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Consumers cut back, and economists are gloomy
By: CHRIS BAGLEY - Staff Writer | ∞
Continued fallout from a deflating housing market is biting deeper into North County consumers and retailers, raising new doubts that other sectors of the economy will be able to stave off a recession, according to economists and a series of recent sales reports.
Sales of new cars and trucks, which typically account for more consumer spending than any other type of product, almost certainly fell again in 2007. Spending on furniture and other home-related items began falling in late 2006, a trend that one business owner in the industry says appears to have accelerated through the end of last year. Even the Christmas season, normally a bright spot for shopping centers, provided only a dim twinkle, according to an industry report last week.
Though consumers have come to account for 70 percent of the U.S. economy in recent years, they haven't provided much cause for optimism recently, either in North County or elsewhere, said George Whalen, chief executive of Retail Management Consultants in San Marcos.
"Retail employment has suffered badly over the last couple of months," Whalen said. "If consumers cut back the way it looks like they will, it will help fuel a recession."
Rising home values allowed San Diego-area homeowners to tap growing home equity from the mid-1990s through 2006 and go on a decade-long shopping spree.
Though the regional economy has kept unemployment low and salaries creeping upward in the last year, the home-equity trend has reversed. After increasing by more than $2.4 billion in 2004, the total value of the region's houses and condominiums shrank by nearly $1 billion last year and will probably do so again this year, said Marney Cox, chief economist for the San Diego Association of Governments.
Living in a smaller ATM
That is leading the region's consumers to cut back, according to Whalen, Cox, other economists and homeowners.
Taxable sales in San Diego County came in at about 2.4 percent lower in the last six months than in the second half of 2006, according to preliminary figures a state tax agency provided to Cox's association.
"The change in home equity and the decrease in the available value ---- it certainly cuts down on your spending a bit," said Matt Remnek, who bought and furnished his house in San Elijo Hills in early 2004 with gains from the sale of his home in northern San Diego's Scripps Ranch development.
"I wouldn't buy the same television today," Remneck said. "I wouldn't buy the same couches today."
Remnek's neighbors have enjoyed some of the biggest equity gains in San Diego County since 2001 when the first houses in the master-planned community were built, though they've also watched equity vanish much more quickly since the market turned in 2006.
The typical three-bedroom home in the 92078 ZIP code, which includes most of San Marcos south of Highway 78, sold for about $350,000 in the second half of 2002.
That figure rose to about $600,000 in the last six months of 2006 but fell back to about $505,000 late last year, according to the Sandicor/Tempo multiple-listing service that local real estate agents use. Prices in most other inland communities have followed that trend, albeit less dramatically, while appreciation in many coastal neighborhoods has merely flattened out.
Numerous residents interviewed last week said North County's home-price roller coaster hadn't led them to vary their spending habits over the last few years. Several said they refinanced homes to consolidate other debt, including student loans, car loans and credit-card balances.
But many others said they and their neighbors had used small home-equity loans to install a swimming pool or landscaping, features that generally add value to a house.
Still others said they had watched neighbors borrow against growing home equity to buy luxury cars or otherwise upgrade their lifestyles. Many of those neighbors fell into foreclosure or sold their homes and moved to lower-cost areas after struggling with the resulting mortgage payments, they said.
Taking gains, taking care
Several economic studies have concluded that a $100,000 increase in home value leads to an average increase of about $6,000 in consumer spending, Cox said.
That proportion is roughly accurate for San Diego County, Cox said. About one out of four homeowners has borrowed against newly available home equity to finance either home improvements or other consumer spending in the last seven years, and those borrowers used, on average, about one-fourth of what was available, Cox said.
Two doors down from Remnek, a couple paid $658,000 for their house in June 2004, then borrowed $66,000 against it later that year and an additional $113,000 in March 2006, according to one database of public property records in Southern California.
While such loans are still available to homeowners with substantial equity, they're being used less aggressively, according to figures compiled by First American CoreLogic, a mortgage research company: San Diego County homeowners with open lines of credit had drawn just 19 percent of the value of their homes in October 2007, down from 29 percent in August 2004. While that's often a smart move in terms of personal finance, it also takes some steam out of local consumer spending, economists say.
A continuing slide in the number of home sales is also taking its toll, homeowners, business managers and economists said last week, since a home buyer often spends several thousand dollars furnishing and redecorating. The number of home sales in North County fell from more than 11,000 in 2005 to just under 7,000 last year, according to the HomeDex report last week, prepared by Robert Brown, an economics professor at Cal State San Marcos for the North County Association of Realtors.
Foot traffic
The evidence of all that is showing up in the empty parking spaces in front of several types of businesses, even as the region's freeways remain jammed with luxury cars commuting to high-paying jobs. Sales of home furnishings and building materials began to slacken in late 2006, according to several cities' reports of sales-tax receipts.
President Ed Kruger of WestCoast Flooring Center said the market for home improvements eroded rapidly over the course of 2007. Kruger said the company's showrooms in San Marcos, Encinitas, and Chula Vista and a spun-off flooring business in Temecula have lower sales figures even than last summer, as fewer customers undertake home-improvement projects.
"It's a pain," President Ed Kruger said. "There's people going out of business right and left already."
For car dealerships, too, 2007 was almost certainly another year of fewer sales and lower profit margins, according to city and industry reports. The region was on track for about 139,000 new-vehicle registrations, based on a January-to-November report published by the New Car Dealers Association of San Diego County. That figure has fallen every year since peaking at 163,000 in 2004, when the region's home values were increasing most dramatically.
Sales at Brecht BMW are off by 5 percent to 10 percent, but only among vehicles priced under $40,000, co-owner Tom Brecht said. That corresponds to the housing market's turmoil, which has affected entry-level and midrange dwellings, whose prices depend more often on buyers who finance most or all of the purchase price, Brecht noted.
Data from a wider slice of the retail industry last week weren't much better: The International Council of Shopping Centers reported that revenue at U.S. stores open a year or more grew by less than 1 percent last month from December 2006, an increase that roughly mirrors San Diego County, local economists said.
Saved by salaries
Any recession would probably have mild effects locally, Whalen said, because San Diego County's economy remains solid in most respects. For one thing, it has diversified considerably since cutbacks in the aerospace and defense industries sparked a recession in the mid-1990s.
A state agency estimated the local unemployment rate in November at just 4.8 percent, only slightly higher than a year earlier. And the region's average weekly wage increased to $930 in March 2007 from $752 in March 2001, according to the most recent report from the U.S. Bureau of Labor Statistics.
The average annual increase of 3.6 percent has kept workers just ahead of inflation in the region, which has averaged 3.4 percent since 2001.
Home values notwithstanding, those wages have always been consumers' main source of funds, Whalen said.
"Throughout past recessions, consumers have really kept the economy alive," he said. "I don't see consumers stopping their spending. They'll be judicious in their spending. They'll be cautious in their spending. But they're not going to stop spending."
Contact staff writer Chris Bagley at (760) 740-5444 or cbagley@nctimes.com.
Fooled Again wrote on Jan 12, 2008 8:57 PM:One thing that is not mentioned is that contrary to previous recessions,the cost of essential goods and services like gasoline, food, health care is not falling with the economy. While salaries may have risen 17% or so since 2001, the wealth factor for a family has continued to go down. House price escalation and some retirement stock gains were our wealth builders. Now they are going down quickly. The wealthy during the past several years have become very wealthy, but the middle class has been fooled again into thinking that he was rich when in fact all he was doing was fueling the path for more wealth for the wealthy.
Parties over wrote on Jan 12, 2008 9:32 PM:Gee, I thought it was tax cuts that fueled the economic boom. I guess that theory was a load of baloney. Truth is home equity drove the boom. We have made our bed, now we gotta sleep in it.
huh? wrote on Jan 12, 2008 9:47 PM:'Almost certainly fell?' What kind of journalism is that? Of course we need to be cautious and realistic about the economy. But isn't there enough real news about the bad economy to keep newspapers from talking about "almost" certainties? That's the kind of thing that causes paranoia and is not useful to anyone.
The Republican Agenda.... wrote on Jan 12, 2008 11:18 PM:Once again the Republicans have spent our way into another recession. Of course they'll say it was due to wasteful social service spending but we all know the truth. It was their expensive war in Iraq which never paid off like they thought. So while GOP slugs rake in the profits from the Bushite's tax breaks and sweet-heart deals, the rest of us have to ride out the economic downturn. Thanks GW and company, you've ruined our country and taken our freedoms. Only the ignorant support the status quo.
NC Watcher wrote on Jan 13, 2008 6:33 AM: Sounds pretty bad like we should all move to Iraq, the new promised land, future 51st state of the union, George's trillion dollar plus Disneyland. Might as well joy your tax dollars in your old age.
democrats the same wrote on Jan 13, 2008 6:34 AM:Democrats are no better. Just look at what they have done in Sacramento. They have over spent and cronyism is high. The speaker appoints his buddies to powerful posts and justifies it based on racial considerations. It is time to get rid of the parties or to change the system so more parties can be viable.
Randy wrote on Jan 13, 2008 7:19 AM:Tri-City Hospital should not propose yet another bond on the June 2008 ballot. The hospital should wait a few years until the economy recovers from its tailspin.
local unemployment wrote on Jan 13, 2008 7:41 AM:at only 4.8 percent. Shows that any idiot can get a job nowdays. With an inflated minimum wage it's no wonder a meal costs over $5 at a fast food joint. They pay unskilled workers higher wages and the workers just get worse and worse. They can't even get a hamburger order correct. The politicians wring thier hands and cry for higher minimum wages so people can have a "living wage". What a sham. They just want higher wages so they can collect more tax dollars to waste.
Mary wrote on Jan 13, 2008 8:45 AM:There are several big picture factors that are different now - the price of oil has gone from $20 a barrel at the start of the Bush administration and is now at $100. This effects not just the price of gas but plastics, fertilizers and freight costs to get products to market. On the Whitehouse website is a chart that shows the percent of the government budget spent on interest on debt going back to 1940. Historically it is between 1.5 and 1.8 percent. Today it is 8.9 percent and it is project to be 10 percent by 2010. This is unprecedented in our history. This is the legacy of the Bush tax cuts that have doubled our debt and accumulated as much debt as going back to the George Washington administration. They tried to defy gravity - never in the past 3000 years has a pharoh, an emperor, a king, a tribal leader, a prime minister or a president gone to war and lowered taxes. It can not be done and we and our great grandchildren will pay for this Bush folly for years to come.
Jan wrote on Jan 13, 2008 8:54 AM:I agree with Mary. The Bush legacy is the throwing the gas on the fire to make America blow up and burn out quickly.
This is part of the cycle wrote on Jan 13, 2008 9:10 AM:Remember all the "woohoo" when everyone was hundreds of thousands richer? Well, this is the other side...reality. The good thing is that this will be a LEARNING LESSON for many. Some will even start to save money again after hitting bottom. The scary part is that this downturn will last far beyond what most people realize (5 years +).
Krjisty wrote on Jan 13, 2008 9:18 AM:It all goes back to the one thing that is robbing this country of prosperity: the complete sellout of American jobs to China and now even to India. Pretty soon there will be only a small number of jobs open in this country that require a college degree. Most of the jobs will be outsourced. So, maybe our kids will be advised to go for jobs as welders and hair stylists. They can't export those jobs, at least for now and think what they will save in college tuition.
sickofgreed wrote on Jan 13, 2008 12:10 PM:For the past ten years people thought they could make easy money investing in bubbles, first the tech stock bubble, then the housing market bubble. Bad news, from now on you'll have to create wealth the old fashioned way, spend less than you earn and save the difference. This is a very arduous way to create wealth, but it will create a more frugal and sustainable economy. You won't be blowing what should be your retirement savings at Pechanga and Barona casinos and buying oversized SUVs and McMansions. If you have to actually work for what you have, and not refinance your way out of irresponsibility, you will aquire an appreciation for money and save for the future, because social security is not going to take care of you.
peewee wrote on Jan 13, 2008 12:11 PM:Record profits for oil companies yet they receive tax breaks; trillions spent (financed by China) on the Iraqi quagmire; but the Repubs are trying to change the subject and make illegals the cause of all our problems, even though they keep the borders open. Go figure.
JSten wrote on Jan 13, 2008 4:00 PM:So...
I heard more than once that a pool may not always add value to a house. It seems that the maintenance and upkeep is more that the modern urban dweller is willing to go for. Also remember tehre is a water shortage. Or was it just bullcrap when trying to sell-it only adds value when you are trying to buy.
So?
And what about the "vanishing equity" Gertainly a gain from the 300's to the 600's, back to the 500's still represents a respectabile "gain". Or are we focusing on the roloff from the peak? The more I read, the more I want to fgorget.
JV wrote on Jan 13, 2008 4:48 PM: Vote For Ron Paul and no doubt everyone will if they want out of this economic mess (Google Ron Paul and read the clear solutions for today's problems)We are not sheep waiting to be led to the slaughter any longer,send a clear message to big government!!!!
JV wrote on Jan 13, 2008 5:12 PM:All of Congress GOT a RAISE, $4000.00 annually!! They make $168000.00 a year to waste away your tax dollars and to cater to special intrests.Everyone on this sight works a hudred times harder at putting food on the table then these decietful bums!!!! VOTE FOR RON PAUL!!!! IT'S THE PEOPLES COUNTRY LET'S TAKE IT BACK!!!
Paul wrote on Jan 13, 2008 6:11 PM:Politicians (both parties) are like dogs. Canines live in the moment, they never concern themselves learning from history or the future of any consequences. With apologies to all dogs and dog owners out there, at least dogs will watch thier owner's back.
Time To Conserve wrote on Jan 13, 2008 8:33 PM:Front page story on the L.A. Times today. "The current downturn looks more unsettling than a simple swing in the financial cycle, and traditional remedies might not be up to the task."
how wrote on Jan 13, 2008 8:39 PM:Q: How do you know when a politician is lying?
A: When their lips are moving...
Gotta take issue with 'huh' wrote on Jan 14, 2008 8:05 AM:Did the hostile blogger "huh?" even bother read to the article? The author backed up his "almost certainly" statement in the story: "The region was on track for about 139,000 new-vehicle registrations, based on a January-to-November report published by the New Car Dealers Association of San Diego County. That figure has fallen every year since peaking at 163,000 in 2004, when the region's home values were increasing most dramatically."
sickofgreed wrote on Jan 14, 2008 10:02 AM:Neither Ron Paul nor any other politician will solve YOUR problems that YOU created for yourself. What is Ron Paul going to do? Wave his magic wand and make 13 trillion dollars of deficit disappear along with reversing trillions of vanished home equity? If you do, you are a fool. The damage has been done and it's pay-up time. You can't vote your financial problems away after being irresponsible. Quit whining, act like an adult and live within your means as most of the rest of the world does. Doing this will solve Americas problems.
Chris Bagley -- Staff Writer wrote on Jan 14, 2008 10:14 AM:One of the commenters took issue with the assertion that new-car sales "almost certainly" declined last year. The fourth paragraph under the heading "Foot traffic" notes that this assertion is based on figures from January through November, because the New Car Dealers Association of San Diego County doesn't expect to release its December figure for another two or three weeks. Dealers sold and registered 126,800 cars and trucks in the first 11 months. Divide that number by 11, multiply it by 12, and you get 138,327. An officer of the association told me this is a good approximation, since car sales figures don't peak significantly in December like sales of toys, apparel and some other products. The estimate represents a 4 percent decrease from 2006, when 144,066 new vehicles were sold and registered.
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