Arizona Is in Recession

It looks like things are definitely slowing down in AZ. It's not looking too good for the AZ economy right now. The state government has a shortfall of about $1 Billion or so for this year and is now making cuts, and the deficit for next year is projected to be even larger. This is in great part due to the drop off in sales tax revenue recently due to the mortgage meltdown.

The mortgage debacle has hit AZ especially hard due to alot of speculation and questionable lending/borrowing practices. There are now investigations underway involving many of these loans all across the country and AZ is no exception.

Further exacerbating the situation is the credit crunch, as banks are retiscent to make loans even to customers with good credit. They are trying to shore up their positions and manage all the losses due to bad loans. Look for a sharp slowdown in consumer spending in 2008 due to the tidal wave of adjustable rate resets in the first six months of the year.

Even more indicative of a slowdown in AZ, are the perceptions of many people that I have talked to (friends, coworkers, people in different industries) regarding the economy. They feel that the economy has really taken a hit due to the real estate bust ($1 out of every $3 in the AZ economy is related to real estate). Alot of folks also took adjustable rate mortgages that are poised to reset this year which will sap their disposable income. Some folks are just plain scared, and when that happens people curtail their spending which deepens the downturn.

Adjustable rate mortgages which are now starting to reset are increasing the foreclosure rate which will exacerbate the problem with waning consumer spending. More and more customers are giving the house back the bank. They're simply mailing the keys back to the lender and walking away - it's called 'jingle mail' (see article below).

The links below to local news articles seems to indicate that recession is almost here, if not already.

UPDATE: 06/30/08: Mortgages Ltd., a Phoenix commercial lender has filed an "emergency motion" in bankruptcy court to obtain a $125 million dollar loan to keep itself afloat. The company had previously filed bankruptcy on June 24, 2008 and is now in a Chapter 11 voluntary bankruptcy. This event has a significant bearing on the Phoenix area commercial real estate market and construction as Mortgages Ltd. is the largest private lender in the state of Arizona. Construction on the downtown Hotel Monroe project, the funding of which involved Mortgages Ltd., has halted due to lack of funds to pay contractors.

This will undoubtedly have a ripple effect on the state economy as Mortgages Ltd. was involved in large scale, high profile projects such as Centerpoint (condo project in Tempe, AZ and Hotel Monroe (downtown Phoenix). See links to articles below.

Notice of Trustee (NOT) sales set an all-time record in the Phoenix area as some 6,668 NOTs were issued in Maricopa County (the county that includes Phoenix and it's surrounding areas.) NOTs are a precursor to foreclosure within the next 90 days, so look for a tidal wave of foreclosures to come. More information on this is available from the link below.

Update July 1, 2008 - State tax revenue plunges due to foreclosures. "Arizona's tax revenue dropped 13.6 percent in the quarter ending March compared with the same period last year. On Thursday the Arizona legislature approved a budget plan for the coming year that eliminated a $2 billion shortfall by cutting spending for college construction projects and expanding revenue by beefing up photo enforcement and the state lottery" according to the BusinessWeek/MSNBC article below.

Update July 6, 2008 - AZ Republic News Article states that "Adjustable-rate mortgage "resets" - in which a low initial interest rate is converted to a higher rate - are expected to peak this month in Arizona, and experts say the summer resets undoubtedly will lead to fall foreclosures." With about 5% of Arizona mortgages 30 days already behind in payments, this will only add to the fire. After the peak in resets this month, the rate of ARMs that resets will decrease but the reverberations from the past ARMs resets will be felt throughout the economy. The article also mentions that another ARMs reset peak is projected to occur in mid-2010 which does not bode well for AZ real estate. Read more at the link to the article below.

Update Feb. 26, 2009: It is now reported that during the past 12-month period Arizona lost more jobs than at any other time in it's history. Some 155,400 jobs from January 2008 to January 2009 were lost. See article from East Valley Tribune below. In other news, the state of Arizona budget is expected to have a budget shortfall of nearly $3 Billion in the next fiscal year. Taxes may increase.

Update Aug. 7, 2010: The Arizona economy continues to stagnate (see article below). Very high commercial real estate vacancy rate in the Phoenix metro area (roughly 25%) and continuing residential foreclosures still weigh on the economy.

Update Oct. 13, 2010: CNBC article regarding widespread economic downturn and the impact on Arizona's economy. See link below.