Struggling economy

Arizonans waiting for that long-promised economic recovery are going to have to cool their heels for a few more years.

At an annual forecast luncheon Wednesday, Lee McPheters, a professor at the W.P. Carey School of Business at Arizona State University, pointed out that Arizona ranked seventh in year-over-year job growth in the entire nation. And he predicted that growth rate could double, to as much as 2 percent in 2012.

But McPheters pointed out that growth rate is from very depressed levels: Even if his prediction comes true, that still would leave the number of people working in Arizona by the end of next year about 250,000 below when the economy peaked in 2007.

And pre-recession levels? McPheters figured that won't happen until 2015.

Economist Elliott Pollack, also speaking at the forecast sponsored by ASU and JPMorgan Chase, sketched out a similar time line for recovery of the housing market.

The problem, he said, is that more than 50 percent of homes in the Phoenix area alone are "under water," with more owed on the mortgage than the property is worth. He compared the situation to that of a manufacturer who is stuck with an oversupply of some particular item.

"First thing you can do is put it on sale," Pollack said. "And you're going to keep on cutting the price until the product moves off your shelf."

He said that's precisely what's happening in the housing market.

"Everything's on sale," Pollack explained. He said about 27 percent of sales of existing homes are foreclosures, with another 31 percent being short sales, where the lender agrees to accept less than the outstanding balance on the mortgage.

"More than half the market is distressed," he said. Only when that oversupply is gone will prices go back up.

McPheters said the home price situation is complicated by that lack of job growth as well as the national economic situation.

"People can't sell their house," he said. "They can't relocate."

He said that migration to Arizona before the recession was running at about 100,000 a year. It has now slowed to just 40,000.

And even if they could, McPheters said, there's nothing to bring them here.

"People tend to go where the jobs are," he said. "And Arizona job growth is very, very slow."

Pollack also sees a link between job growth and home prices.

He said that, theoretically speaking, a 1 percent increase in population should result in a similar jump in the number of households.

"When unemployment is this high, you tend to get a doubling-up effect, especially in people 25 to 34 years old," he said. "You get a knock on the door and the horrible thing happens: Your kid wants to move back in."

Only when the unemployment rate drops to the 7 percent range, Pollack said, will that situation begin to reverse. But he figures that even reaching that level, which is still close to double what it was in 2007, will not occur before 2014.

Pollack acknowledged that many of the homes being snapped up now are by investors.

But he said while some may be hoping to "flip" them for short-term gains as the market recovers, he does not see a new oversupply of homes on the market. Instead, Pollack said, he expects many of those investors to hang on to the properties as rentals.

"Depending on whose figures you believe, about 75 to 90 percent of people moving out of single-family homes are moving into rental single-family homes," he said.

"If you've got two kids and a dog, you're not going into an apartment," Pollack continued. "You're moving into a single-family rental down the street."

The result, he said, is that one out of every five single-family homes in Phoenix alone is a rental, twice the rate of a decade ago.

But Pollack does not foresee levels of home ownership rising back to where they were.

"A lot of people who should never have been in a single-family home were in a single-family home," he said. Credit is now tighter and many of these people will not qualify for a mortgage again.

But for some of the same reasons, Pollack foresees a boom in apartment construction.

He said vacancy rates dropped from 14 percent to 10 percent in a single year. And Pollack said there are only a small number of units under construction, predicting a sharp uptick to deal with demand.

What also will happen, he said, is "upward pressure on apartment rents."

(1) comment

JR Hunn

I wonder whether people would be more interested in the comments of people who have demonstrated competence in forecasting. This article also does not include any of the logic behind forecasts of a recovery in 2014 or 2015. Perhaps readers would be interested in specific choices or adaptions that are relevant to them personally in relation to emerging and accelerating trends.

I talked to a millionaire in 2006 in Scottsdale who declined to heed my warnings. Soon, he was no longer a millionaire. Another lady (who was his employee) chose not to dive in to mortgage debt based on conversations with me and her financial success blossomed.

I made a list of 9 authors who published forecasts of at least one of the major developments of the last several years. I am one of those 9.

My first warnings about concern for a weakening real estate market (for the whole US and beyond) were in early 2003:

"Unless you have a very specific reason to believe that real estate will outperform all other investments for several years, you may deem this prime time to liquidate investment property (for use in more lucrative markets)."

From: http://www.gold-eagle.com/editorials_03/hunn030303.html

When you read that article, you can see that I made reference years in advance to the collapsing of the credit bubble, a crashing of real estate prices, a continuing rise in prices of commodities like gold and oil, and my specific emphasis was on a particular sector of the US stock market that went on to rise over 1600% since late 2000. By 2004, I specified the most important causal issue in shifting global economic trends as the rising of fuel prices since 1999, which had also rocked the economy of much of Europe. I called it "The DominOIL Effect."

see www.theDominOILeffect.com

Obviously, different people have different circumstances, so as the economy of Arizona and the rest of the world changes, different adjustments will be relevant for different people. Some people need to focus on accessing cash urgently, some on radically improving their relationship to their debt, and some on prudent investing. One of the best ways of reaching me to assist you with prospering is through my blog, and here is a funny parody video on my blog about the mindsets that result in people temporarily doing other things besides adapting to the eternal shifting of risk and opportunity:

http://jrfibonacci.wordpress.com/2011/07/12/1645/

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