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Economy faces test from housing slide

Tourism activity, new businesses remain stable

By Anna Sowa / The Bulletin

Published: December 02. 2007 4:00AM PST

Central Oregon’s economy continues to slow, but is relatively resilient despite a persistent, intensifying downturn in residential housing, according to a quarterly measure of the region’s economy.

The Central Oregon Business Index stumbled in the third quarter of 2007 to 175.7, a 0.7 percent drop from the second quarter and 1.6 percent lower than third quarter 2006. The index base of 100 was set in 1998 and nine economic variables, including building permits and employment numbers, comprise the index.

Overall, the index’s quarterly year-over-year declines illustrate that the region’s economy is quickly cooling after riding the wave of the red-hot housing market of 2005 to 2006, said Tim Duy, adjunct assistant professor of economics at the University of Oregon and the study’s author. As housing cools, its effects are limited to sectors directly tied to housing, Duy said.

The third-quarter intensification of the housing slide suggests that this heavily weighted sector will continue to drag down the Central Oregon Business Index in months ahead, he said, with most forecasters expecting the housing market to continue to deteriorate through 2008.

Additionally, that market may remain weak even after it hits bottom, Duy said.

“The housing market is just a mess,” Duy said. “I’ve been saying for a while that these are the two toughest quarters — the fourth quarter 2007 and the first quarter of 2008 — we have to get through without any other major negative shock (to the market).”

If Central Oregon’s economy can weather the housing storm through next year, Duy thinks the region will avoid a recession. A recession is typically defined as two consecutive quarters of declines in gross domestic product, Duy said, adding that a more subjective definition is a broad-based downturn in activity experienced by multiple sectors and consistent with declining employment.

“I’m hoping that in the second to third quarter next year, (the housing market) will stabilize,” Duy said. “A turnaround has been harder to predict and talk about. Talking to mortgage brokers, their business is fundamentally changed because of the lack of access to capital — they just can’t make the types of mortgages they’ve made before and I think the financing just is not going to be there next year.”

The housing market has a limited spillover to other sectors of the economy, Duy said, although employment growth has slowed and retail activity is down.

“There’s no housing ATM anymore,” Duy said.

Woodhill Homes in Bend is one business shackled to housing. The builder this year has logged 75 percent fewer closings and new-home starts compared with the boom years of 2005 and 2006, said owner Jay Campbell. The company also has laid off 20 percent of its work force since that time, Campbell said, with primarily administrative workers going first. As a result, other employees are diversifying their tasks to make up for the reduced labor.

The company currently employs 11 people in Bend, he said, and employed 16 at the peak of the housing market. Some of those workers left on their own accord, Campbell said.

“We’ve in turn focused on the market but also on the business and ways in which we can do things better and improve our systems,” he said. “All that said, and you’ll probably hear this from every builder: There has never been a better time to buy a house.”

Campbell doesn’t expect the housing market to pick up before 2009, at which time he hopes consumer confidence increases.

Labor

Employment growth has slowed year-over-year, with Bulletin help-wanted ads reversing a gain made in the previous quarter. The Bulletin reported 7,452 help-wanted ads for the third quarter, their lowest level in two years for any quarter, Duy said.

The slide in help-wanted advertising is consistent with a drop in hiring, Duy said. Employers added 600 workers to nonfarm payrolls in the third quarter, a 3.1 percent gain over third quarter 2006. That increase pales in comparison to the 19 percent job growth experienced from the third quarter 2005 to the third quarter 2006, according to the Oregon Employment Department.

Initial unemployment claims rose modestly, Duy said, but remain normal for the region’s amount of job growth.

New business filings were mostly stable, suggesting a solid pace of business formation that should support the job market, he said, adding that many of the business filings are LLCs created for the sole purpose of buying or selling a business.

“Overall, the labor market is consistent with an economic environment in which employers are cautious about adding workers,” Duy said, “but remains strong enough to prevent numerous layoffs.”

Steve Williams, regional economist with the Oregon Employment Department in Bend, said the job market continues to grow along with Central Oregon’s population. In 2007, the tri-county area added 10,000 people, he said, compared with 2006, when the region added 11,000 people through births and in-migration.

“We’re still seeing that population growth is continuing, albeit slower than in 2005 to 2006, but it’s still in a range that’s generating demand for new workers and new business,” Williams said. “Recently, the Wal-Mart Supercenter (in Redmond) opened up, and we’ll see another big chunk (of jobs) when Lowe’s and Home Depot open up (in Redmond).”

Tourism and housing

Tourism activity remained strong in the third quarter, according to the index, with both Redmond Airport passenger counts and estimated Bend lodging tax revenue posting solid gains.

In contrast, the housing market is falling faster and faster, Duy said. Housing units sold in the region fell again to a monthly average of 225 homes, compared with 305 in the third quarter of 2006. September was especially bad with 153 homes sold compared with 214 in September 2006, Duy said, reflecting the national tightening of credit in the home mortgage market.

Duy points to 10- and two-year interest rates on U.S. Treasury bonds as indicators of the economy. A year ago, the 10-year interest rate reached its maximum point below the two-year rate, he said.

“That’s often a signal of economic weakness,” Duy explained. “It means the federal bank will probably start cutting interest rates.”

Median days a house sits unsold on the market remained relatively stable at 82 days.

Residential building permits for new construction, however, have dropped sharply, Duy said, to a monthly average of 82 permits. In the first quarter of 2007, the index tracked 199 new building permits in Deschutes County. The third quarter of 2005 saw a monthly average of 391 permits.

But the sagging residential market isn’t hurting everyone in the construction industry.

For Steve Herbert, president of Herbert Construction & Remodeling LLC in Bend, more difficulty selling homes means more homeowners are turning to remodeling. Herbert said he has been doing more and more additions to homes and updates to older ones. Many homeowners are choosing remodeling over buying new homes because they don’t want to change neighborhoods or move their children to a new school, he said.

“When home prices fall off in an economy like we have now, people who were holding out (to sell) until the last minute but can’t, remodel,” Herbert said. “Now, remodelers are a good thing to be.”

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

This article has been corrected. Read correction.

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