Of Subprime Mortgages and Unrestrained Development

There is a great article this morning in the New York Times Magazine focusing on the development of Maricopa, Arizona. Primarily, it highlights the short-sightedness of using adjustable rate mortgages and interest only loans and the like. Such financial tools have their uses, but it seems that too many home buyers, particularly in hot markets like Arizona, used those tools in conjunction with an assumption that the boom-times would last forever. I had a history teacher who told us that, whenever someone tells you that the good times are here to stay, you should check your wallet and head for cover. (He told the class this in October of 1987; made a little gesture as if sniffing the air; and said, “in fact, it smells like we’re in for another downturn.” A week or so later, Black Monday took place on Wall Street. He had my attention for the rest of the year.) Home values were inflated, people would come in and buy the houses with interest-only loans, ARMs, and the like; anticipating that the home values would continue to rise; at which time, they could refinance or sell the house. When home prices started drifting back down to earth, the house of cards started collapsing. People find themselves struggling to pay their interest-only mortgages in a market where they could rent a property twice the size at half the price. It reminds me of some of my collections where the bank has repossessed the car and the debtor thinks that should be the end of it. I have to advise them, that this isn’t the case where they struck a crappy bargain, agreeing to pay more for the car than it was probably worth (not to mention depreciation, etc.) Now they don’t have a car, *and* they’re stuck paying an extra few thousand bucks. This home market problem is like that with dollar amounts that are an order of magnitude greater.

But there was a side-theme to the article that caught my attention as well. There is real value to local government restrictions on development. Obviously this runs contrary to libertarian notions of a mostly unrestricted right to use one’s property as one sees fit. But, with almost no zoning laws or area planning in effect in Maricopa, each developer was acting in a way to maximize its profits, but this lead to a town that didn’t work especially well. For example, there was only one road to Phoenix, with no overpass over the train tracks, turning the busy roads into a parking lot when a train came by. Apparently there was no space for a high school. High schools lowered property values. One developer said he’d rather build a jail on his property than a high school. In the evenings, since the area was little more than subdivisions, there was nowhere to go and nothing to do. Apparently you were looking at a 45 minute drive to find anything interesting to do. Typically local government will have community development regulations in place to promote the orderly growth of a community, mitigating some of the negative consequences of developers acting purely to maximize their personal self-interest. However, Maricopa wasn’t much of a community before the developers came in to take advantage of the expansion of the Phoenix metropolitan area.