The Desert

Ryan Avent comments on a great Washington Post article on the utter devastation the housing bust is wreaking on the Phoenix area. All across the country, prices are declining and the economy is slowing. But sunbelt boom towns have gotten caught up in the bubble feeback loop in a way that just doesn't seem to be true in northeastern downtowns. First the micro level, meet the Ao family:

They bought their first home in 2005, for $269,000. They paid for it using an Option ARM, which allowed them to make a monthly payment of $850, which was less than what they paid for rent in Los Angeles. Only later did they realize that meant that their loan amount would grow over time, not shrink, as would their payments.

"When we saw the payments were so low we decided to buy another house," Rebekah Ao said. "With the market going crazy, we figured we could sell the other house in a couple of years."

They now owe $287,000 on the first one and $320,000 on the new home, which they are renting. Their credit card balances, which they once kept at zero, have ballooned to more than $14,000 as they struggle to make ends meet.

On the macro level, the article notes that fully ten percent of the Maricopa County labor force works in the housing sector. But with prices in decline, there's not going to be much new residential construction until the area "works through its inventory of about 37,000 unsold homes, which could take three or four years." Meanwhile, rather than being in a position to help out with a little juice, the Arizona "state government is staring at a billion-dollar shortfall in its $11 billion budget." And of course local government budgets are normally hit harder than state ones by declining property assessments. Not only are most families seeing their home equity go down, but families like the Aos facing increased debt are going to need to cut back on spending. So will people who work in the building trades. So will some categories of public employees and public assistance recipients as the state cuts its budget. That means a spiraling economic downturn.

Now of course if the rest of the national economy were humming along, all that excesses property might just get snapped up. It's a lovely part of the country with great weather -- a lot of people might want to move there if a housing bust made the property cheap temporarily. That, in turn, could inject some new economic activity into the area. But with prices on the decline everywhere, it's hard to see where the new demand comes from.

Photo by me, available under a Creative Commons license.