By Gary Lirette, host of the North Idaho Business radio show on KSPT and KBFI, economic researcher, and REALTOR® for Tomlinson Sandpoint Sotheby's International Realty
Recently, I attended a lecture by Anthony Grasst, a very astute MBA who runs a mortgage division of MetLife. It was gratifying to hear words of wisdom that offered another view of our economy besides the doom and gloom one hears on the radio waves or sees on the tube.
Graast explained that the job losses after the dot.com boom/bust and 9/11 was, if not worse than we are having now, at least comparable.
According to E-commerce News, 2001 went into the record books as the most devastating year in terms of Internet jobs lost.
In an article released in 2002, "For the year (2001), 100,925 positions were cut -- about 250 percent higher than the 41,515 cut during all of 2000, when the dot-com shakeout began in earnest."
Figures were much higher than that according to ComputerWorld.com, spanning many sectors and totaling over 2 million job cuts for 2001.
True numbers are often fleeting. Certainly hundreds of thousands lost jobs from the dot.com debacle, and probably millions. Post 9/11 job losses were also staggering. Our current recession passed that benchmark for total job losses in November 2008. Still, many forget we had these two recent large downturns in employment: the dot.com bust and 9/11. We recovered.
There is no doubt we experienced a double whammy. As our national economy began to recover from the dot.com bubble burst, 9/11 sent us right back down the tube. Yet we recovered.
In fact, the financial losses from these two events may have been even worse than our current crisis, with many experiencing greater losses because the stock market affected more real wealth in much greater fashion than today.
According to Wikipedia: "Several communication companies, burdened with unredeemable debts from their expansion projects, sold their assets for cash or filed for bankruptcy. WorldCom, the largest of these, was found to have used illegal accounting practices to overstate its profits by billions of dollars. The company's stock crashed when these irregularities were revealed, and within days it filed the second largest corporate bankruptcy in U.S. history. Other examples include NorthPoint Communications, Global Crossing, JDS Uniphase, XO Communications, and Covad Communications. Demand for the new high-speed infrastructure never materialized, and it became dark fiber, impacting companies such as Nortel, Cisco and Corning, whose stock plunged from a high of $113 to a low of $1." It wasn't only internet and tech related companies that caused national financial pain. Who can forget Enron?
The financial losses from 9/11, hurricanes Gustav and Katrina, and other disasters during the Bush administration, as well as the true costs of the war in Iraq, have some comparisons to our dismal condition today. While the press appropriately covered these disasters, the overplay and total consuming coverage of today's crisis makes those pale in comparison.
For those trying to buy homes, money is tight. However, according to Grasst, liquidity is changing. True liquidity right now is not as tight as the press would have you believe. Stated Grasst, "The money supply has increased by 20% over the last few months, but takes 6-9 months to show in the market."
The message Grasst related in his lecture was that financing is available; you just have to have a job, pay your bills, and you can't lie. What a concept. Other sources of money have become available from companies like MetLife, which came into the credit and mortgage business in 2007, after all the bad loans had already been made. Other revamped sources are the loans from the USDA that has revised its rules, making their loans a great alternative. Most local and Inland Northwest banks for the most part did not make the kind of questionable loans that put other banks in jeopardy, according to Jack Dyck V.P. and Regional Sales Manager for Mountain West Bank in Sandpoint.
Our problem, it seems, is that we have become a society that expects instant gratification; we demand results that occur instantaneously. The Great Depression lasted at least six years, from 1931 to 1937. While one can argue that the stock market is responding to President Obama's policies and actions, only those born yesterday would not reason that these problems and issues were years in the making. How sad we as adults and intelligent Americans, so educated to instant gratification, now believe that in just sixty days in office, one man can fix what we as a nation took years to bring to fruition.
Grasst pointed out that according to the press, our banks and financial institutions are broken, much like the Great Depression. The Great Depression had four years of banks going broke. We have had one. The stock market lost 90% of its value during the Great Depression. Currently our losses are at 40-50%. In both cases, stocks were extremely overvalued. Remember when the stock market first broke 7,000, then 10,000. As a younger investor fresh out of business school, I didn't think I would ever see 10,000. After all, the market had hovered between 500 and 1,000 from the late 1950s to the mid 1980s. Then, for ten years it was between 2,000 and 3,500. The remarkable run up to 14,000 points took place in a little over ten short years. (See this historical chart) One could say the same happened to home values. Too much, too fast? This is the opinion of many economists.
Job losses hurt, but a more important factor is consumer spending. While seven or eight percent unemployment is caustic, keep in mind we still have 92% employed: consumer confidence is key.
Grasst states, "Changing the sentiment of the public, and in my business of real estate, the most important thing we can do is to educate buyers. We are close to the bottom when it comes to home prices. Has gas begun to go back up?"
"Recently, about two months ago, we were informed we have been in a recession for over a year. Were the pundits a little bit behind on that info?"
So, where is the bottom? Yahoo Education posts the United States population growing at an annual rate of .92%, though other sources quote .88% annually, with Wikipedia putting the number closer to 1%. With a current population of over 306 million, this increases our population by 3 million every year. This puts US housing needs well above our current levels of construction.
Chris Kaucnik, former marketing director of the National Association of REALTORS®, on February 11, 2009 wrote, "The average number of months for inventories to fully shift during this 56 year period is 35. Optimistically, we could be entering the downward curve of the bell beginning in the second quarter of 2009, especially with some added government incentives." See this article published by RIS Media written by Chris Kaucnik, currently director of marketing for Home Warranty of America, Inc.
Current numbers in North Idaho around Sandpoint back up the premise that our inventory is low, or at least at normal levels. According to the Selkirk Association of REALTORS®, closed sales of homes, condos, and townhomes for 2004 was 1,241 units, 1,190 units in 2005, 920 in 2006, 936 in 2007, and 605 in 2008. Certainly there is strong evidence for up to 1,000 homes a year to be available for our market's growth. We currently have 1,097 residences for sale. Are we oversupplied? It doesn't take a statistician to divine we currently have a one-year supply of housing. Last year, in spite of declines in pricing coupled with low interest rates, we saw a substantial decline in sales. We all know the reasons. How long can a downturn last for an area that is touted as the next Lake Tahoe? Predictions make sense for having a better year than 2008. (The Selkirk Association of REALTORS® deems these numbers reliable, but not infallible.)
Unemployment is another great concern. Spokane just hit 9.6%, (Reported by the Spokesman Review on February 24, 2009) so our local figure, basically matching current national levels at 7.8% is a bright spot. (Figure taken from the February Newsletter of the Idaho Department of Labor) This is due in large part to our manufacturing base. While many think of Sandpoint as a tourist economy, tourism-based employment is actually in fourth position, behind manufacturing employment (See this Bonner County Profile published by the Idaho Department of Labor)
With such a diverse employment picture, coupled with our continued success as a tourist destination, the needs for more homes available outweigh the bleak national picture. To date, our units sold for this same time period year over year is the same at 79 sold. However, our market is already ahead of last year's figures by $3,000,000, and the average sold price is up by almost $54,000 per home. Even the median sold price has increased by $35,000. Any way you look at it, thus far we are ahead of 2008.
This brings up another great worry for potential buyers of real estate in the Bonner County area of North Idaho; that is the concern that if they buy now, they could be upside down in their purchase very quickly. Many of our buyers are coming to North Idaho from parts of Arizona and California; places that have seen declines of up to fifty percent. According to the OFHEO's Home Price Index, the United States saw a decline in home values of 4.5% for 2008. Washington State declined 3.7%, Idaho lost 1.76%, Spokane at 1.26%, and the closest community to Sandpoint that was measured, Coeur d'Alene, went down 4.45%. Our own numbers showed a decline of 4.4% for 2008. With predictions taken into account, many economists are predicting this trend will change in the Inland Northwest by the end of the year. The most consistent economist giving analysis about North Idaho has been Jeff Thredgold, CSP and self-described economic futurist who puts out quarterly info for Zion's Bank. His prediction for Idaho is a turnaround by the latter half of 2009. (Read his Winter Predictions)
Still, even if North Idaho housing values decrease by a couple of points, many REALTORS® point out homes are at the best price levels in years.
Another factor comes into play. Interest rates are at an all-time low. (See this news report from CBS) Tony Grasst points out, "Every one percent saved on interest rates translates to a 10% savings in value. So, when the Fed gets out of the mortgage business in June, we will probably see interest rates go up. We have artificially low rates currently." Just Google the keywords 'Artificially low interest rates' and you can find zillions of articles on the web. Will rates go up? Probably. So, if buyers are buying homes at reduced prices, with incredibly low interest rates, does this mean it is the right time to buy? These indicators arguably point to a favorable yes. Does this mean it will be a bad time to buy after June? Interest rates historically begin to rise slowly. So, towards the last two quarters of the year, prices and interest rates will still be at historic lows. This suggests 2009 to be one of the best years to buy a home this decade.
Checking today's interest rates, buyers can expect to get a rate between 4.85% and 5.17%. If we believe some of the predictions for next year, interest rates could be between 6.5 - 7%. Certainly the Fed doesn't have much room to move rates down with the Federal Discount Rate at ½% and the Federal Funds current target rate of 0 - ¼%. Can you say, "Less than zero?" If rates do approach 7% by 2010, the real cost of buying a home could be 20-25% higher than today, even if the selling price remains the same. Put into perspective, a $300,000 loan at 4.85% for thirty years will have a total payout of $569,000 and a monthly payment of $1583.00. Change the rate to 6.85% and the total payout changes to $707,000 and the monthly payment to $1965.00. In real terms the amount payed to the bank would be $138,000 higher. Could you put a child through college for that additional amount? Even in a smaller, but still significant way, paying an additional $382.00 a month could put many buyers out of the market.
In conclusion, what is the truth about the economy? Numbers seem to be skewed for the highest possible drama by politicians and the national and local media. Looking closer, while times are disconcerting to some and devastating to others, the truth seems to be a more mixed bag. Certainly, we have been here before, and not so long ago. Locally, we are faring considerably better than other parts of the world. What is our job and commitment to our community? Personally, I believe it is our task to cut through the maligned figures and malaise, give out real numbers, and continue to work towards making our community what it is: the best place to live in the world.
Gary Lirette, host of North Idaho Business and North Idaho Arts and Adventure on KSPT and KBFI, economic researcher, and REALTOR® for Tomlinson Sandpoint Sotheby's International Realty.
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