The Financial Crisis: One Year Later

by Mark G. Holbrook, ECCU President/CEO
(Originally published as a post within ECCU’s former e-publication, The Buzz.)

How will this financial crisis end? It’s been a year since I addressed this question in an article introducing a new weekly ECCU resource—The Buzz. Let’s look at what has transpired since then.

The past year has been every bit as tough as expected, but thankfully no worse. Unemployment is flirting with 10 percent, but depression-level unemployment (25 percent) is nowhere in sight. Most economists agree that we will see a slow, modest rebound in employment as the economy improves, probably starting in the second quarter of next year. Some are predicting a “jobless recovery,” meaning that as business improves, companies will be slow to hire. They are wringing out every possible ounce of productivity from existing capacity, waiting until demand is more predictable before committing to higher payrolls.

Bank failures are just about on target with predictions. I reported last year that at worst 200 banks would fail in this cycle. The most current Federal Deposit Insurance Corporation (FDIC) report shows 106 failures so far this year, and a total of 133 since the start of 2008.

Housing prices have firmed up in some areas as investors have reentered the market, but billions of dollars in new foreclosures are expected in coming months, almost guaranteeing that any recovery of housing values will be minimal. It will be a long time before homeowners are able (or willing) to tap into equity to fund discretionary spending.

Economic recoveries are generally driven by consumer spending. A weak job market and low homeowner equity will continue to dampen consumer confidence and spending, assuring a long and perhaps jagged recovery.

The commercial property market has lagged behind residential housing, but is now experiencing significant stress. Low occupancy rates and rent concessions are driving defaults up and commercial property values down. This cycle will place further stress on the economy for some time.

Fortunately, most churches are not affected by this trend, since their values are not driven by rent. Churches’ properties are “owner occupied,” and the great majority of them are not looking to sell. One caution: Churches with mortgages that are more leveraged (loan-to-value ratios approaching 80 percent) and with loan maturities coming due may find their property worth less than when they originated their loans. This situation could make it more difficult to refinance. Churches that might face this situation should contact their lender soon to discuss options. (ECCU is glad to work with ministries to find wise and appropriate loan solutions.)

What can we expect in 2010?

For now, it appears that a recovery is emerging amidst mixed signals. Unemployment hasn’t peaked, but is expected to do so relatively soon. Business productivity is up, and consumer demand is showing modest but positive gains. Banks are starting to lend, though credit standards will be much tighter for years to come. Investors, who have hoarded cash for the past year, are slowly beginning to make equity investments.

Ministries are reporting mixed giving patterns. Most healthy ministries with stable leadership teams that practice conservative financial management are seeing steady or even growing income. Those churches and ministries experiencing declines in giving have generally made appropriate and necessary budget adjustments.

In planning for next year, ministries must continue to budget conservatively and monitor their financial performance closely. A key to financial stability in these economic conditions is to respond quickly to negative trends. Those who delay, hoping things will improve on their own, will soon face even greater challenges. Therefore, a 2010 budget finalized in November or December of 2009 may need to be adjusted as the year progresses. Any recovery will be weak and fragile, and the “trickle down” to the offering plate could lag by months, a year, or even more.

Given this economic picture, I’m compelled to conclude this update exactly as I did that first article of The Buzz last October: “For ministries, the challenge will be to judiciously manage their funds and make adjustments that allow them to keep pursuing their mission.”

Then again, fulfillment of our shared mission has never depended on dollars, but on the God from whom all things come.

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