The Perpetual Growth Machine

The Perpetual Growth Machine

by Matt Jenkins

Arizona sets out to disprove the notion that someday the West will run out of water

BUCKEYE, Arizona — The housing market may be cooling off, but the news doesn't seem to have reached Arizona. In the WestValley, 45 minutes from downtown Phoenix, the small farming community of Buckeye has the feel of a Wild West boomtown. Fresh-pressed housing developments sprawl across the desert. In some neighborhoods, newly occupied houses sit next to half-built homes with tiles still stacked on their roofs. Even in neighborhoods that are still uninhabited, the traffic is endless; framing crews, roofers, drywall crews, painters and convoys of linemen from APS, the local power company, prowl the streets. And on the constantly expanding edge of the city, construction crews are grading pads for the next installment of the more than 4,000 new houses built in the Phoenix area every month.

Amid the sea of new rooftops, the homebuilders' modular sales centers and model homes can be impossible to find. Companies have taken to hoisting gigantic American flags. On weekends, they launch an additional flotilla of blimps and balloons, and deploy an army of sign-toting hucksters at freeway off-ramps and intersections.

One Saturday in May, local high schooler Marco Gutierrez and a friend stand at the intersection of Yuma and Cotton roads. Marco waves a sign for Beazer Homes while his friend holds one for homebuilder Centex. The two look as if they've narrowly escaped being paved over. Cotton Road has recently been rebuilt and shifted to one side, and cars are backing up on the smooth, new pavement. Gutierrez stands on the old road, a decrepit ribbon of blacktop. "Last week," he says, "this road was open. I used to stand" — he stabs his finger toward the growing line of cars on the new road — "right there."

Many of these neighborhoods feel like they're a suburb of somewhere else. New homeowners speak of mistakenly thinking they had crossed a state line the first time they came to look for a house out here, because there are so many California license plates on the cars.

In a subdivision called Sundance, Maria Lozano and her four children relax in the shade of their garage. Lozano, a formidable woman with an unsentimental take on the world, says she and her husband, Vincent, bounced around California before finally coming to Arizona three years ago. They sold their home in Fontana — the Los Angeles suburb where the Hells Angels got their start — "because of the traffic, the crowdedness," she says, and moved their family here. Lozano now works as an office manager for a dental practice in Buckeye, and hopes the move to Arizona is her last one. "I don't want to do it again. I hate moving. To move again is almost like … uh, no."

Lozano says that when she moved here, housing prices were a third of what they were in California. The Phoenix area is filled with people like her — "equity refugees" who have cashed out and fled the traffic, crime, and high cost of living, primarily in California but elsewhere as well. They have created a phenomenal demand for housing, which the homebuilding industry here has happily met.

With the real estate market going soft nationwide, however, a cloud has drifted over the Sunbelt. If you're of an apocalyptic cast of mind, it's easy to wonder whether this Wild West economy will tank and leave legions of homeowners with over-inflated mortgages, homes they can't sell, and foreclosure notices piling up in the mailbox. But local leaders insist that Phoenix will never lose its allure. They contend that the state has put in place the protections needed to keep Arizona livable — and growing — almost indefinitely.

The question that may ultimately reveal the most is this: What if the boom keeps going? That's exactly what Arizona's water managers are beginning to ask, as they work to line up the water necessary to sustain the millions of people projected to move here in coming decades. Arizona is leading the way into a stark — and very complicated — new reality, one that it shares with much of the West: Development can continue only if water is taken from someone else. And the true costs and consequences of sustaining the boom, particularly in the face of climate variability and change, are only now beginning to suggest themselves.

The homebuilding industry in Phoenix is frequently likened to a giant machine. "It's the old cliché that growth in Phoenix is like automobiles in Detroit: It's the major industry," says John Hall, a professor at ArizonaStateUniversity's School of Public Affairs. "If you want to build a tract house, then there are five or six of the best outfits in the world here." Those companies, including Pulte, Centex and Fulton Homes, have honed what he calls "a real good assembly-line manufacturing process: The builders here are big builders and they can put a lot of homes down in a fast way."

Pulte Homes, for instance, has brought many of its construction crews in-house after years of using subcontractors. It slots houses — each of which takes about eight months to build — into a tight schedule to ensure what one company employee calls "a steady flow of production: Everybody has Web sites where they can log on and see where they're supposed to be, when."

Much more is coming: Forty miles west of downtown Phoenix, on the back side of the WhiteTankMountains, archaeological crews are surveying a 34,000-acre patch of creosote, ocotillo and shot-up kitchen appliances for the largest development ever built in the state. The 83,000-house project, called Douglas Ranch, could be home to a quarter-million people.

The development, originally put together by an East Coast pension fund, is owned by a group of high-profile local investors. They include Jerry Colangelo — who has also been an owner of the Arizona Diamondbacks baseball team and the Phoenix Suns basketball team — and real estate moguls Mike Ingram and Monty Ortman, who have amassed nearly a billion dollars' worth of land in Arizona.

Douglas Ranch will be big, but it also represents something of a new direction for development. Initially, the project would have simply created a giant bedroom community. But Tom Hennessy, a former Pulte Homes manager who is overseeing the development, says, "We're taking a fresh look at it. There's really an opportunity out here to do things differently."

As re-imagined, Douglas Ranch will at once embrace the landscape and be something of a world apart. It will include large swaths of open space designed to preserve a migration corridor for mule deer that summer in the nearby White Tanks. But it will also be an economically self-sustaining community, complete with a working downtown that provides jobs for its residents. Hennessy, whose office is in downtown Phoenix, spends a lot of time driving back and forth between there and Douglas Ranch. That's something he hopes the people who buy homes in the development won't have to do. "It would be a failure," says Hennessy, "if we had everybody who was living out here driving into Phoenix every day."

Douglas Ranch's investors have hired an economic-development consultant to attract businesses. But Hennessy seems particularly concerned about ensuring adequate "workforce housing" for the kinds of low- to moderate-wage workers, such as elementary schoolteachers and police officers, that a self-sufficient community can't do without.

Behind all of these plans looms a potentially significant worry: The housing market in Phoenix, like the one nationwide, is cooling off. But Hennessy is not concerned: "You couldn't sustain the pace that was happening a year ago. The price increases, the rising land costs, the housing costs, it was driving people out of the market. Now we're getting back to what the Phoenix market really was."

Last year, developers built 63,000 single-family homes in the Phoenix metropolitan area, according to Elliott Pollack, a local consultant who tracks the real estate industry. Over the long run, he says, "We think there's demand for maybe 45,000 single-family units (a year)."

Pollack has estimated that the Phoenix area's population, now just shy of 4 million, will reach 8.3 million by 2030. More conservative projections put it closer to 7 million. No one expects growth to slow significantly.

Practically every planner, water manager and real estate guru in Phoenix has a set of population projections close at hand, produced by the Maricopa Association of Governments. Known colloquially as "the red dots," they provide a glimpse of the future. By 2030, 75 percent of all the growth in the Phoenix area is projected to take place in the West Valley. By 2050, Maria Lozano's house, which today is on the edge of the city, will disappear under a smear of red.

Just up Cotton Road from the spot where Marco Gutierrez waves his sign, Centex Sales Manager Julie Platt is selling houses faster than her company can build them. She says she's sold some 300 homes here since late last summer. The first of those won't be finished until this August; in fact, she won't even have model homes to show buyers until the end of this summer. That, she says with a winning smile, makes for a tougher sell: "It's like, 'OK, You've gotta trust me, this is going to be great!' "

If it's hard for homebuyers to imagine what a house will look like without seeing a model, it is infinitely harder for them to comprehend some of the fine print that comes with these homes.

Tucked away in the "taxes" section of these developments' public reports, after disclaimers about the proximity of hazards and nuisances such as Perryville Prison (8 miles northeast), Luke Air Force Base (18 miles northeast) and Palo Verde Nuclear Power Plant (28 miles southwest), is an innocuous-looking paragraph which blandly informs homebuyers:

"Property is subject to assessments imposed by the Central Arizona Water Conservation District (CAWCD) for membership in the Central Arizona Groundwater Replenishment District (CAGRD). The CAGRD costs will be a part of the annual property tax billing from the county treasurer. A lot purchaser's share of the costs will depend on the amount of water used."

Should you ask a new homeowner — or even a sales representative — about the Groundwater Replenishment District, they will, to a person, stare at you as if you have suddenly started speaking in tongues.

The District is an obscure agency with a staff of five, expressly created to allow development to continue in an era of tough water regulations. Of all the cogs in the homebuilding machine, it is the least visible.

In 1980, after decades of rampant groundwater mining in Phoenix and Tucson, the state Legislature outlawed the practice, effectively cordoning off aquifers as a drought-protection reserve. Five years later, the Central Arizona Project began delivering Colorado River water as an alternative, pumping it across the desert in the massive CAP canal (HCN, 3/21/05: Arizona returns to the desert).

At the same time, largely in response to a rash of embarrassing "dry lot" real estate scams in the late 1960s, the state decreed that developers must have a 100-year assured supply of water for each home they build. "Does it really mean a hundred years?" asks Steve Olson, who directs the Arizona Municipal Water Users Association. "There's nuances, but it will at least outlast my mortgage. And you need that to protect your property values."

The law may have made Phoenix and Tucson the safest places in the West to invest a quarter-million dollars in a new house. But putting groundwater off-limits would have stopped development on the outskirts of the two cities, in the areas beyond the reach of the Central Arizona Project.

So, in 1993, developers wrote themselves an exemption to the law and got it approved by the state Legislature. Development, the new law decreed, could happen on the fringes, using mined groundwater — if the homeowners paid to pipe in an equal amount of surface water and "recharge" it underground, as part of the state's drought-protection water stash. The Groundwater Replenishment District was created to take care of the details.

The plan was a compromise, and it came with a price. No one, however — not even the District's creators — knows what that price will ultimately be.

"I don't think (homeowners) realize what they're buying," says Guy Carpenter, a master-plan designer at a firm called HDR Engineering, who has watched the District for years. "When they sign their name to the title of that house, they are taking on the responsibility of paying for whatever it costs to get that water supply replenished."

The cost is now only about $70 a year. That could soon change, however. The small cadre of people who follow the Groundwater Replenishment District frequently speak of its role in "bridging the gap" between the water demands of new subdivisions and the state's available supplies. But that gap is widening at an alarming rate.

Today, the Groundwater Replenishment District covers more than 184,000 homes in Phoenix and Tucson. It covers new subdivisions like Sundance, where Maria Lozano lives; it covers Verrado, a tony new-urbanism development built on a reclaimed Caterpillar bulldozer proving ground at the foot of the White Tank Mountains; it will cover Douglas Ranch; and it will cover a burst of new building in Pinal County, south of Phoenix, much of it marketed to lower middle-class buyers. That's to name just a few: The District is now responsible for finding water for more than half of all new homes in the state.

Two years ago, officials estimated that they would add about 18,500 houses a year over the next decade. Just last year, however, the District took on nearly 25,000 homes. Cliff Neal is the District's manager, and as someone who daily walks through the intricate maze of water, he usually speaks with a negotiator's measured language. But he says that even with the housing market softening, "I gotta be honest with you: This year looks like a record year."

If the pace set in the first four months continues, 36,000 new homes will join up in 2006. If development continues at this rate, the District's obligations by 2015 will be at least twice what they were projected to be. And as the District begins buying water to cover its obligations, homeowners like Maria Lozano will have to foot the ballooning bill.

Last November, CNN's online magazine, Business 2.0, ran a story headlined "The Next Real Estate Boom." The story led with Douglas Ranch and proclaimed that, "unlike Los Angeles, the area has enough water — from underground rivers, aqueducts, and nearby mountains — to support all the new residents."

Phoenix has thrived because the allure of a piece of endless sun, at an affordable price and no risk of dying from thirst, is irresistible. The city's business elites have a tremendous investment in that image, because it is what keeps people coming — and that is what the entire Phoenix enterprise depends on. But the city's boosters will have to work hard to hold that image together in the coming years. While Arizona's unofficial motto may be, "We've got plenty of water," most of that water is already being used.

Thirteen years ago, when the Groundwater Replenishment District was created, the Central Arizona Project canal brimmed with "excess" Colorado River water. That excess will vanish rapidly over the next decade. One result: Although Douglas Ranch will sit right next to the Central Arizona Project canal, the project won't hook up to it, because all of the water is destined for elsewhere.

To keep up with growth, the Groundwater Replenishment District will have to buy water from other water users. That's something that water agencies in Southern California and the Denver area have done for years. But the District's mounting obligations could force it to buy more water over the next several decades than any other urban water agency in the West.

Two years ago, the District commissioned an inventory of possible water sources. Cliff Neal says the District could potentially lease some 900,000 acre-feet of water each year, enough to supply up to 2.7 million homes. That is enough to cover at least 50 years of continued growth. But the District will only be able to get that water by negotiating water-transfer deals piece-by-piece — with cities that can sell wastewater, with farmers who now use water to grow crops, and with Indian tribes, which have been winning rights to large amounts of water (HCN, 3/15/04: The New Water Czars).

Roughly half of the state's share of the Colorado River is currently used by Indian and Anglo farmers on the river near Yuma. The Groundwater Replenishment District anticipates that it will need to lease some of that water within a decade — but, given current rates of growth, it may need it even sooner.