Tuesday, October 17, 2006

Ghost Towns of the 80s and Today

Over on Calculated Risk, a quote from Janet Yellen, President and CEO of the Federal Reserve Bank of San Francisco:

According to some of our contacts elsewhere in this Federal Reserve District, data like these are actually "behind the curve," and they're willing to bet that things will get worse before they get better. For example, a major home builder has told me that the share of unsold homes has topped 80 percent in some of the new subdivisions around Phoenix and Las Vegas, which he labeled the new "ghost towns" of the West. Though the situation isn't that bad everywhere, a significant buildup of home inventory implies that permits and starts may continue to fall and the market may not recover for several years. While builders remain hesitant to cut prices so far, and instead offer sales incentives, price cuts at some point in the future seem almost inevitable.

The speech was about prospects for the U.S. economy, and Calculated Risk and those who left comments general spoke in those terms. But it reminded me of a book I read years ago called Daisy Chain by James O’Shea. O’Shea wrote about the rise and fall of Vernon Savings and Loan, and the savings and loan crisis in general. It’s a great book, and one part I always remembered was a quoted video voice-over shown to FSLIC regulator (and the closest thing to a hero of this story), Ed Gray. The video was an aerial view of miles and miles of low-rise condominiums along the I-30 corridor east of Dallas. The narration went like this:

Looking west toward downtown Dallas, we can see the hundreds and hundreds of units that are under construction, none occupied. . . Building after building, probably twenty-four to thirty complexes, all unoccupied. . . Other mature projects, probably complete for a year. . . no occupancy. . . The problems of security, vandalism, fire, control, completion—all are readily apparent from pictures like these. A project called Snug Harbor—vacant. On Faulkner Point North, numerous projects, numerous buildings, virtually totally vacant. No sales effort, no leasing effort, and across the street, more slabs and active construction. Notice the incredible waste, the total lack of contractor control. . . Evidence of arson is already available. . . This particular series of buildings made up one project, apparently totally vacant, with severe freeze damage inside each unit.

This happened because the economy of Texas collapsed when oil prices dropped, and because the S&L industry was deregulated to such a degree that developers could own banks, loan each other money, flip properties with each other, and essentially make obscene profits without actually having to sell any condos or homes.

The empty condos were an early warning sign of the collapse of the S&L industry. The government (and ultimately taxpayers) bailed out the industry. Will we have to do that again for home builders and the financial institutions that extended credit to them?

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