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Area economy cools after run-up

Housing slowdown plays role in tempering growth rate

By Anna Sowa / The Bulletin

Published: December 17. 2006 4:00AM PST

Central Oregon's economic growth is declining after a three-year surge, a new report shows.

The Central Oregon Business Index fell to 173.5 in the third quarter of 2006, a 1.1 percent drop from the previous quarter, according to a quarterly analysis released by Timothy Duy, an economics professor at the University of Oregon and director of the Oregon Economic Forum.

"To say it's a recession would be premature because the index still hasn't slowed to levels we saw in the national recession of 2001," Duy said. "There's a decrease in the rate of growth, which would be consistent with an economy that's slowing from relatively high rate of growth and this is consistent with what we're seeing happen nationally."

Around 2001, the index dipped during the national recession, but its rate of growth started shooting up in the third quarter of 2003 and continued accelerating until third quarter 2006, Duy said.

During the 2001 recession, Bend saw weaker growth but didn't see the extreme job losses experienced on a national level, he said, adding that local growth helped offset the recession's effects.

The index, which comprises nine variables, was a healthy 3 percent higher in the third quarter of 2006 than it was in third quarter 2005, Duy said. But that's a slower growth rate than the 8.1 percent increase posted in the second quarter of 2006 over the second quarter of 2005.

Personal income growth is expected to slow, mirroring the index, Duy said.

The index measured three variables directly affected by housing, said Aaron Frank, a University of Oregon economics student who worked on the index: housing units sold, the length of time houses sit on the market and residential building permits.

"Because housing is so important for Bend's health, we gave it more of a spotlight," Frank said. "That could change, though, if we get more data that shows another variable is becoming more important - like tourism, which is also an important market in Bend."

In the third quarter that ended Sept. 30, 311 housing units were sold, down 45 percent from last year's third quarter. Additionally, houses sat on the market a median of 104 days in the third quarter 2006, compared with the record low of 82 days in fourth quarter 2005.

Deschutes County builders have been responding to the downturn in housing by sharply scaling back construction plans, Duy found: Residential building permits are down 49 percent from their peak in the third quarter of 2005.

"Locally, we know there was quite a bit of speculation activity in housing, especially in Bend," Duy said. "The unwinding of this housing bubble is not causing people to not move here, but it will have an impact."

Central Oregonians may already see lower home prices as developers work to unload their inventories, said Ross Robertson, director of sales and training with the Garner Group, part of Coldwell Banker Morris Real Estate in Bend.

"We've had a lot of activity just in the last two weeks," Robertson said Friday. "With rental prices rising, we're seeing a lot of first-time home buyers and investors picking up homes before prices go up again."

Overall, the market still looks good to investors, Robertson said. He expects most of the housing inventory will be absorbed by the first half of 2007 and as Central Oregon's population increases, more housing demand will result.

"We'll see a dramatic upspike in the (beginning) of 2008 in terms of (the average sale price of homes)," he said.

The Central Oregon Business Index's nine variables, all seasonally adjusted, stretch back to 1997. A base number of 100 was pegged in 1998 and each subsequent index will be measured against that. The idea is that as long as the index remains above 100, the region is growing.

Year-to-year change in the index, however, is more indicative of the economy's performance.

The nine variables and their economic implications:

* Unemployment insurance claims from the Oregon Employment Department office in Bend.

The number of claims hasn't changed much since 1997, but a third-quarter 2006 increase indicates more people recently filed for unemployment insurance. This helped push the index down.

* Airport passenger activity at Redmond Airport.

Passenger boardings have steadily risen over the years, with a dip after 9/11 that reflected the national decline in air travel. In March 2005, Delta Connection jet service to Salt Lake City was launched, which positively affected the index. Air travel is an important economic indicator because it shows business and tourist travel, which brings commerce to the area and helps support the region's tourism industry, whose annual economic impact is estimated at nearly $500 million by regional tourism officials.

* Bend lodging revenue, adjusted for inflation.

Lodging revenue fell after 9/11, but has been recovering since then. The revenue, which is estimated by dividing room-tax revenues by the tax rate, rose through the third quarter, which means the tourism industry is still strong in Bend.

* Building permits for Bend, Redmond and unincorporated Deschutes County.

A dramatic rise began in 2003, peaked in 2005 and has dropped dramatically in the past three quarters, which will have some lagging effects not immediately apparent: The region will see a flattening of the number of new buildings and housing construction in the next few months.

* Units sold, Deschutes County.

Like building permits, housing units sold saw a quick increase around 2003, peaking in 2005. The number has declined for the past three quarters - a strong signal that the housing market is cooling and that housing prices had been inflated. Now that fewer units are selling, prices will have to drop in order to get units sold to a sustainable level, Frank said.

* Median days on market.

The median days Deschutes County houses are sitting on the market has generally declined since 2003, bottomed out in 2005 and has since been slowly creeping upward, another indicator that negatively impacts the index and shows the housing market is cooling.

* New business incorporations in Deschutes County.

Month-over-month changes in new business incorporations have skyrocketed since the recession of 2001. This could be an almost artificial jump, Frank said, because many businesses create multiple LLCs for the purpose of buying and selling property. In the last quarter, the number of incorporations has started to come back down to a normal level - again, a function of the cooling housing market.

* Non-agricultural employment.

Employment is steadily increasing, which means individuals looking for jobs are finding them easily.

Since unemployment insurance claims also are increasing, these two factors indicate that employers are becoming increasingly flexible in hiring and firing, Frank said, perhaps due to increased competition in certain sectors.

Additionally, the data show that while more jobs have been added, more labor also is beginning to be freed up, meaning a greater labor pool exists to compete for a greater job pool.

* Help Wanted advertising counts in The Bulletin.

The number of Help Wanted advertisements have quickly increased since the beginning of 2005, only slowing in the last quarter. Although fewer Help Wanted ads were placed last quarter than the previous quarter, the rate of growth is still well above year-ago levels, Frank said. This is an indicator of the healthy regional job market and job growth.

This the first comprehensive economic index done specifically for Central Oregon.

The index is meant to be used as a predictor of Central Oregon's economy, Frank said.

"I like to think of it as licking your finger and putting it in the wind," he said. "It gives you an idea of the general direction of the economy."

Anna Sowa can be reached at 383-0304 or at asowa@bend bulletin.com.

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