ONTARIO, Calif.-Two states hit hardest by the recession are showing signs of recovery in 2011, albeit at different rates.
Daniel Penrod, senior industry analyst for the California and Nevada Credit Union Leagues, said the picture is brighter in the Golden State than it is in the Silver State. Penrod told Credit Union Journal there is beginning to be some "consistency" in the economic numbers in terms of trending up, but cautioned CU executives not to expect rapid improvement in either state in looking ahead to the remainder of this year.
"We are not seeing the large jumps that everyone is hoping for," he said. "But we are seeing small gains building on each other and trending in the right direction. There are things we have been talking about for a while that we were hoping to see, including increasing income tax revenue in California. Unemployment remains elevated and needs to come down for the overall strength, but there is some hiring going on and wage increases we have not seen for years."
There is stability in California, Penrod reported, especially along the coastal regions. He said the coastal recovery is a byproduct of how things went during the bubble. Historically, real estate closer to the beach has grown at a higher price. During the boom, home prices in the "Inland Empire" region of Southern California were nearly equal to the price of houses in Orange County, which is an "imbalance" in terms of the location, he explained.
"So the Inland Empire had farther to fall. The job bases and higher wage employment have always tended to be in the coastal regions, which supports the housing markets there."
'Bumps And Bruises'
The inland areas of both Northern and Southern California are still struggling through "bumps and bruises," but Penrod said he is seeing price stability in housing-which is a crucial first step toward a recovery. He said the cities and counties inland are trying to find a way to increase job diversity in those areas, so they are putting together incentive packages to bring non-manufacturing/non-warehousing jobs.
A recovery in the California housing "will take time," Penrod assessed, and any comeback in home prices will rely on how quickly overall employment picks up.
"Employment is a key decision point for any loan officer," he noted. "These days no job equals no loan. No job security on the borrower side means a lot of people are not looking, even though affordability is better in California than it has been in a long time. There are great opportunities, but there is a lot of hesitation."
Outside of the credit union industry, Penrod reported, getting a loan remains difficult because money is still tight. Recent data from the Federal Reserve Board's loan officer survey suggests there will be "some loosening," but there was no data collected on subprime borrowers, which "raises an eyebrow," he said.
What Is 'Normal'?
When will conditions get back to "normal"? Penrod said that depends on one's definition of the word. For several months now, people have been expecting "normal" to be reliving 2005, "but that is not coming for a long time," he concluded. But if "normal" is 2% to 5% appreciation year over year and some job growth, he said the economy is starting to show some signs of that level.
"The tech sector in the [San Francisco] Bay Area is pretty strong right now, and the hope is that growth will trickle over into other areas," he said."Overall, we are headed in the right direction, and the hope is things will move faster than the numbers are implying. The numbers are suggesting it will be a slower, steady climb rather than a quick recovery."
On the financial services side, savings is increasing but demand for borrowing is still muted. Penrod said used auto lending is reaching a break-even point and "should continue to trickle up, which hopefully will spill over to new auto lending, which has been greatly impacted on the consumer lending side."
"We are seeing strength creeping back into credit unions and their financial reporting," he said. "Even in the areas that were hardest hit, the credit unions there are starting to see some stability in their numbers."
While all concerned would "love to go from downturn to growth," Penrod said in reality there needs to be a time period of stability before the economy can move back up.
"Depending on where someone is in California, things are either into that stability period, which might last for another couple of quarters, or some areas are actually picking back up. I don't want to give the thought that we are back and ready to push forward. Things are not all better, but the sun is shining a lot brighter than it has for a while."
Silver State Still Stumbling
The recession hit California before it hit Nevada, but when it did Penrod said Nevada absorbed a "pretty big shock in a lot of different areas." Construction and tourism/gaming were two of the hardest hit sectors. Unemployment remains very high in the Silver State, but Las Vegas started to see some signs of improvement in foreclosures in 2010.
"Any enthusiasm in the housing market is tempered by the fact the foreclosure rate in Las Vegas was still five times the national average as of the end of 2010," he said. "The good news is the numbers are trending in the right direction, and getting foreclosures out of the system will go a long way toward helping the overall recovery move forward."
Nevada's struggles have been well documented, but at the end of 2010 there was an increase in visitors, gaming revenue and passengers at McCarran International Airport, which Penrod said are "important elements" in getting the Silver State stabilized, and, ultimately, back to growth. At this point, he said the data suggests there still is "some room to grow" before Nevada can be regarded as stable.
"2011 will still see some bumps along the road. If the international market and the bordering states, including California, continue to improve, then it is possible to see an increase in tourism, especially weekenders coming in from neighboring states."
One "elephant in the room" is the state budget deficit. Nevada's legislature meets every other year. The last state budget had a $900 million gap, and Penrod said the word is the 2011-13 budget gap is going to be even greater: $1.5 billion to $3 billion.
The previous budget gap was addressed by increasing license and application fees. Penrod said it is possible that greater revenue growth might shorten the gap of the pending budget, as happened this year in California.
"It is a big unknown right now, and won't be known until the middle of 2012," he said.
Trending Good, Numbers Not
Nevada's CUs are "doing what they can given an extremely difficult environment," Penrod assessed. The state began and ended 2010 with 23 credit unions, after losing CUs in previous years, which he noted is a trend in the right direction.
"Lending remains difficult given the state's high unemployment and credit worthiness issues," he said. "Numbers for Nevada's credit unions are trending the right direction, but they are still negative. The combined net worth ratio increased in 2010 to 7.7%, from 7.35% the year prior. They are on the right path, and if things can continue to improve around them and conventions increase, that will be a huge step in hastening the overall recovery."
The overarching trends "are headed in the right direction," he continued, "but the state is not in the stability stage yet. If things keeping heading the way they are, that stage will come sooner rather than later.."
