From the Asbury Park Press:

The Shore’s economy is expected to slump in 2009

The Shore’s economy is expected to tumble again in 2009 as consumers, worried about falling home prices, reeling from investment losses and bracing for possible layoffs, rein in their spending.

It’s the consequence of the asset bubble created earlier this decade by consumers who, with easy access to credit, lived beyond their means. Now the bill is due. Consumers need to scale back, and the economy is suffering.

“The paradox facing the country is, how can a country that got itself into deep peril by borrowing and spending without limits now borrow and spend its way back to prosperity?” said James W. Hughes, a Rutgers University economist.

New Jersey’s economy, virtually stagnant earlier in the decade, was pulled under water by the national economy, a victim of the housing market whose mortgages were pooled together into securities and sold to investors.

Homeowners’ incomes didn’t keep pace with their home payments, and they began to default. Investment banks faced bankruptcy just two years after recording record profits. Stock market indexes lost upwards of 40 percent. Banks turned cautious, reducing lending and bringing economic activity to a near halt.

The result so far: New Jersey lost 34,400 jobs during the first 11 months of 2008 and the state’s private sector was on course to end the decade without any net growth, Hughes said.
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The forecast for 2009 is for more trouble ahead. Why?

— The housing sector has yet to stabilize. Home prices statewide on average have fallen about 20 percent from their peak in 2005, and they are expected to fall another 8 percentage points to bring them in line with workers’ incomes, said Jeffrey G. Otteau, president of the Otteau Valuation Group, an East Brunswick real-estate consulting firm.

The industry is expected to see another wave of homeowners whose mortgage rates spike, thus pushing their payments beyond what they can afford. Additionally, there is the problem of people who would like to buy a home, but put such dreams on hold because they worry they will be laid off.
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— Consumer spending has deteriorated. Shoppers in Eatontown said they were taking steps on their own to live more frugally. But many of them couldn’t spend with abandon, even if they wanted.

The reason: Homeowners earlier in the decade used the ever-rising values of their homes to go on a spending binge. They could refinance and take cash. They could get a home-equity loan to renovate their home, pay for college or even pay off their credit cards.

With home values on the decline, they can’t borrow as much, if at all. Home buyers, for example, who put 20 percent down to buy a home in 2005, would have little equity since home values have declined just as much.

The ripple effect is widespread. Consumers spend less. Corporate revenue declines. Companies lay off workers to remain profitable.

“An economy that’s 70 percent dependent on household consumption would like to see people spending more, but given the lack of savings, it’s a good thing that people are starting to save,” said Patrick J. O’Keefe, a director at J.H. Cohn, a
Roseland-based accounting firm.
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— Stores are closing and vacancies rising. The impact can already be seen in towns such as Red Bank, where some store owners have written farewell messages on their windows.