The Good, The Bad And Housing

Louisiana State University Professor Emeritus in Economics Loren Scott expects south Louisiana’s economy to grow rapidly, outpacing other regions in the state.

“This is the hottest area in the state right now,” Scott said.

He also set forth the good, the bad and the housing market in his Louisiana Economic Outlook 2008-09 report.

Scott debuted his report Oct. 18 at a luncheon on Nicholls State University’s campus.

We’re the ‘Good News’

Scott said south Louisiana is the hottest area in the state right now.

“You will remain the fastest-growing area in Louisiana,” Scott said.

South Louisiana has one of the highest concentrations of oil and gas employment in the nation, meaning the industry has a great influence on the economy.

Scott expects the area to grow at a rate of 2.7 percent this year, while adding 5,200 new jobs. And he said the job growth could be better if the area can find more people to hire.

He attributes a boom in the oil and gas extraction sector as well as the shipbuilding and fabrication sector for the growth.

The $1.3 billion LA 1 project will just be icing on the cake for the area.

The area will also bask in the glow of what Scott calls the “Jack Effect.”

A massive new reserve of oil was discovered in the Gulf of Mexico a little over a year ago, leading to a recent, record-breaking lease sale of the Gulf’s deep waters-the Jack Field.

In this area, beneath two miles of seawater and five miles of the earth’s crust resides an oil reserve thought to rival Prudhoe Bay

Not only that, the Gulf’s pirate-free political stability is entirely enticing to the oil and gas industry.

While oil prices are high, the industry makes money and so does the state. But Scott warned things may not always stay this way.

“Just because it’s $86 (a barrel) today doesn’t mean it can’t be $56 (a barrel) tomorrow,” Scott said.

And while he was on the subject, Scott tried to ease concerns of oil reaching $100 a barrel.

“The discussion in the press about $100 a barrel, I think that it’s silly,” Scott said.

Scott’s reasoning is that if prices were to reach such astronomical levels, the average person in the United States would be capable of absorbing the cost at the pump.

But the rest of the world would not. Scott said Europe, China and India would be forced to cut back.

To prove his point, Scott said only one nation in all of Europe has a higher per capita income than Louisiana.

And he said it is ridiculous for people to blame “Big Oil” because ExxonMobil, for example, only accounts for a single digit percentage of oil revenues in the world.

As for natural gas, Scott forecasted prices going down due to market pressures and production in the Gulf increasing 10 percent.

Oh No! N.O.!

Scott delivered the bad news-New Orleans is slow to recover.

“The recovery rate has slowed down.” Scott said. “The reason for that is the housing problem.”

Some 134,900 jobs were lost since Katrina in the New Orleans area. This is actually good news, as estimates originally put the job-loss figure at 215,000.

But the area is only adding them back at a rate of about 900 a month.

Some 182,000 homes were destroyed or rendered unlivable by Katrina.

Add in the fact utility costs are up. Homeowner’s insurance costs are up. And property taxes have risen and the Crescent City is weathering another perfect storm-just one of a different sort.

Many who evacuated, or were forced out don’t have plans to return.

Scott said less than 40 percent of people polled plan to return to St. Bernard Parish to rebuild and little over half plan to return to Plaquemines Parish.

But where there is catastrophe, there is opportunity. The area can look forward to $15 billion in construction.

The city also needs to rein crime under control if it wants its convention market to come back.

“Crime is a big issue for the convention business,” Scott said.

Economists receding from housing market recession

Scott said he thinks the nation will get through the housing slump without a recession and almost all economic forecasters are lowering their numbers in housing.

He indicated a poll by the Wall Street Journal of 56 forecasters. Some three or four thought the slump in the housing market would lead to a recession.

One of the reasons the housing market will not cause a recession is the fact it only accounts for 6.2 percent of the nation’s $13 trillion economy.

And the problem in the market is mainly focused on the sub-prime area, which is only nine percent of the mortgage market.

Scott also said he believes interest rates are going to stay at a historically low level.

One of the problems caused by the housing market slump is what Scott referred to as the “Wealth Effect.”

When the market does well, home prices rise. So homeowners who made purchases in the past (when the market was cooler) literally gained wealth as the value of their homes inflated with the market.

Housing prices were inflated an average of 10 percent, but the inflation was mainly concentrated on the east and west coasts.

And some of these homeowners liquidated the difference, getting cash for the wealth they got without having to do anything. This extra cash, leads to spending.

But as housing prices begin to fall, they lose that original wealth and are left in a financial hole.

Scott said, nationally, a five percent reduction in housing prices equates to a trillion dollars worth of decline in wealth.

Coastal Commerce Bank, Louisiana Bayou Region and Louisiana Economic Development sponsored the event.