More pain forecast for local economy

The feeble housing market has plunged Sonoma County's economy into a recession and home prices likely will fall another 16 percent before stabilizing in mid-2009, according to a key economic forecast released Friday.

While early signs of recovery have emerged, the inventory of homes for sale in the county is so high and the rate of price decline so steep that it may take a year for the market to bottom out, said Steve Cochrane, senior managing director of Moody's Economy.com.

"I am fairly optimistic about Sonoma County, but as with the U.S. economy, the near term is going to be difficult," he said.

From the peak in late 2005 to the bottom in mid-2009, Cochrane is predicting a whopping 38 percent drop in the value of the average Sonoma County home.

The average home sold for $440,000 at the end of March, according to The Press Democrat's monthly survey. An additional 16 percent drop would cause about $70,000 in value to vanish, bringing the median price to $370,000, a level not seen since May 2002. The median peaked at $619,000 in late 2005.

The annual report, commissioned by the county's Economic Development Board, was presented Friday to about 300 business leaders gathered in Santa Rosa.

Cochrane told the group that Sonoma County, along with others in the state, is now in a recession.

While high oil prices, a soft job market and the "fragile" stock market all are contributing to the local slowdown, the dominant cause remains the imploding housing market, Cochrane said.

The housing crunch has pushed California and several other states into recession, he said. Others include Nevada, Arizona, Florida, South Carolina, Tennessee, Ohio, Indiana, Michigan and Wisconsin.

Consumers are finding themselves with less home equity to tap at precisely the time they need it most as prices soar for everything from food to energy. This combination has left shoppers skittish and "household balance sheets in tatters," Cochrane said.

The delinquency rate for consumer loans in Sonoma County remains lower than the state and national averages, but it is rising faster, a sign that people here are under increasing financial stress, Coch-rane said. That will drag on the retail sector. Tourism will likely also suffer in the short term as frugal consumers facing $4-a-gallon gas cut back on vacations to Wine Country.

The rise in the county's unemployment rate from 4 percent to 5 percent is troubling as well, because it shows companies aren't growing. The construction industry has been particularly hard hit and probably will shed even more jobs before recovering, he said.

"Sonoma County is struggling to keep up," Cochrane said.

Despite the turmoil, he said, the local economy remains comparatively resilient and should rebound strongly once the housing market stabilizes.

There are already signs it's begun. An increase in home sales in the past two months is encouraging and shows buyers are eager to jump back in once homes return to more affordable levels.

And following five years of flat or negative population growth in the county, last year's half-percent influx of new residents was an important shift. "This is a fabulous sign for the economy. The exodus seems to be over," Cochrane said.

Certain sectors of the local economy are holding up fairly well, benefiting from the strength of the global economy and the weakness of the dollar, he said. Wine and high technology are enjoying strong demand abroad, and local tourism is seeing an influx of foreign visitors and their strong currencies.

Other industries, such as health and wellness, green technologies and creative professionals, are strong or poised for growth, he said.

Over the next five years, he predicted job growth of 1.6 percent a year, outpacing the state's overall 1 percent growth.

While the cost of doing business in Sonoma County remains high, the area's relatively inexpensive commercial real estate should give businesses room to grow once the recovery takes hold, he said.

"This coming year is going to be a difficult one," he said, "(but) we get through this year, we get through the housing market downturn, and hopefully by mid-next year the housing market stabilizes and these more positive long-term factors kick in and help drive the economy moving forward."

While the report identified a 15 percent drop in the median home price, analysts at the Pennsylvania-based research firm said the latest data indicate the decrease will be 16 percent.

You can reach Staff Writer

Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com.