As foreclosures arrive, there goes neighborhood

QUEEN CREEK, Ariz. -- Out on Phoenix’s suburban fringes, where cement mixers are fast colonizing hay and cotton fields, the day is winding to a close. The home hour has arrived.

But sundown gives away a troubling secret: Behind dark windows and unanswered doors, it’s clear nobody is coming home.

At the ranch home on Via del Palo, a newspaper in the driveway has lain unclaimed since April. The house at the corner of 223rd Court has faded fliers stuck in the door.

They’re empty, left behind by a rising tide of foreclosures.

This neighborhood has a still-unfolding story to tell, one that’s not always comfortable to hear.

Not long ago, builders were raising home prices thousands of dollars week after week. Families camped out for lotteries to win the right to buy. Buyers gambled with loans whose risks were obscured by euphoria.

This is the tale of how America’s real estate boom came to a seemingly ordinary subdivision called the Villages at Queen Creek, where the whipsaw of easy credit has led to some extraordinary times. They were the best of times, for a while. But the empty homes raise serious doubts about what comes next.

As the nation’s number of foreclosures skyrockets, what is happening here and in similar neighborhoods is worth considering.

While the pressures at work in Queen Creek were extreme, the choices people made -- and the consequences -- are not so different from those faced by thousands of other homeowners and their neighbors.

“Honestly,” said Joy Kessler, standing on the doorstep of the house she and her husband were surrendering to foreclosure, “if you were in this situation, what would you do?”

In 2004, Dave Gustafson and his family headed to Arizona to visit relatives. The buzz of construction convinced them to look around.

Back in California, they had less than 1,100 square feet. But salesmen here offered 2 1/2 times the space for half the price.

The place they liked best was the Villages, a warren of streets cradling a golf course, quickly filling with sand-colored, stucco homes.

“The salesperson was saying that they were going up $1,000 a week,” Gustafson said. “So . . . we signed right away.”

Builders made it easy. A down payment of $2,000 to $5,000 was all it took. Buyers could borrow at low teaser rates and pay only the interest each month.

As promised, prices were going up faster than the houses themselves.

By the time the family’s home was completed, the $179,000 base price had climbed to $220,000.

The Gustafsons opted for Corian counters, a pool and whirlpool, adding more than $50,000 to their loan. Payments were fixed for only two years, but they didn’t worry. With prices rising, they’d refinance. In five or six years, the Gustafsons figured, they’d sell for $500,000.

They were hardly the only ones feeling optimistic.

Kris Rowberry, ecstatic when the value of his home in nearby Gilbert took off, bought a second one in the Villages as an investment. “I was thinking, ‘Man, if I could have 10 properties, I could just kind of retire . . . and kick back and live off the income,’ ” he said.

But the speculative mind-set confounded retiree David Pickering, who’d never heard of interest-only loans. The Pickerings were simply buying a place to live.

Around them, though, such notions began to look old-fashioned.

The American Dream is overdue for revision.

“There’s been a huge shift in the way people view their houses,” said John Karevoll of DataQuick Information Systems. “Your house now can basically be used as an ATM.”

A generation ago, families celebrated getting a mortgage and again when they retired the loan. A home meant security. Financial commitment promoted pride and neighborhood roots.

But Americans have become more mobile, and looser lending has made it easier to buy a home and borrow against its value.

Now a home is not just a place to live, it is an investment -- a way to make money and finance a lifestyle, said Robert D. Manning, an expert in consumer credit at the Rochester Institute of Technology.

The lending industry encouraged that transformation, promoting not just subprime loans but mortgages requiring little or no documentation of income, no money down, and interest-only payments.

When easy borrowing combined with a run-up in prices, speculators joined the fray.

But rising interest rates and falling home prices put particular pressure on people who live in the homes they own.

When people who bought almost entirely with borrowed money see appreciated worth disappear, there’s little incentive to hold on. Few players, though, seemed to appreciate the chance they might get caught.

“Lenders never said no,” said Jay Butler, director of realty studies at Arizona State University. “Nobody expected this to continue, but they hoped it would just long enough to get out of it -- and they were caught up in the whirlpool.”

By late 2004, the Phoenix real estate market was roaring.

The euphoria reached Queen Creek, though the freeway hadn’t yet arrived. “Drive until you qualify,” agents told buyers.

Buyers lined up to make a down payment in the new subdivisions. Rowberry joined 200 people one Saturday morning for a chance at 15 lots. California and Nevada investors came to greater Phoenix looking for the next great deal.

“I’m just one guy and it wasn’t unusual to get three [calls] a day” from speculators, said John Wake, a real estate agent. “A lot of them weren’t sophisticated. They’d never invested before.”

The Villages, already half completed, looked too good to pass up. Southern California investor Alan Jullien bought three homes.

The market spike turned the Gustafsons’ $235,000 home into one worth $380,000.

Across the valley, homeowners watching values shoot up, borrowed against those gains.

“Everyone was doing the same thing: Taking out lines of credit, milking it for all it’s worth,” said Matthew Berends of Surprise, another Phoenix suburb where prices soared. His home is in foreclosure. “In one year for a house to go up $80,000, it’s like too easy.”

But some relatively modest purchases would prove to be risky gambles.

Greg Giniel and his wife moved into a home bought by a friend, with Giniel as a silent partner. What Giniel hadn’t counted on was that the friend had bought three other homes with adjustable-rate loans that were bound to rise.

One street over, the Kesslers paid $279,000 for a house in the fall of 2005. With $25,000 down and an interest-only loan, it seemed wiser than renting.

There was a problem, though. A market that had skyrocketed was about to plunge.

It takes time for a homeowner to get into trouble, but sometimes not that long.

Last year, the Gustafsons fell behind on their mortgage. In August, their lender started foreclosure.

Problems began to snowball. High gas prices prompted people to rethink living on the outskirts. Investors rushed to sell.

In 2005 -- a record-best year for Phoenix real estate -- just five homes in the ZIP Code containing the Villages were lost to foreclosure, according to Information Market, a Phoenix research firm. So far this year, at least 75 have been claimed by lenders. In the Villages, many homes where foreclosure is pending are empty, a sign owners have given up.

The problems aren’t always obvious. The golf course remains watered, playgrounds neatly swept. Many streets, particularly in areas built before prices spiked, are filled with families.

But on other streets, homes without curtains in the windows, with dirt and cobwebs collecting in doorways, are eerie.

In May, the house to the left of the Pickerings’ went to foreclosure. The one on the right followed. It made David Pickering uneasy. “The weeds in the back are getting so tall now that they are growing over the separating wall into my yard,” he e-mailed, alerting the homeowners’ association. “Something must be done about this.”

Researchers say foreclosures chip away at neighbors’ property values. Here, they compound a larger problem.

Builders continue adding homes at reduced prices. Investors are trying to sell. Lenders are seeking buyers for foreclosures. Homeowners whose financial troubles might be solved by selling can’t compete.

In many ways, the Villages is fortunate because much was built before the market soared, said Amanda Shaw, president of Associated Asset Management, which administers it and 300 other Arizona subdivisions.

But it can be difficult to know when homeowners are in trouble.

“There are people who think they don’t have an alternative . . . other than to turn the lights off at 1 in the morning, hop in the U-Haul and just leave,” Shaw said.

Their house is worth less than it used to be, but it’s home, Dave and Maryann Gustafson decided.

In May, their lender agreed, temporarily trimming the $1,000 a month increase in their payment to $400. It should keep the Gustafsons in their house.

Greg Giniel is not so sure. His home is scheduled for auction in November. “I’ve got to figure out how to buy my own home back,” he said. “If God doesn’t pull me out of this one, I don’t know where else I’m going to go.”

Things looked just as uncertain to Joy and Paul Kessler -- until they did the math.

They could fight for their house. But why? It’s worth at least $40,000 less than they paid. “It’s sad to say but honestly, we don’t feel like there’s anything worth saving in this house,” she said.

So the couple decided to let the place go. Everyone said it was the right thing to do.

Still, it doesn’t sit right with her husband. When times were good, they made a commitment, he told her. Somehow, it doesn’t feel right to walk away.