Tuesday, December 21, 2010

The effect of declining home prices on small business borrowing

The Federal Reserve Bank of Cleveland has a new economic commentary on the declining housing bubble's effect on small business borrowing. Here's the conclusion:
Everyone agrees that small business borrowing declined during the recession and has not yet returned to pre-recession levels. Lesser consensus exists around the cause of the decline. Decreased demand for credit, declining creditworthiness of small business borrowers, an unwillingness of banks to lend money to small businesses, and tightened regulatory standards on bank loans have all been offered as explanations.

While we would agree that these factors have had an effect on the decline in small business borrowing through commercial lending, we believe that other limits on the credit of small business borrowers are also at play and could be harder to offset. Specifically, the decline in home values has constrained the ability of small business owners to obtain the credit they need to finance their businesses.

Of course, not all small businesses have been equally affected by the decline in home prices. While many small business owners use residential real estate to finance businesses, not all do. Those more likely do so to include companies in the real estate and construction industries, those located in the states with the largest increases in home prices during the boom, younger and smaller businesses, companies with lesser financial prospects, and those not planning to borrow from banks. These patterns are also evident in the data sources we examined.

The link between home prices and small business credit poses important challenges for policy makers seeking to improve small business owners’ access to credit. The solution is far more complicated than telling bankers to lend more or reducing the regulatory constraints that may have caused them to cut back on their lending to small companies. Returning small business owners to pre-recession levels of credit access will require an increase in home prices or a weaning of small business owners from the use of home equity as a source of financing. Neither of those alternatives falls into the category of easy and quick solutions.


  1. I apologize for being OT, but:

    “Washington, D.C. leads the nation, with 21.5% of the population on food stamps”


    Can we re-inflate the bubble, or even sustain prices with 21% of folks on food stamps?

  2. The National Assn. of Realtors is running ads warning that tampering with the mortgage interest deduction would hurt "hard-working American families." The ads point out that 65% of the taxpayers who took the deduction made less than $100,000.

    What the group doesn't say is that about 75% of the entire $85.5 billion that people saved in taxes from the mortgage interest deduction in 2008 went to individuals or couples making $100,000 or more, according to an analysis by the congressional Joint Committee on Taxation of the latest data available.

    Based on the committee's numbers, taxpayers who took the mortgage deduction saved, on average, $2,330 in 2008. But for those reporting incomes of $200,000 and more, the average savings were nearly triple that amount.

    About half of all homeowners in the U.S. — and just a quarter of all taxpayers — benefit from the mortgage interest deduction at all. That's because most people don't have home loans or don't pay enough in mortgage interest to take advantage of the benefit.

  3. Yeah, small business owners shouldn't hold their breath waiting for prices to go up. Better to find other sources of equity.

  4. "Can we re-inflate the bubble, or even sustain prices with 21% of folks on food stamps?"

    Probably. To my knowledge, DC has always led the nation in people on foodstamps, especially given the huge underclass that lives in SE.

    To put it bluntly, these people have never mattered before. Why do we think they will matter now?

  5. @ ROBERT:

    Of course you can! DC is different!

  6. Different we are:

    "It takes a resilient economy to ride through the Great Recession - and it doesn't hurt to have the world's most powerful government in your backyard.

    Both of those could apply only to Washington, D.C., as the nation's capital rose to the very top of MarketWatch's 2010 annual ranking of the Best Cities for Business, beating out such cities as Omaha, Neb., Boston and Des Moines, Iowa."


  7. If its on a blog-like yahoo real estate site, it isn't news.

    What is news is the fact that Vincent Gray is now the mayor of DC, and he's regressive.

    Fenty's progressive appointees and officials are quitting or getting fired as I write this.

    Will the yahoo real estate blog consider DC to be a great place to do business in 2012? Probably not.

  8. @ANON

    Yeah...keep telling yourself you're different...enjoy the way down...it happens to everyone.

  9. @Armond and @Robert - Well, yes and no: if you looked at the recent census data, what's really going on in DeeCee is that the population/demographic is changing - sure, the same un-/under-employed bunch who kept prices east and south of the park very very low for ages and ages (since '68) is not doing anything to prop up the market. Indeed, there would have been almost no DC bubble if that demographic had been the dominant one.

    But, the DC population is increasing, and it's also increasingly made up of upper-middle income earners who can get loans.

    @Anon - 12/22, 10:43AM - the mayoral leadership is a trailing not leading indicator. Fenty got elected because the demographic is shifting and his "progressive" administrative picks were a nod to that new demographic. Gray is the reactionary backlash.

    I predict Gray's core constituency will be disappointed since I don't believe he's really that different from Fenty (nor are either of them ultimately all that different from Marion Barry) and more so because what drives their angst is something the Mayor can't control or change...like I said, the mayor is simply reactive.

    - Gentrification - the mayor can't enforce racial/ethnic homeownership preferences - this will be the result of a battle of wallets.

    - Jobs program patronage - it may look like Gray is capitulating to the DCPS but they're going broke and that won't change, particularly during the downturn.

    - Developer friendly policies - these guys have the $$$ and the jobs...the mayor will continue to make nice with them...they bring in a tax base that fills city coffers.

    Gray might put a different wrapper, but he will respond to the same set of pressures that Fenty did. None of this, by the way, has squat to do with why people are moving back into the city:

    - more metro stops
    - shorter commutes
    - people wait to have children until they are older (they are not as dissuaded by the bad schools).

    This is a national trend, BTW, not just DeeCee...

  10. "Leroy said...
    Probably. To my knowledge, DC has always led the nation in people on foodstamps, especially given the huge underclass that lives in SE."

    Yes but, now if they want a home loan, they have to qualify for one.