Gregg Davis, an economics instructor at Flathead Valley Community College, has a solution for the current economic downturn: “It all comes back to consumer confidence,” he told a crowd at Wednesday’s annual Economic Future of the Flathead breakfast.
The trick, he admits, is convincing people to invest in a turbulent market, “and it’s hard to feel confident when the people around you are losing their jobs.” Or, as appraiser Jim Kelley – the event’s other keynote speaker – explained, when housing prices and the rate of housing sales are crashing.
Davis said unemployment statistics don’t fully reflect the impact of economic downturn here, because “they’re a lagging indicator” and don’t account for cuts like reduced hours, benefits or wages. “Unemployment rates don’t get bad until well after things are bad, and don’t get better until things get way better,” he said.
The Montana Department of Labor and Industry announced this week that Flathead County’s unemployment rate rose to 8.7 percent in December, the fourth highest rate in the state.
Using interviews with local business owners and an economic model that shows how a lost dollar ripples through the local economy, Davis presented the indirect impacts of 615 job cuts at three of the valley’s largest employers – Plum Creek, Semitool and Columbia Falls Aluminum Company.
The 615 jobs lost there indirectly jeopardize another 1,428 jobs throughout the valley, he said. “Obviously, that won’t be exactly right,” he said. “What that does tell us for sure, though, is that there’s sizeable pressures on well over 1,000 jobs.”
As the unemployed cut their expenses, the direct impact those 615 job losses have on spending is about $484 million, with another $228 million lost as that trickles down, according to the model. Labor income will decrease directly by $79 million, and indirectly by another $62 million.
“It’s not just 615 people losing their jobs,” he said.
Rather than unemployment rates, Davis said he prefers looking at the “wealth effect,” or consumer confidence, as an indicator of a local economy. While Montanans are generally more optimistic toward the economy than the nation as a whole, Davis showed how consumers’ outlooks statewide began plummeting around December 2007 – near the beginning of the current recession.
From 1990 to 2000, Davis said, the real net worth of Americans increased at an average of 5.3 percent per year, and savings during that time period decreased nationally from 8 to 2 percent. Then, when real net worth dropped to about 2.3 percent growth between 2000 and 2007, savings increased.
“People started going out and spending like drunken sailors,” he said of the 90s. “We feel wealthier when our homes and stocks are appreciating, even if our income is staying the same. That drives spending.”
The good news, Davis said, is that when consumer spending does return, the valley with its varied economic sectors, community college and amenities, will be poised to rebound.
The area real estate market is likely a few years from its rebound judging by past downturns and current conditions, Kelley said. Over the past two years, housing prices, and the rate of housing sales, have plummeted in northwest Montana.
“The last two years the volume has really dropped off,” Kelley said. “It’s back to ’98 levels or before.”
Which is to say that the number of residential sales is down 27.5 percent in 2008. Following the decline in the late 1990s, it took three years for the housing market to regain its previous sales volume levels, Kelley said. The numbers rose even higher from there, so the market will have even further to climb this time around.
Nationally, there’s an average of 10.4 months of unsold housing inventory on the market. In Flathead County, that number is about 21 months.
Lower income houses have fared better here – for homes in the 200,000 to $300,000 range, the inventory now is 13 months deep – but the glut in the high-end housing market continues to grow. The inventory of homes priced between $1 million and $2 million is seven years deep. For undeveloped lots the inventory is almost six-and-a-half years.
Changes in housing prices are harder to gauge, Kelley said. As sales prices drop people stop selling, and one large sale can sway the average statistics significantly. Median sales prices, though, declined almost valley-wide last year, especially in high-end areas like Bigfork (down almost 18 percent) and Lakeside (down about 27 percent).
In one bright spot, the drop brings home prices closer to wages in the valley. In the 1980s, Kelley said the median price of a Flathead Valley home was 2.5 times the median wage. That grew to 3.5 times the median wage in the 1990s, and then spiked to 5.5 times the median wage in 2003.
“Affordability and the median price hang in there together up until that year, and then it really broke severely,” he said. “It suggests what we may need to get back to to get the market going again.”