(Agencies)
Updated: 2007-10-07 10:26

In June of 2004, Dave Gustafson took time off from his job as a supermarket produce manager, and the family headed to Arizona to visit relatives. The buzz of construction and word of low home prices convinced them to have a look around.

Dave and his wife Maryann liked what they saw.

Back in California, they had contented themselves with less than 1,100 square feet. But salesmen here showed them floor plans that would give them 2 1/2 times the space for half the price.

The place they liked the best was a subdivision called the Villages, a crescent-shaped warren of streets cradling a golf course, quickly filling with sand-colored stucco homes. The local schools had a good reputation. It was affordable. There was an extra-big lot on a cul-de-sac, with enough room in back for a pool.

"The sales person was saying that they (homes) were going up US$1,000 a week," Dave Gustafson recalls. "So when we came to look, we signed right away."

Builders made it easy. A downpayment of US$2,000 to US$5,000 was all it took to get started. Buyers could borrow at low teaser rates, requiring payments of nothing more than interest.

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

By the time the family's new home, a two-story model called The Starling with a cathedral ceiling in the living room, was completed the next spring, the US$179,000 base price had climbed to US$220,000.

"We were making money while we were waiting," Dave says.

The Gustafsons picked out Corian counters and maple licorice-finished cabinets at the builder's design center, and opted for a pool and a whirlpool bath, adding more than US$50,000 to their loan. The interest rate was fixed for only two years, but they didn't worry. With prices rising so fast, they could always refinance. And in five or six years, the Gustafsons figured, they'd sell for US$500,000 and downsize.

They hung a plaque over the dining table: "Home is Where Your Story Begins."

They were hardly the only ones feeling optimistic.

Kris Rowberry was ecstatic when the value of his home in nearby Gilbert started to take off. So he 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," says Rowberry, a nuclear safety inspector.

But the speculative mind-set confounded buyers like retiree David Pickering. When Pickering and his wife left Pennsylvania in August of 2004 for a new home in the Villages, they'd never heard of interest-only loans and the idea of buying a home as an investment hadn't occurred to them.

They were simply buying a place to live, hopefully for a good, long time.

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

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