Experts point to steadying housing market, local banks doing well

Isaac Bonnell

Predicting the next turn of the economy is a complicated science. Much like a meteorologist’s weather balloons, different economic indicators from various sectors can sometimes bring in scattered data that may not present a clear picture.

Often the only thing to do is to look at the current status and plan for the next step.

Now, long after “credit crunch” and “subprime” headlines have run their course, a more familiar word is popping up: the R word. Recession.

Shh, don’t say it too loud, though. In a consumer economy, consumer confidence is often an indicator that strikes home for many businesses and such confidence can easily be bruised.

Confidence or no confidence, the economy is slowing, said Bill Conerly, an economist and author of the book “Businomics: From the Headlines to Your Bottomline.”

“I think it’s about a 50-50 chance that we’re in a recession now,” Conerly said. “If it’s not a recession, then it’s a recessionette. But it’s definitely a slowdown.”

However, the effects of this slowdown may not be felt immediately or as painfully in the Greater Puget Sound area, thanks largely to the strength of Boeing sales, said Conerly, who is based in Portland, Ore.

“Microsoft is doing well, but it’s really Boeing that is making Seattle look good,” he said.

The manufacturing sector is often quite vulnerable to recessions, so if one of the region’s largest manufacturers is faring well, things can’t be too bad. But this connection is rarely made in headlines that tout the newest and most dramatic trends, Conerly said.

“The headlines [that most business people] see are not distributed evenly across the economic sectors,” he said. “For example, housing is a small sector, but it’s getting half the headlines. As a result, if you just focus on the headlines, you’re seeing a lot of bad news.”

As for the housing market, the storm clouds that have darkened the sector for several months may be lifting this year, due in part to the Federal Reserve recently lowering the prime rate for lending. Though interest rates are now at levels not seen since 2004, Rich Jacobson, CEO for Horizon Bank, said he is expecting the Federal Reserve to lower rates yet again later this month, which should help real estate investors to regain faith in the market.

“There are some early signs of a potential recovery in the local housing markets,” he said. “Mortgage rates are about as low as they were four years ago. But it does take time for those reductions to flow through the markets.”

Even a slight rise in the market is a relief, especially for those looking to invest. Fifteen months ago, Brant Faulkner of Faulkner Investment Services sensed that the real estate market was slowing, so he began placing less of his customers’ portfolio risk in that market.

“It was a good time to underweight commercial real estate,” he said. “Call us lucky or call us smart, but it did pay off for us.”

Now, with interest rates lowered, Faulkner said the market is picking up again, so much so that he expects to start increasing portfolio exposure in real estate again this spring. More importantly, in the long run, the real estate market will continue to ride the waves.

“Look out three to five years and things will be normal,” he said. “We’ll be worrying about new crises by then.”

Jacobson said he is still a bit concerned about the high inventory in the real estate market, however, which he said could take awhile to slide back down to normal levels. Until then, he described his outlook as “cautious optimism.”

Beyond the housing market, Jacobson said he is optimistic about the low unemployment rate in Whatcom County and he thinks it is a good indicator of things to come.

“We still have strong employment in this area,” he said. “When the unemployment stays this low, it signals a healthy business environment.”

Additionally, Jacobson said he sees the weak American dollar as one of the big factors that keeps Whatcom County insulated from the slowing national economy because it draws many Canadian shoppers to local retail stores.

For Terry Daughters, vice president of commercial banking for Peoples Bank, construction is also an important economic indicator. Now, as lowered interest rates are drawing prospective home buyers back into the market, home builders could see business pick up again after a dark and slow winter.

“I think we’ll see the residential real estate market pick up after the first quarter,” Daughters said. “I don’t think you can stop people from coming here, and those people are going to need a place to live.”

Nonetheless, Daughters said some construction companies have been hurt by the downturn and some of them may not get back into the market because there is just not the same number of prospective home buyers looking to purchase a new house.

Plus, the lowered prime rate is not exactly conducive to those seeking a first-time loan.

“It may not be helping the new purchasers as much as it is helping people who borrowed a few years ago refinance and get a lower rate,” he said.

In general, local banks have been quite insulated from recent national trends — thanks to very minimal exposure in the subprime mortgage market. Horizon Bank, which has been in Whatcom County since 1922, is continuing to grow despite the national trends. During the fiscal quarter that ended on Dec. 31, 2007, Horizon Bank reported a gain of 14 percent in their loan portfolio. Peoples Bank is also weathering the market fluctuations quite well, thanks to steady lending practices, Daughters said.

“We did not get into the subprime market,” he said. “We continued to do the types of loans that we’ve always done in the past.”

And as shown in the past, the economy benefits those who can ride the ups and downs of a constantly changing business environment.

How to plan for a recession

Riding the waves of the economy can be difficult, especially if the waves are unexpected or coming at you from a new direction.

And in today’s fairly stable economy, dealing with a downturn can sometimes be foreign for most business people, said Bill Conerly, economist and author of the book “Businomics: From the Headlines to Your Bottomline.”

“It’s been great that we’ve had a stable economy for the last two-and-a-half decades, but many of America’s business executives are just not experienced in a recession,” Conerly said. “Today, if there’s an executive who has 25 years of business experience, he or she has gone through two to three recessions.”

It used to be that 50 years ago, a business executive with that much experience had gone through four to five recessions, Conerly said. Thus, Conerly outlines in his book four steps to riding out the waves of a recession.

1. Figure out your business’s vulnerability to a recession. What would happen if things slowed down?
2. Develop an early warning system based on indicators that directly affect your business. Keep an eye on these indicators.
3. Sketch out a contingency plan and outline specific expenses that can be cut back if necessary.
4. Ensure that the company has the flexibility to implement the contingency plan.