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Financial Shock Waves Yet to Hit in Louisiana
September 20, 2008
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For much of the past year, many New Orleans-area businesses have noticed consumers having more difficulty getting the credit that came easily in the days of a robust housing market. And with consumers unable to move forward with purchases because credit isn’t available, or paying higher interest rates to do so, local businesses have seen their profits shrink. That means a business like Duhon’s can’t hire as many employees or pay them as much, contributing to the slowdown of the entire economy.
The Times-Picayune
Financial Shock Waves Yet to Hit in Louisiana
by Rebecca Mowbray
Friday September 19, 2008
Aside from losses on the stock market, most Louisiana residents have yet to feel the full impact of the nation’s financial crisis.
Bank loans and financing for major purchases like appliances and furniture still can be obtained with relative ease in the state. And while one residential real estate project in New Orleans has succumbed to financing challenges, most large developments in the area are at least moving forward.
Still, there are signs that problems in the national economy are beginning to creep into the lives of real people.
Just wait, said Mike Anderson, until the next time borrowers try to take out a loan.
“There is definitely a credit crunch. Be prepared to bring the kitchen sink when you meet with a loan officer, because there’s a lot of things you will need to do to prove that you’re credit-worthy, ” said Anderson, president of Essential Mortgage, the mortgage arm of Latter & Blum Realtors Inc.
Where the situation will go after a week of unprecedented turmoil on Wall Street and government efforts to prop up the financial system is anybody’s guess, but local businesses say they’re watching the situation closely.
“I think anybody who tells you they’re not concerned would be telling you a lie, ” said Mitchell Mintz, president of the Hurwitz-Mintz furniture store. “The paper losses scare a lot of people. People have money in the bank, money in the market, and it shows people that they have a lot to lose. Psychologically, a lot of people do pull back.”
But Guy Brierre, senior vice president of credit risk management at Capital One, N.A., said people in Louisiana have a lot less to worry about than their counterparts in other parts of the country. The economic activity from rebuilding after the 2005 and 2008 hurricanes will help insulate the state from a downturn, and drilling for lucrative oil and gas is bringing new money into the region. Local unemployment rates also remain low, Brierre said.
While banks say they are scrutinizing loan applications carefully, Alden McDonald, president of Liberty Bank and Trust Co. of New Orleans, said they are still loaning money.
In fact, the volume of loans at Louisiana banks increased in the most recent quarter, according to the Louisiana Office of Financial Institutions. And some believe that local banks could actually emerge stronger from the national financial crisis as they pick up business that big banks can’t handle anymore.
Financing is stickier
At the consumer level, people are beginning to see evidence of the slowdown when they use their credit cards and buy furniture, cars or homes.
Troy Duhon has had it with the companies that finance automobile purchases.
He’s got hundreds of cars at his four New Orleans-area car dealerships and plenty of worthy customers, but the lenders have tightened up on terms because of the national credit crunch and auto industry doldrums, making it more expensive for people to buy a car.
“I think there’s a lot of people who are being affected that really don’t need to be, ” said Duhon, owner of Toyota of New Orleans and Premier Honda, Kia and Nissan dealerships. “They’re good, great customers to loan money to.”
For much of the past year, many New Orleans-area businesses have noticed consumers having more difficulty getting the credit that came easily in the days of a robust housing market. And with consumers unable to move forward with purchases because credit isn’t available, or paying higher interest rates to do so, local businesses have seen their profits shrink. That means a business like Duhon’s can’t hire as many employees or pay them as much, contributing to the slowdown of the entire economy.
Mintz said he doesn’t believe that the terms his customers are paying for furniture financing have changed but he’s making sacrifices to keep business flowing.
Mintz has been offering two-year no-interest financing to customers even though doing so costs him about 10 percent of the sale. At the same time, he is making less because the company that does the financing is paying Mintz less for steering the business its way.
As if the shrinking availability of credit wasn’t enough, retirees or people on fixed incomes are finding themselves with less buying power because financial instruments like bank CDs, Treasury bills and money market accounts are paying almost nothing in interest. A three-month Treasury bill, for example, is paying just 0.23 percent interest, when inflation is about 2.5 percent a year.
“Your real rate of return is negative, ” said Peter Ricchiuti, assistant dean at the Freeman School of Business at Tulane University. “They’re very close to charging you for holding your money. Anyone who’s living off of interest is in trouble, and probably is going to be in trouble for a long time.”
But with the national lending entanglement, there are opportunities for consumers. Anyone who can manage to buy stocks, Ricchuiti said, probably will clean up, because they can buy right now at deep discounts. And with national retailers shedding inventory, there’s probably going to be great shopping at discount stores.
Plans are still a go
Major real estate development projects around the metro area are largely moving forward, albeit slowly.
Construction has not begun on the Tracage, a condominium project at the back of the Warehouse District. And while developers of the Trump Tower condominiums on Poydras say the project will go forward, they have yet to break ground three years after announcing the deal.
At least one project has fallen victim to the credit crisis.
Shea Embry and Cam Mangham, developers who planned to build 105 condominiums on Burgundy Street in Bywater, said Friday that they plan to wait until the economy recovers and local lenders have more latitude to make real estate loans. The project, ICInola, was supposed to integrate sustainable design principles and appeal mostly to buyers in the $400,000 to $750,000 price range.
Developer Pres Kabacoff said the only projects he sees going forward in the current lending environment are those with public subsidies such as historic tax credits or tax-exempt bonding capacity.
Residential real estate sales also are being stymied because limited access to credit is choking the supply of first-time homebuyers who feed the market. But opportunities exist for those with good credit.
Fannie Mae and Freddie Mac have arbitrarily decided that anyone with a credit score of less than 720 is risky, and have tacked on fees that make borrowing significantly more expensive. Arthur Sterbcow, president of Latter & Blum Realtors Inc., said that the increased cost of borrowing for people who have less-than-stellar credit means that many worthy first-time homebuyers can’t get into the market. That, in turn, means homeowners can’t sell their houses and move up the food chain.
“They’ve jacked up the fees so much that they’re strangling the market for buyers, ” Sterbcow said.
But with recent interventions in the market, many people with good credit can get mortgages with a 3 percent down payment on properties up to $271,050. And with a large inventory of properties on the market, there are deals to be had.
“Average credit, you’re going to pay more. If you’ve got good credit, you can wheel and deal, ” Sterbcow said. “If you’re looking for the bottom, this is it.”
… … .
Jen DeGregorio, Kate Moran and Jaquetta White contributed to this report.Rebecca Mowbray can be reached at 504.826.3417 or rmowbray@timespicayune.com.
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