NYT: Recovery lags where housing boomed

CLINTON, Md.?? Half a decade has passed since crowds of lunchtime workers regularly packed the Fish Market restaurant, a popular fixture of this southern Maryland crossroads known by the lighthouse on its roof.

Sales representatives for drug companies no longer buy hundreds of dollars in food for workers in the medical offices across the street. The private dining room, once a popular spot for business meetings and family parties, was closed in the fall.

The official statistics say that the national economy has been growing for almost three years, and that Maryland is growing faster than most states. But in Prince George?s County, where housing prices have fallen more than anywhere else in the state, there is scant evidence of renewed prosperity.

Auto sales are slowly improving nationwide, but car dealers here say the arrival of spring and tax refunds are failing once again to bring buyers to their lots. Contractors who built homes say they are glad for work fixing roofs.

?I don?t think you?ll find anyone in here who will tell you that it?s over,? said the Fish Market?s owner, Rick Giovannoni, gesturing at the half-empty tables.

He paused, then added: ?Well, we are selling more drinks.?

A growing body of research suggests that the recent recession may have brought an enduring shift in the geography of American growth. Places like Gwinnett County near Atlanta, Lake County, north of Orlando, and San Joaquin County in California?s central valley, where housing booms were fueled by borrowed money, may now become long-term laggards under the weight of those debts.

Auto sales down sharply
Various kinds of economic activity, including auto sales, fell more sharply and are rebounding more slowly in areas that had the highest debt burdens at the peak of the boom in 2006, according to a series of recent studies.

Jobs that depend on local spending, in restaurants and retail stores, were eliminated in larger numbers in high-debt areas. And the latest available data suggests that those jobs are returning more slowly, too.

?Typically where the recession hits hardest the comeback is more vibrant,? said Amir Sufi, a finance professor at the University of Chicago who is an author of several of the studies. ?We?re not seeing that this time around.?

This debt hangover has its strongest grip along the western and eastern coasts, where the scarcity of land helped to drive housing prices and debt burdens to extreme levels. Prince George?s, which fits like half a doughnut around the eastern side of Washington, was particularly vulnerable because it is the least affluent of the Beltway counties. People here, as in other less affluent suburbs, tended to have few investments beyond the equity in their home.

Housing prices in Prince George?s more than doubled from 2001 to 2006, reaching an average of $341,456. The average household, in turn, accumulated debts exceeding 2.5 times its annual income. The crash, when it came, wiped away much wealth and some income ? but none of those debts.

Greg Howell, who runs an auto finance company that works with Washington-area dealerships, said sales remained particularly depressed in Prince George?s and across the Potomac River in Prince William County in Virginia, an area with a similar boom in housing prices.

Sitting in a back office at Driveline Auto, a Prince George?s dealership in which he owns a minority stake, Mr. Howell said that business had ?hopped? in the years before the crash. Since then, he said, a lot of dealerships had closed.

People who need cars are buying, he said. People who want cars are not.

?When a customer points at a shiny BMW, there?s more margin there,? he said. ?Until the want comes back, these businesses will struggle.?

?It hasn?t been fun in five years,? he said. ?And it?s going to be awhile.?

It may sound obvious that people with debt problems will spend less. But it is less obvious that this would weigh on growth. According to standard economic theory, if some people borrow too much and reduce their spending, prices and interest rates should fall, inducing other people to increase spending.

The slow pace of the current recovery has led some economists to revisit that assumption. Interest rates cannot fall below zero, and they argue that the hole is so large that zero is not low enough to attract all the new spending needed to fill it.

Professor Sufi and his colleagues were among the first to present evidence for this theory. They used credit card data to show that spending in high-debt counties fell more sharply during the recession: on durable goods like dishwashers, nondurable goods like clothing and even on groceries. The sharpest drops happened in areas where people reported little wealth beyond their homes.

In a second study, Professor Sufi and Atif Mian, an economist at the University of California, Berkeley, divided jobs into two categories: Those that depend on local spending, like waiters in restaurants, and those, like factory workers, that can be sustained by spending in other places. They found that employment in local jobs fell much more sharply in high-debt counties from 2007 to 2009.

Persistent disparity
The New York Times analyzed employment data for 2010, released since the study was completed, and found that the disparity had continued in the early stages of the recovery. Employment in local jobs did not increase in high-debt counties in 2010 even as it began to grow modestly in low-debt counties.

Everett Allen, who owns a remodeling business in Prince George?s, used to have enough work for six employees. In recent years he has employed three.

?If somebody used to call in October, I wouldn?t do the job,? he said. ?I wanted to be off over the holidays and I gave my guys time off. Now if somebody called in October, I probably would be doing it. But we don?t get those calls now.?

The average price of a home fell 47 percent in Prince George?s from 2006 to 2011, according to the Maryland Association of Realtors. Some economists see this ?wealth effect? as sufficient to explain the decline in consumption.

But a recent national study by Karen Dynan, an economist at the Brookings Institution, found that households with higher levels of debt cut spending by a larger amount even after accounting for the effects of wealth.

Household debt is now in decline. The Federal Reserve calculates that average household debt payments as a share of disposable income fell below 16 percent in 2011, from a peak of 18.85 percent in 2007. But it is not clear where the process of paying down debt, or deleveraging, will stop, or how long that might take. Economists do not even agree whether people are reducing debts voluntarily, or whether banks are forcing a change in lifestyle by refusing loans and reducing borrowing limits.

And the consequences remain in dispute. John C. Williams, president of the Federal Reserve Bank of San Francisco, argued at a conference in February that the areas hit hardest by the recession are recovering at the same speed, they simply have a longer road to travel.

?The link between house prices and regional economic activity is much clearer in the downturn than in the recovery,? Mr. Williams said.

But the ideas advocated by Professor Sufi and his academic allies are rapidly entering the mainstream. The White House highlighted their research in the annual Economic Report of the President, published in February.

And the theory rings true to Mr. Allen, the longtime Prince George?s contractor.

?People are scared to spend money right now,? he said.

Spring came early this year, and spring is when customers usually start calling, but Mr. Allen said this has been as quiet a spring as he can remember.

This story first appeared on April 2 in The New York Times under the headline, "Where Housing Once Boomed, Recovery Lags."

Copyright ? 2012 The New York Times

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