From Washington D.C. to Main Street, everyone seems to be playing the shell game and frantically trying to find where the solution to the financial crisis is hidden. In mid-September, the United States entered a financial crisis that has been called the worst since the Great Depression. However, the warning signs were there, even at the end of last year.
While economists debated throughout the year whether the economy was in recession, residential real estate prices plummeted into a free fall around the country (though NH experienced more moderate declines). Housing did not correct as hoped, but collapsed as 2008 mortgage delinquencies (even in NH) doubled from one year ago. Losses in the
financial markets followed the decline in residential real estate values because several large financial institutions had interests in housing markets.
In March of 2008, global investment bank Bear Sterns collapsed under the weight of bad debt tied to the subprime mortgage crisis, and the Federal Reserve loaned funds to aid that company's sale to JP Morgan, an unprecedented move at the time. But more such bailouts followed, and closely. In late summer the Treasury Department brokered the $200 billion taxpayer bailout of Fannie Mae (FNM) and Freddie Mac (FRE), the largest holders of residential mortgages in the U.S.
Also add the $85 billion federal loan to the largest U.S. insurance company, American International Group (AIG), followed by the failure of Lehman Brothers. United States, European and Japanese central banks have pledged cooperation and resources to stem the tide of an ever-widening global financial tsunami. Congress approved a U.S. Treasury proposal for a $700 billion bailout for distressed financial institutions. The Treasury has suggested reviving the Resolution Trust Corporation, a U.S. Government-owned asset-management company charged with liquidating assets (primarily real estate-related assets, including mortgage loans). Those had been assets of savings and loan associations (S&Ls) declared insolvent by the Office of Thrift Supervision as a consequence of the Savings and Loan crisis of the 1980s.
Energy prices rose again with oil prices topping out at $140 per barrel in the summer of 2008, before retreating to below $80 in October. Even with that decline in energy prices, many NH consumers are anxious about the coming winter heating season, especially since home heating oil companies were offering pre-buy contracts of $5 per gallon when oil prices hit record highs. Yet other price measures suggest that inflation seems to be under control.
Business and consumer confidence, which had been stalwart through 2007, finally gave way in 2008. Consumer confidence in NH hit its lowest point since 2001, according to a June 2008 Univ. of NH Survey Center Granite State Poll.
Whether we are in a recession now, or not, the bumpy ride is not over. Corporate profitability, long an underlying strength, could be threatened by financial market turmoil. Exports remain strong now, but could falter if overseas economies weaken. On the positive side, NH is entering this period a little stronger than New England or the nation as a whole. Unemployment rates in NH have remained below the U.S. average. New Hampshire housing prices have fallen, but will not drop as much as we have already seen in parts of California and Florida. New Hampshire financial distress is not as severe, given the fact that consumers are consistently making their credit card payments on time, according to a September 2008 report by credit reporting agency TransUnion.
The U.S. started losing jobs in January 2008, while the New England employment base has stopped growing. But NH has been adding jobs since September of 2007.
In the fourth quarter of 2008, the U.S. economy declined by 0.2 percent, which seemed to signal a contraction. That was followed by two moderately positive quarters for gross domestic product in the first half of 2008. Real gross domestic product-the output of goods and services produced by labor and property located in the United States-increased at an annual rate of 3.3 percent in the second quarter of 2008. The acceleration in real GDP growth in the second quarter primarily reflected a larger decrease in imports and acceleration in exports, along with an increase in state and local government spending.
Economic Indicators
New Hampshire Gross Domestic Product, adjusted for inflation, declined between 2006 and 2007 due to a drop in finance, insurance and real estate economic activity. According to estimates from the Bureau of Economic Analysis, NH's real Gross State Product grew by 7.2 percent between 2003 and 2007, less than New England's growth rate of 10.2 percent during the same period.
The Granite State Productivity Index, calculated using the ratio of NH Gross State Product per person compared to the national ratio, shows an increasing long-term trend, but a decline in 2006 and 2007. The Index indicates NH saw even faster productivity growth since 1990 than did the rest of the country. New Hampshire in-state electric sales were up slightly in 2007. The state currently has enough in-state generation to be a net electric energy exporter to other states.
New Hampshire bankruptcies totaled 6,058 in 2005, an all-time high, as Granite State residents rushed to the exit in order to file before the October 2005 change in bankruptcy laws. About 1,800 bankruptcies were filed in 2006 and 2,928 in 2007. Based on data through July 2008, NH is estimated to endure about 3,800 bankruptcies in 2008, which is still below the annual levels seen in the 1990s.
Employment and Wages
While Hillsborough County has the highest average weekly wages in the Granite State, the fastest growth in weekly wages between 2006 and 2007 was in Merrimack County. Among industry sectors, the Management of Companies and Enterprises sector wages increased the fastest between 2006 and 2007, followed by wage increases in State Government.
On net, NH gained 6,800 jobs during that same time period-Losing industries shed 3,300 jobs, while gaining industries added 10,100 positions. Construction accounted for most of the jobs lost between 2006 and 2007, while administrative and support, and waste management and remediation services industries accounted for the largest share of the job gaining industries, followed by professional, scientific and technical services.
The North Country has suffered job losses associated with the decline of forest industries and manufacturing. And unemployment rates by labor market area clearly show the economic distress in Berlin in July 2008, which posted a 5 percent unemployment rate, one of the highest of any NH labor market area. And unemployment rates in NH communities bordering Massachusetts tend to be higher than elsewhere in the state.
Critical Industries in NH
Economists use location quotients to analyze a regional economy relative to a larger area, to determine the most important industries in the region. A location quotient is a calculated ratio between the local economy and the economy of some reference unit, usually the U.S. economy. The ratio is calculated for all industries to determine whether or not the local economy has a greater share of that industry than expected. If an industry has a greater share than expected of a given industry, then that extra industry employment is assumed to be critical because those jobs are above what a local economy should have to serve local needs. Generally speaking, location quotients greater than 1.0 indicate a critical industry or occupational sector. (See Location Quotient chart on page 29.)
A locations quotient analysis for employment by major industry sector shown in the chart reveals that manufacturing is still a critical industry in NH. High tech is an even more critical industry in the Granite State. Other critical sectors are trade, transportation and utilities, education and health services, and leisure and hospitality industries.
Employment by Occupation
Another way to examine job change in NH is employment by occupation. Business and finance professionals, health care occupations and education occupations have seen gains in both jobs and wages between 2002 and 2007. Information technology professionals and food serving occupations have seen more jobs, but wages have not kept pace with inflation. Worst off are the production or manufacturing occupations, which have seen declines in number of positions and real wages.
Income and Migration
Income growth in NH had been at double-digit rates prior to the downturn, and slowed considerably in 2001 as the national recession took hold in NH. At its lowest point, NH personal income grew on a year-over-year basis by a little more than one percent. Recent personal income growth for the state has averaged about 5 percent annually. New Hampshire's total personal income was close to $56 billion in the first quarter of 2008.
Without international in-migration, the population in the states of Connecticut, Massachusetts and Rhode Island would hardly have grown at all between 2000 and 2007. Net internal migration, (the difference between United States residents moving in and out of a state), has been negative for all three states since 2000. While people from other countries move into Connecticut and Massachusetts, the current residents of the Nutmeg and Bay States tend to move out.
New Hampshire by far has the most net internal migration of any New England state. Data from the most recent American Community Survey of the U.S. Census Bureau estimates that less than half (44.2 percent) of the Granite State residents that were born in the United States were actually born in NH. That means that more than half of the native- born residents now in NH moved in from another state. By comparison, three quarters of the native-born residents of Massachusetts were born in the Bay State.
New Census Bureau estimates show that NH's in-migration is slowing and the out-migration is increasing. Most of NH's domestic in-migrants come from Massachusetts. When people leave NH, most go over the border into Massachusetts. The two states with the biggest net gain of residents from NH are Florida and Maine. However, NH saw accelerating net domestic migration losses to Georgia, North Carolina, South Carolina and Virginia between 2000 and 2006. Hillsborough County receives the greatest number of international migrants moving to the Granite State, probably because that county contains the two largest urban areas in the state-Manchester and Nashua. Rockingham County receives the largest number of domestic migrants, followed by Merrimack, Belknap and Carroll counties. The population, and therefore the workforce, is older in NH's rural counties. In Coos and Carroll counties, the number of deaths in the last seven years exceeded the number of births.
High Technology
The NH portion of information technology (IT) payroll, as a part of the total wages and salaries in the state, is second highest in New England. But information technology in NH is more concentrated in manufacturing than in services. For example, Massachusetts had 15 percent of its total employment payroll in IT in 2006, 3.9 percent in IT manufacturing and 11.1 percent in IT services (a ratio of about 2 to1). New Hampshire had 9.6 percent of its employment in IT, but 3.5 percent in IT manufacturing and 6.1 percent in IT services. New Hampshire has a larger portion of its IT employment in manufacturing than in any other state in the region.
Financing and Business
The expansion of the high-tech sector was fueled in part by venture capital. According to the MoneyTree survey, U.S. venture capital investment reached a high of almost $20 billion in the second quarter of 2000, but started to fall after that. Nationally, venture capital investment reached a low point of $4 billion in the last quarter of 2002, and showed a moderate rebound in the second quarter of 2003. Venture capital investment nationally reached $7.4 billion by the second quarter of 2008.
Investment from venture capitalists into Granite State firms averaged about $150 million per quarter through the year 2000. New Hampshire venture capital investment fell by an order of magnitude in the early quarters of 2001 to a little more than $10 million per quarter. A subsequent high point of $104 million invested in the second quarter of 2004 has not been exceeded, although recent venture capital investment in the state in the second quarter of 2008 reached $82 million.
Troubles at Wall Street securities firms could have ripple effects that could stifle mergers and acquisitions in the technology industry and further dampen the market for initial public offerings. Problems for tech companies could develop because they rely on the investment banks to underwrite their initial public offerings.
In the banking sector, according to the Federal Deposit Insurance Corporation, NH's insured institutions continue to be profitable despite some pressure on net interest margins. The ratio of past due and non-accrual loans to total loans dropped consistently between 2003 and 2006, but rose in 2007 and 2008. The drop in total bank assets this year in NH is likely caused by state banks switching to federal charters, including Citizens Bank.
Tourism
Travel and tourism is NH's second largest industry in terms of jobs and attracting dollars from out of state. 2007 was a slightly positive year for NH's travel and tourism industry in comparison with 2006. There were more visitors and slightly higher spending per visitor. The total number of visitor trips increased by an estimated 1.2 percent to 34.1 million trips. The number of visitor days increased by an estimated 2.1 percent to 53.2 million days. Rooms and meals spending by tourists and business travelers in 2007 was estimated to be 2.1 percent higher than for 2006. Total spending by tourists and travelers is estimated to have increased to $4.367 billion, up by 2.7 percent from 2006. Rooms and meals sales to travelers in NH have the biggest effect in the White Mountains, where it brings in more than $4,400 per White Mountain resident.
The NH ski industry may have had one of its best seasons in the last decade, in terms of snowfall, visitors and revenue. This past winter, 118 inches of snow fell, as measured at the Concord weather station, just short of the 122-inch record in 1873-1874. Although just an estimate, there were probably in excess of 2.2 million visits to state ski areas last winter; and revenue was up at all ski areas. At Loon Mountain, revenue was up 20 percent over the previous year, and 13 percent over the ski area's best year ever.
Real Estate and Housing
Sales of existing homes in NH declined by 10 percent in 2007, compared to the same period in 2006, according to the NH Association of Realtors. Sales declined by 22 percent in Cheshire County and 18 percent in Coos County, which endured the largest losses in sales. For the first six months of 2008, NH home sales, excluding condominiums, declined another 22 percent compared to the same period in 2007.
Prices for homes have held up well in 2007, declining by 2 percent. The state median sales price saw another 8 percent decline in the first six months of 2008. The highest rents and home prices in the state are in southern NH. During the last five years, rents have grown the fastest in Coos and Cheshire counties, and slowest in Hillsborough and Merrimack counties.
Housing permit data indicates that building activity in NH and New England has leveled off. Total construction contract awards also appear to be steady. Real estate markets locally and nationally have cooled down, reflected in slowing building activity.
The number of foreclosures in NH, while still a relatively small number, increased in 2007. In the first half of 2008, there were 4,064 foreclosures, compared to 2,495 foreclosures in the first half of 2007 and 1,343 foreclosures posted in the first half of 2006, according to ForeclosuresNH.com. If 2008 continues at the first-half pace, the annual number of foreclosures will increase to about 8,000 in NH for all of 2008. Increasing home foreclosures could lead to an increase in apartment rentals, condo sales and mobile home sales in the state.
Many housing market observers don't understand that the problem with increasing foreclosures is not sub-prime loans, but falling home prices. The mortgage crisis was not caused by sub-prime adjustable rate mortgages resetting to higher interest rates. While a reset could often be a trigger event, forcing families to default, the underlying problem is that as house prices fall, homeowners no longer have equity in their homes.
Sub-prime loans are only a symptom of the problem, and not the problem itself. Homebuyers took out sub-prime loans to try to get into a housing market when prices were increasing at double-digit rates back in 2003 to 2006. Most of those homebuyers probably never intended to keep the Adjustable Rate Mortgage (ARM) sub-prime loan, but instead to refinance out of the mortgage before the adjustable rates reset. Refinancing out of a loan is not possible in a housing market where prices are falling.
Homeowners don't default when they have equity in their homes. They will either borrow against the equity to make their payments, or they will sell the home and put money in their pockets. As home prices continue to fall, the number of homeowners with no equity will soar. The risks of delinquencies and foreclosures are certainly greater for sub-prime loans, but even prime borrowers will be at risk when home prices fall and they become upside down in their mortgage payments.
How far could NH home prices fall? One way to forecast where home prices could bottom out is to look at the historical relationship between NH home prices and apartment rents. In a balanced housing market, the purchase price of an existing home should increase at about the same rate as the median rent for apartments. After all, houses and apartments are just different products in the same market for housing. From 2000 to 2005, existing home purchase prices increased faster than rents in most areas of NH. New data for 2006 and 2007 show that with home prices leveling off, and apartment rents increasing moderately, the ratio of home price to rent is at least flattening out. The readjustment of the ratio of home prices to rents will probably occur over time through increasing rents and falling home prices.
Looking at NH home-price-to-rent ratios by county reveals that some of the most active housing markets have the highest home -price-to-rent ratios. The home-price-to-rent ratio was highest in Rockingham County in 2008 at 2.24. Belknap County, home to the Lakes Region, had the second highest ratio. Cheshire County in the western part of NH had the lowest home price to rent ratio.
New England Regional Data
Looking at the last few years, NH had the fastest population growth compared to other New England states. Between 2003 and 2007, NH's population grew by 2.6 percent, nearly five times as fast as the 0.5 percent average for New England. Even in the most recent year, NH's population base grew faster than the New England average.
The growth in gross state product is proof of NH's economic resiliency. Granite State exports grew by 27.2 percent between June 2007 and June 2008, following increases from 2005 to 2007. As world demand for consumer goods and electronics continues, NH's exports should increase. Data through July 2008 from The Federal Reserve Bank of Philadelphia shows NH's economic activity increasing by 2.5 percent over the previous year, one of the highest growth rates among the New England states.
Also among NH's strengths: it has the lowest tax burden in the country, a high standard of living, an educated labor force, and a high quality of life. It is also the safest state in the country, according to FBI statistics.
Current Issue - May 2024