A real estate sales sign sits outside of a house for sale in Phoenix, Arizona
A home for sale in Phoenix REUTERS

The Arizona state economy is expected to grow but at a lower gear than that which the state was accustomed to during the housing-market-driven-growth days, as the economy is still recovering from the recession and the collapse of the housing market.

Wells Fargo economists predict that the state's foreclosure rate could touch historic levels by 2016. The Arizona housing market continues to move sideways while median prices continue to drop. In fact, median home prices for single-family homes are at levels not seen since 1999 and housing affordability is at levels not seen since 2003, according to Arizona State University's Realty Studies Web site.

At the same time, Arizona's foreclosure rate stood at 3.09 percent in September 2011, compared to 3.14 percent for the previous month and 3.82 percent in September 2010. Thus, the foreclosure situation continues to improve but at a snail's pace.

The same is true with the 90+ day delinquency rate, which dropped to 7.45 percent in September from 7.64 percent in August and 10.5 percent in September 2010. Thus, although the housing market is clearly improving, it is happening very slowly.

At these rates, the foreclosure rate could reach its historical level in 2016, and the delinquency rate could do so by 2019, Wells Fargo Economist Eugenio Alemán wrote in a note to clients.

Of course, these values assume that the rate at which foreclosures and delinquencies decrease maintains its recent pace, which is a big assumption. However, this provides an idea of the problems that face the Arizona housing market and the size of the challenges ahead.

Home prices continue to be under pressure in this environment and they are still affecting the number of homes that have negative equity or are underwater. After home prices fell at a 22.3 percent annual rate during the second quarter, home prices managed to grow at a 4.7 percent annual rate during the third quarter.

However, home prices remain negative on a year-ago basis and a recovery in home prices is still a ways off, which means the negative equity issue will persist for some time. The days that Arizona could count on strong population growth are over, at least for now and thus home prices will most likely remain under pressure for some time.

As a result, growth will be slow and the recovery will not feel like one until the housing market can come back with some strength, something that economists do not foresee for several years.