Monday, February 11, 2008

If There's A Forest of Bad Arizona Economic News, Will Any Dead-Tree Papers Print It?

I think of myself as an active consumer of local news, particularly the business section, and I’ve read lots about the ASU predictions of tougher, slower times but nothing about the U of A call that the state is already in a recession. I realize we’re all boosters here in Arizona, but occasionally it helps to let some of the bad news out early if it’s going to come out anyway.

Regarding the economy, did you know that the Rs don’t want to call it "employer sanctions"; the new politically-correct term is “worksite enforcement.” And what better way for our GOP-controlled legislature to deal with a recession than by (1) making it more cumbersome for businesses to hire new workers and (2) spending money locking up illegal aliens, increasing government expenditures and keeping them from earning money and consuming? Makes perfect sense.

My rushing-out-the-door suggested headline was “Recession? It’s Already Here,” but the editor gave me more space and more words. But weren’t most of the dinosaurs actually fast?

East Valley Tribune, Feb. 10, 2008

It didn’t make quite the splash of the 1988 Barron’s article “Phoenix Descending -- Is Boomtown U.S.A. Going Bust?” but last week The Washington Post had a
page 1 article with similarly bad news: “Housing Crisis Casts a Cloud Over Sun Belt / In Once-Booming Areas, Help Could Be Too Little, Too Late.” And the news is worse than 20 years ago.

The article focused on how the various stimulus packages being debated in Washington won’t do much to help housing rebound. But it’s not clear that any federal stimulus package (especially consumer-oriented tax rebates and business tax incentives) could re-inflate a burst housing bubble.

The really sobering lesson in the article has little to do with tax rebates, interest rate cuts, and overextended homeowners facing bigger loan payments on houses dropping in value. That’s the bad news. The worse news is what all of these factors mean for the overall Arizona economy.

In Phoenix, construction -- primarily residential housing -- represents almost 10 percent of total employment, 1.5 times the national average. The area’s total output, which grew by 7 percent last year, is expected to drop in 2008. (Even during the worst of the S&L era, we still had positive growth.) Some 13,000 homes in Maricopa County are in foreclosure. Our concentration in a rising real estate economy helped Phoenix boom while things were good, but now will make not-so-good times even worse.

Lee McPheters at Arizona State University wasn’t willing to go as far, University of Arizona’s Marshall Vest already decided in December that regardless of whether the national economy goes into recession, Arizona, California, Florida, Michigan, and Nevada already were. For the Sun Belt states on that list, blame the collapse of the housing market; in Michigan, it’s the decline of the auto industry.

Another illustrative statistic comes from
Forbes magazine. Using data from RealtyTrak, the magazine said Maricopa County ranks third in the country for the number of foreclosures with “negative equity,” where the amount owed exceeds the value of the house. The national leader is Wayne County (Detroit), Michigan, where the auto industry’s long-standing decline is reflected in declining home values. Nearly 40 percent of the houses in foreclosure have negative equity.

In Maricopa County, the percentage is much lower, 15.9 percent. But that number may be deceptive. Having such a low number of foreclosures with negative equity could mean that many homeowners with adjustable-rate mortgages couldn’t manage higher payments, and are walking away from their homes, unable to sell in a declining market, even though they’re leaving equity behind.

But it’s also possible that the property’s current appraised value (which RealtyTrak uses to calculate equity) is higher than the actual market value, and that as values continue to drop, the negative-equity percentage will increase. Appraisers in Detroit have had years of experience dealing with declining values, so their numbers may be more accurate than participants in the Phoenix real estate market, to whom declining prices are like snow, something we only read about.

Leave apart the irony of Forbes magazine -- Capitalist Tool! -- now offering readers handy tips on arranging a short sale. You used to hear a lot around here how we have a post-industrial, diversified, services-based economy. But it turns out that what the auto industry is to Detroit, residential home construction is to Phoenix. Maybe people, after a brief pause, will resume moving to a place dependent on the automobile, with half-completed infrastructure, little social capital and investment, lots of nearly-vacant edge subdivisions, a noisily-angry attitude about immigrants, and a weak governmental financial structure -- but that’s not a slam-dunk bet.

We’ve laughed for years at those dinosaurs in Detroit, dependent on the auto industry. Maybe our similar dependence on growth and residential construction just makes us slightly more modern dinosaurs. Sure, Michigan may be Jurassic, but what if we in Arizona are the lower Cretaceous?

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