Economic house of cards

When the real estate market began cooling in 2005, it was like a pebble thrown into a pond, spreading through the Central Coast economy.

The slow-down since then is almost a textbook example of how the sputter and cough of an economic engine can put the brakes on all the businesses it's pulling behind it.

Some economists and industry experts predict the current slowdown will continue to or through 2008; others say they are already seeing signs of recovery.

Understanding how an artificially inflated housing market heated and cooled northern Santa Barbara County's economy can give an idea of how it may help it recover - at least in the short term.

Superheated industry

In 2000, local housing prices skyrocketed. Median home prices doubled and even tripled in some areas in just five years.

People with jobs in San Luis Obispo and Santa Barbara, where home prices were out of reach for those with median incomes of $50,000 to $60,000, flocked to the North County, especially the Santa Maria area.

But slow-growth policies and attitudes in San Luis Obispo and Santa Barbara somewhat stagnated those economies, according to analysts with the UC Santa Barbara Economic Forecast Project.

That led to fewer people buying homes in northern Santa Barbara County, and sales slowed. Prices leveled off and, in some cases, dropped.

The economic ripples spread, first to businesses tied directly to real estate.

“When sales of existing homes start falling, the Realtors, title companies - there are lots of people involved - their income slows,” explained Bill Watkins, executive director of the Economic Forecast Project.

Existing homes stayed on the market longer and fewer homes sold, making it harder on real estate agents who jumped into the business when the market was hot.

“It used to be a lot easier,” said Wendy Teixeira, president of the Santa Maria Valley Association of Realtors. “You'd show two houses and write an offer on the hood of your car. Now, it takes two or three months to sell a house. It's challenging for beginning agents.

“As an association, we've not seen a rapid decrease in members,” she added. “But definitely, when you have 500 agents and 90 closings last month, a lot of people are not going to get paychecks.”

Beyond lenders, escrow companies and termite inspectors, homeowners spent fewer dollars fixing up houses to make them more attractive to buyers, who would then fix them up more.

“When you're selling a unit, you spend money on it,” Watkins said. “When you're buying a unit, you spend money on it. So the big hardware companies, the national ones, are seeing a sales decline. Their income is down, and they're laying off workers - or not replacing them.”

As business slowed, workers spent less, affecting everything from restaurants to car dealers to retail stores, and the lower demand for homes also affected the construction industry.

“In the market that we had, which ended about 18 months ago and was abnormal - superheated - builders didn't start construction on units until they were sold,” explained Jerry Bunin, government affairs director for the Home Builders Association of the Central Coast.

“Now we're in a normal market,” he continued. “A lot of units that were built are not selling, which creates a standing inventory, and that's slowing construction.”

The slowdown in development, in turn, had an impact on the construction industry.

“The whole industry is falling down, and you can see some (contractors) are a little panicky about what's coming,” said Robin Hayhurst, executive director of the Santa Maria Valley Contractors Association.

“This (downturn) is not as easy as the last one,” she said. “We had a pretty good 10-year ride.”

Some companies have laid off employees, and others are working fewer hours each month. A few are taking jobs in areas like the San Joaquin Valley, where construction is still going strong.

“The labor pools are thinner than they were,” Hayhurst said. “There is definitely less work, but it's not a crisis. ... Depending on their specialty, some have had to go out of the area to work.”

Bunin noted construction activity runs in cycles, and developers generally are able to go with that flow.

“The building community is really used to this,” he said. “They don't like it. It makes them nervous. But they're used to it. Lots of builders prepare for this.

“If it continues for a long period of time, that's a different story,” he added. “But nobody is going out of business, and there is nobody being close to that that I've heard of among the people we represent.”

Economic impacts

Still, the slowdown in the housing market and its effect on other businesses is evident in some of the statistics gathered by the UCSB Economic Forecast Project:

Northern Santa Barbara County's gross regional product in 2006 was about $8 billion, a 4-percent increase from the $7.7 billion in 2005. By comparison, the area's gross product climbed 6 to 8 percent per year from 2002 to 2005.

Employment growth was virtually flat in 2006. Allowing for jobs lost, an estimated total of 124 jobs were added in Santa Maria, for a growth rate of just 0.2 percent.

The median family income for Santa Barbara County in 2006 was $65,800, up from $64,700 in 2005. But adjusting for inflation, that represented a 2.5-percent drop, based on the buying power of a dollar in 2000.

In Santa Maria, the median family income was even lower, hovering around $50,000, with about 15 percent of the population living below the poverty level.

Retail sales growth in Santa Maria suffered correspondingly. Rising steadily from about $600 million annually in 1995 to about $1.3 billion in 2005, sales remained virtually flat in 2006, rising about 1 percent.

But industry observers say hope is in sight.

Picking up the pace

Although the housing market may not return to the superheated levels of the last five years, there are signs it is picking up again.

“These cycles typically last two years or 14 months, and this one started rather dramatically in 2005,” Watkins said, noting he doesn't expect an economic lag. “Once construction starts, the money gets spent fairly quickly and it starts moving around.”

New home construction is rising.

Data from the Construction Industry Research Board shows 255 single-family residential building permits were issued countywide in the first three months of 2007, or about 20 percent more than the same period in 2006.

Almost all of those - 166 units - were in Santa Maria.

“The historic trends show the city of Santa Maria doing 55 percent of the total in the county,” Bunin said. “This year so far, it's 65 percent. Last year, it was 26 percent.”

Existing home sales are seeing a rise, and loan applications also are increasing.

“We're just now starting to see (loan volumes) come back on the upswing,” said Mike Hahlbeck, president of the North Central Coast Chapter of the California Association of Mortgage Brokers.

“That's traditional for this time of year, but we started the year slower than usual,” he continued. “People are wanting to get pre-approved, to refinance, to switch from one type (of loan) to another.

“Once that starts to happen, it usually starts to bring stability. People start shopping at the hardware store, the furniture store, the landscaping company.”

Although interest rates took a slight jump at midday Friday, Hahlbeck expects them to hover in the 6- to 6.25-percent range unless there is a major change in global conditions.

And he doesn't expect any rise in rates to deter homebuyers: “I don't think a slight rise in interest rates will make people not want to buy.”

In fact, some say this may be a good time to buy a new home. Since some housing prices are down, buyers will pay less property tax. Buyers also can lock in a good interest rate and take advantage of tax write-offs.

“The last time we hit a peak (in housing prices), we had a $220,000 median,” Bunin said. “That fell to $180,000, and if you bought your home (at the peak) as a speculator, you took a loss. But if you still had that home today, it would be worth more than half a million dollars. ... We're telling people this is a good time to buy.”

Mike Hodgson can be reached at 739-2221 or mhodgson@

santamariatimes.com.

May 22, 2007