Top story of 2008: County may feel bite of recession through 2009

Editor's note: Here is the story Tribune staff chose as the biggest story of the year in 2008. The article, originally published on Jan. 1, 2009, is reprinted below.

For many San Luis Obispo County residents, 2008 didn't end soon enough — with its painful housing market decline, falling stock portfolios, rising unemployment, growing state budget deficit, credit crunch and nervous consumers who curbed spending.

But the worst may be yet to come as the county navigates through the most severe recession since the early 1990s.

"Sadly, there's more pessimism as the economy continues to deteriorate,'' said Kirk Lesh, real estate economist with the UCSB Economic Forecast Project, which anticipates the start of a weak recovery in 2010.

Although the county is doing well compared to some other communities — namely the Central Valley, where the fallout from the housing market has been more acute — economists predict a 1.2 percent drop in the county's gross product (the value of goods and services produced locally) this year.

That follows a decline of 0.7 percent in 2008, according to the UCSB Economic Forecast.

An interest in developing alternative energy sources — such as solar — and investment in petroleum in the county could provide a source of economic strength.

And home sales this year are expected to increase, primarily because of buyers grabbing distressed properties.

Other areas are expected to decline, though, including median home prices (for the county as a whole, as individual cities vary), real median family incomes and real taxable sales, an unwelcome development for local governments that depend on a healthy stream of sales tax revenue.

As well, UCSB economists predict the county's unemployment rate will peak at 7 percent in 2009, a level not seen here in 14 years.

The unemployment rate in November — the latest figure available from the state's Employment Development Department--was 6.6 percent, up from 4.4 percent the same month a year ago.

Lesh fears that the troubles in Sacramento will exacerbate unemployment in the county, which has a heavy concentration of government jobs.

"Our big concern for San Luis Obispo County going forward is potentially large layoffs in government,'' he said. "If it's just a job freeze, that would be nice, but we have concerns that it will be a job reversal."

Real estate worries

More people out of work could mean fewer homeowners paying their mortgages on time, he said.

While the county's foreclosure rate is lower than other communities across California, it rose dramatically in 2008.

A total of 248 trustee deeds were recorded -- the final step in the foreclosure process — in the third quarter of this year, up from 75 in the same quarter a year ago, according to DataQuick, a Southern California-based real estate tracking firm.

The number of notices of default in the county — the first step in the foreclosure process — climbed to 370 in the third quarter of 2008 from 249 the year-earlier quarter.

Lesh believes the county could see a large spike in foreclosures this year as adjustable- rate mortgages reset and more people lose jobs.

One positive development, Lesh said, is that home prices have come down, and that has spurred some sales. Tighter lending standards, however, continue to make it difficult for would-be buyers, he said.

"People can't come up with the 20 percent down,'' he said. "And people are worried about jobs. Homes could drop to $100,000, but if you don't have a job, you won't be able to pay the mortgage," he said.

Mark Schniepp, economist with the Goleta-based California Economic Forecast Project, has a more optimistic view of the housing market.

The county should look forward to signs of stabilization by summer 2009, when buyers begin to snap up more than just foreclosed properties and the credit crunch eases some, he said.

"Sideline buyers will start buying when they perceive the market has bottomed," he said. "That perception will be more evident by the spring."

Hoping for a stimulus

A way out of the vicious cycle of home losses and rising unemployment would be a strong national stimulus package that could boost the struggling economy and motivate lenders to start making loans.

But a stimulus alone, Lesh said, might not do the trick.

"Employers expanding their businesses and hiring people to buy up a few of those homes on the market, that's the kind of stuff that will stop the cycle," he said.

Some government officials are pinning their hopes on changes in the state's financial picture and a revitalization of the national economy in 2009, which could lead to more funding for local improvements.

Shelly Stanwyck, assistant city manager for San Luis Obispo, said city sales tax, property tax and transient occupancy tax revenues have declined.

The city also has instituted a hiring freeze and is taking a conservative approach to expenses. The extra half-cent sales tax voters approved in 2006 is helping to soften the blow, she said.

While no one at the city predicts that this year will be a good one, an economic stimulus focused on infrastructure could be just what the city needs.

"We have a list of projects at the ready," said Stanwyck, noting that it could generate job growth in construction.

More reasons for a positive outlook include continued interest on the part of national retailers.

Kohl's recently announced that it will replace Mervyns at the Madonna Plaza shopping center, another national chain store is negotiating to take over the Linens-n-Things space at Irish Hills Plaza, and Spencer's Fresh Markets will move into the space currently held by Albertsons in the Laguna Village Shopping Center.

"That's a silver lining in SLO," she said.

Cities in the North County also have their share of economic challenges.

In Paso Robles, as in other cities in the county, home construction is almost nonexistent, joblessness has increased and the financial meltdown has resulted in fewer consumers making big-ticket purchases such as automobiles, city manager Jim App said.

"More people are doing without, and now that's being reflected in the city budget," he said.

The city, App said, anticipated the financial storm about a year ago, when it began taking actions to reduce spending.

Over the next 18 months, city officials will try to find as much as $3 million in spending cuts. The city already has frozen 18 to 20 positions and could increase that number this year, he said.

App is confident, however, that the city will emerge from the recession in good shape. Several projects downtown are moving ahead, as well as the Golden Hills Plaza shopping center off Highway 46 East. And there is room for infrastructure projects.

In addition, the city has seen growth in its hotel and culinary industries, fueled in part by the success of the wine industry, he said. Hotel bed tax in the city saw a double-digit increase from last year, he said.

Reasons for optimism

As the county turns the corner in 2009, it will not be all gloom and doom.

Like Lesh, the UCSB economist, Schniepp contends that one weakness in the local economy will likely come from its focus on government jobs, as well as the declining wealth of local residents who lost home equity and suf fered from falling investment portfolios.

But there are several strengths that could bode well for communities here.

Job losses in the financial sector have been minimal given the area's limited ties to the national subprime crisis.

A total of 100 jobs were lost in the financial activities category in November compared to the same month in 2007.

And though the county does have a manufacturing presence (with a total of 400 jobs lost from November 2007), it's not highly concentrated in the county, and consequently, did not produce a major drag on the regional economy, he added.

Tourism remains vulnerable this year, but economic uncertainty could force more people to vacation closer to home.

"The SLO visitor industry may not feel the same kind of declines that will impact destination resorts and more expensive tourist attractions or hotels, especially those that rely on higher proportions of international travelers."

Some local residents are confident that the county will be well on its way to recovery this year.

Stan Sherwin, owner of KJon's Fine Jewelry in Atascadero, said business was down during the holiday season. But after being around for nearly 40 years, he understands that economic swings are temporary.

He points to jobs at the California Men's Colony, Cal Poly, tourism and the wine industry as bright spots that may help the community get through tough times.

Even his customers were more upbeat than they have been in years, he said.

"People are tired of all the negativity," he said. "We can only take so much."