declining, are still stronger than their historical levels.”
Carreira’s estimation about the duration of the slump was similar to others.
“I think it’s certainly reasonable to say it’s going to go continue, certainly through 2008. But it’s extremely difficult to predict that sort of thing,” he said.
From his academic perspective, Carreira commented about the relevance and potential impact of the Federal Reserve’s lowering of interest rates by half a percentage point Tuesday.
“It should have an impact. After that occurred, if you look at the Freddie Mac numbers, the mortgage rates are actually up a bit,” Carreira said. “That tends to hit the credit cards and short-term borrowing quicker. Long-term rates will follow often, but it’s not always the case and there is often a lag.”
Those are positive short-term effects of the rate cut, but the potential long-term effects are not so bright, Carreira said.
The Fed’s rate cut is understood to be a response to the recent credit crunch in the subprime mortgage market, as there has been a big increase in default rates on subprime-rate mortgages in recent months made to borrowers with unstable credit.
There is concern that the rate cut will deal a further blow to an already struggling real estate and housing market, and financial institutions that support them, which could lead to continuing job losses in construction, real estate and financial activities, Carreira said.
Supporters of the Fed’s rate cut argue it will help prevent a recession, in spite of detractors who note a healthy 4 percent growth rate in second-quarter U.S. Gross Domestic Product statistics, although the subprime mortgage crisis hit midway through the current quarter that ends Sept. 30, and those GDP figures are not yet released, he said.
Other concerns are that the rate cuts will cause inflation and that it interferes with long-term market adjustment that should be allowed to run its course to correct the aftermath of “easy money policies” of lowered borrowing standards that existed from 2003 through 2005, he said.
Carreira warned the Fed is merely prolonging or expanding the crisis by “pushing the day of reckoning further into the future,” or “by encouraging more unwise lending and borrowing.”
HERALD/REVIEW reporter Gentry Braswell can be reached at 515-4680 or by e-mail at [email protected]