Toll Scorched in Arizona

"There is such a massive oversupply," East says. The market is bifurcated between the central city areas of Phoenix -- where there is still some demand -- and the outer areas, which are "extremely slow," he says.

In October, new-home sales in the Phoenix area totaled 3,159 units, down 29% from a year earlier, according to the latest data from R.L. Brown Housing Reports. Permits for new homes totaled 1,325, down 43% from last year, the data said.

Surprise, where the Toll project sits, is considered an "edge city" that is in the "direct path of future growth," says R.L. Brown, the author of the market reports. Nonetheless, as the entire Phoenix housing market corrects from boom times, outer areas like Surprise may face even more difficulties because they are so far out and have traffic congestion.

Gasoline, at $3-per-gallon in Arizona, is also hurting housing prices in outlying areas, industry watchers say.

"If they build it today with the land base they had, it could be real challenging," Brown says about the Toll project. "But like any development opportunity of that size, it will span a decade.

"I don't think they are in any long-term negative position relative to that piece," Brown adds.

If Simon does end up pulling the retail piece and no other partner comes in, this "will put even more pressure on the housing component," says Jay Butler, director of realty studies at Arizona State University.