Interesting Times

Arizona State Treasurer Dean Martin studies people's coffee habits as an indicator of Arizona's economic well-being.

"Watch your local Starbucks," Martin said to a standing room-only audience at the Arizona League of Cities and Towns conference, held at the Tucson Hilton El Conquistador in Oro Valley.

"Coffee is a good indicator. It sits between a need and a want," he said.

When the Starbucks trash can is full, that means people are willing to pay $4 for a cup of coffee, and that they have more "disposable income," he said.

When they're buying coffee at less-expensive McDonalds, the major Starbucks competitor, consumers are feeling a pinch. And, because 70 percent of Gross Domestic Product is consumer spending-based, "consumers tell you everything" about economic activity. "Consumer confidence is very important."

Starbucks has announced plans to close two stores in Arizona, which "shows you how resilient the Arizona economy is," Martin said. Those closures are near Phoenix, where "people who couldn't afford a starter home" moved "further and further out." Then the housing crunch hit, and values in those areas plummeted. Anticipated coffee sales did as well.

Another Starbucks store, first proposed for closure and later rescinded, is at Eloy, which was expected to become a Tucson / Phoenix bedroom community before the housing market fell. In the "doughnut" effect, distant rural and inner city housing was first and most heavily impacted by rising foreclosures and falling values.

Yet Martin believes Arizona is faring the best of the four states – Arizona, California, Nevada and Florida – most impacted by the housing market's decline. It is the only one of the four, for example, with an unemployment rate below that of the national average. "It could be a whole lot worse than it is," Martin said.

Martin used a graphic illustration to show Arizona's real estate bubble, and the subsequent "free fall. In the last year, it's really taken on a whole new level of crash. We have not seen a bottom," in part because some commercial construction activity has remained.

The state is in "a post-housing bubble environment," Martin said.

In 2003, Arizona was identified as an undervalued housing market. Investment money flowed in. More housing was built, much of it on speculation.

"We doubled home values in a year and a half," Martin said, "and that's not sustainable. The bubble burst" in mid-2006.

"Are we starting to see a bottom here? It's too early to say. Current housing prices are at 2001 levels in real dollars. We're starting to see investors come back, not short-term, they're buying as a long-term investment, and that's a good sign." So is an increase in issued housing permits, he said.

Supply and demand dictates home prices. "Arizona is still overstocked on homes, but it's improving," Martin said. "Until there is a balance, we'll continue to see price drops."

Thirteen percent of home mortgages are distressed. "We have not seen numbers like this since the Great Depression," Martin said. "We have to stop foreclosures. Foreclosures continue to drive prices down." That said, 87 percent of mortgaged Americans are still making their payments, the Republican pointed out.

He sees a strong future for Arizona. "The reason why people move to Arizona has not changed in this recession. It's not like Michigan. The reason to live in Michigan may be going away forever."

Martin cautions this is "not going to be a fast recovery. There are signs at least it's not going to get worse." He sees a national economic "bottom" in the fourth quarter of this year.

"Unlike previous recessions, we will not come out of this before the national economy," Martin believes, in large part due to the housing effect.

"Everything returns to the mean over time," Martin said. "The worst part of the crash is over, unless the government decides to do something stupid." He does sees rising inflation within three to five years.

Dave Perry, The Explorer, 9-9-09