Slowed but Not Stalled
Monday, May 12, 2008
There was an epic real estate bust, and it spurred a financial crisis so profound that it dragged down the entire U.S. economy. The Washington area felt it more than most, shedding jobs at more than twice the pace of the nation as a whole.
It was 1991, not 2008. It was a commercial real estate bubble that burst, not residential. And it was savings and loans that destabilized the financial system, not an alphabet soup of complex securities like MBSs, CDOs and CLOs.
In local business circles, the notion that the Washington area is insulated from the vicissitudes of national economic trends is so commonly articulated as to be a cliche.
But the experience of the early 1990s shows that it isn't necessarily so. What happens during this downturn depends on how much further housing prices and sales activity fall and whether the federal government becomes more frugal.
There is no question that the region has somewhat different economic strengths -- namely government spending and a highly educated workforce. And in the 2001 recession and slow recovery that followed, Washington endured only modest pain, despite a concentration of the telecom and other technology companies that were the victims of the tech bust. In 2002, when the nation's employment fell by 1.1 percent, the number of jobs in the Washington area actually rose 0.3 percent.
Many of the region's veteran executives think the current downturn will be more like 2001 than like 1991.
"There is a slowdown, but it is nowhere near as severe as the one we had back in the '90s," said James W. Dyke, a partner at McGuire Woods law firm, who has led several Northern Virginia business organizations. "With the federal government, you have that extra cushion."
"We're not totally immune from what's going on in the rest of the country," said William Couper, president of Bank of America in the region and chairman of the Greater Washington Board of Trade. "But the Washington area has made a substantial transformation in these last 15 years that has made us better able to weather periods like this."
So far, the numbers back them up. In 2006, job growth in the Washington area was near the same pace as the nation as a whole, about 1.8 percent. In the past year, companies have slowed their rate of job creation. But in the Washington area, the number of jobs rose 0.8 percent in the year ended in March, twice the pace of the nation.
Similarly, the unemployment rate in the Washington area has been rising, to 3.4 percent in March from 2.9 percent a year earlier. But that was still well below the 5.1 percent national rate. The local jobless rate will probably stay below the national one because this region has a disproportionate share of college-educated workers, who historically have much lower levels of unemployment than less-educated counterparts.
So the local economy doesn't appear to be falling off a cliff, at least according to conventional indicators. But understanding how much the housing and financial crisis will ripple through the coming year is a lot more complicated.
Economic downturns amount to a working out of imbalances. If you want to know where the pain will be greatest, look to where the imbalances were the greatest.
Money was too cheap. Too many houses were built, and they sold for too much. That led to Americans spending more than they could really afford.
It's easy to identify some places where those excesses were at their worst. In Miami, for example, home prices rose 181 percent from 2000 to 2006, as calculated by the Case-Schiller Index, while the average income rose 30 percent. That made it far more difficult for people to afford a house, even with lower mortgage rates. The same is true in much of the Sun Belt: Southern California, Nevada and most of Florida. Those places are already undergoing a painful adjustment, with housing prices falling and joblessness rising.
So how much does the Washington economy need to adjust? Not as much as those cities, perhaps, but more than a lot of the nation, where home prices didn't increase as much. The average home price here rose 140 percent, while per-capita income grew 27 percent.
People in the real estate industry say that while prices are dropping in most of the region, the major damage -- steep price declines, foreclosures and such -- will probably be confined to parts of Prince William, Loudoun and Prince George's counties, where there was the most speculative building and lending activity.
In the region, a lack of building activity and related loss of construction and related jobs, is likely to persist. "What's similar to the early '90s is there's really no bank financing for development right now," said Robert Kettler, whose firm, Kettler Inc., has built more than 50,000 housing units over the past quarter-century. "The banks are more conservative, so it's harder to birth projects, and that has a ripple effect on everyone involved in the business."
The housing downturn so far does not appear to have led to a massive drop in consumer spending.
"It's a shift," said Tammy Darvish, vice president of Darcars Automotive Group and chairman of the Washington Area New Automobile Dealers Association. "Maybe instead of a big-ticket Suburban people are getting a smaller, more fuel-efficient vehicle."
But whether this downturn is more like 1990 or 2001 locally may come down to a rather different factor: Uncle Sam.
In the early '90s, as the Cold War ended and the budget deficit was getting out of control, the federal government pulled back in its contracts with defense and other contractors, a major driver of jobs in Washington. But in the early 2000s, the ramp-up of defense spending kept the local economy growing.
So what is happening today? There are some parallels to the early '90s, as budget deficits are on the rise and many of the homeland security contracts initiated in the early years of the decade start to wind down. But few are predicting a pullback on the order of the early '90s. Investors have been optimistic about government spending in recent months, pushing up the stocks of big contractors.
"Government agencies aren't slowing down much, but it is stretching things, using more of a phased approach," said Dyke of McGuire Woods. "It's: 'We're going to keep this project, but we're going to stretch it out a little longer so it costs less in any one period.' That will have a ripple effect."