Big money worries even affect small, formerly remote Island

By Steve Myrick
Published: October 9, 2008

While financial upheaval roils Wall Street, New York, and political wrangling occupies Capitol Hill, Washington, D.C., Main Street, Martha's Vineyard is already feeling the affects of the downward spiraling economy in concern about bank stability, the construction industry, home prices, and charitable donations, say local business leaders.

While the Vineyard may be somewhat insulated in some economic sectors, it is not immune from uncertainty, and as on Wall Street, doubt about the economic future underlies concern for even the healthiest of Vineyard businesses. Yet several Island business are looking for, and finding, silver linings in the darkest of financial clouds.

The impact of failing banks, frozen credit markets, and unchecked fear among those who make decisions about huge chunks of investor capital hit the Bank of Martha's Vineyard last week in a way that senior vice-president Paul Watts described as very scary.

Among the worries inspired by the global financial crisis, Vineyard business owners wonder if shoppers will be as numerous and generous as they've been in recent years.
Photo by Ralph Stewart

The bank is a branch of Sovereign Bank, which saw its stock price plunge 72 percent when two large European investors sold all of their stakes in the Philadelphia-based bank. Both of those investors were already burned by the failure of Washington Mutual Bank, and the sale of Wachovia Bank.

Moody's Investor Service, a widely watched rating agency, downgraded its ratings on Sovereign Bank on September 2, citing the bank's sizable exposure to mortgage lenders Freddie Mac and Fannie Mae.

Sovereign Bank also replaced its chief executive officer in a move designed to restore confidence among investors.

All this, though Sovereign Bank, including its Vineyard branch, remains a healthy institution, according to Mr. Watts. "We're a strong branch, we're doing well. The bank has $12 billion in cash reserves. We're still making loans, we're still interested in making loans. Our deposit base is staying loyal to us," said Mr. Watts last week.

The bank's stock price rebounded from a low $2.20 per share last week, to $4.54 after the close of trading Wednesday.

The other two Island banks, Martha's Vineyard Savings Bank and Edgartown National Bank, have also spent much of the last few weeks reassuring customers of their financial health.

"Earnings were very good this year, our loan portfolio is very strong," said Fielding Moore, chief executive officer of the Edgartown National Bank. "That's helped us. People are moving money out of investments and putting money where they feel it's safe. We actually have money coming in."

"We're in great shape," said Bob Wheeler, executive vice-president of the Martha's Vineyard Savings Bank. "We're very highly rated by the various bank rating companies."

While executives at all three Island banks say they steered clear of the risky loans and complex investments which have toppled large commercial and investment banks, they are concerned about the effect a Wall Street crisis will have on the Main Street economy.

"We're concerned about what the impact is to the economy if there aren't some measures taken to alleviate the credit crisis," said Mr. Moore. "That really drives the economy. We're not part of that but ultimately it will affect us if the economy suffers and we go into a very deep recession."

Mr. Wheeler said the real estate and construction sectors are already seeing the impact of a softening economy, but he has not seen signs of a slow-down in the retail or tourism sectors. "It's tough to know this time of year," said Mr. Wheeler. "Things are slowing down from the summer, but is it just the normal slowdown? They [retailers and restaurants] were mobbed this summer. Some of the higher priced restaurants were down a little bit, but the Linda Jean's of the world did pretty well. The people that were here weren't buying like they have in the past."

Stimulus plan from Landmarks

For the real estate industry, a fundamentally different way to sell property reflects a fundamentally different real estate market.

For a 10-day period beginning this weekend, Coldwell Banker franchises across the country, including Coldwell Banker Landmarks Real Estate here on the Vineyard, are offering land and homes at sale prices.

"About a third of our listing inventory is going to participate," said Sean Federowicz, a principal in the real estate firm, "to see if this initiative will put the spotlight back on the Vineyard. We're trying to generate some interest in a time of general malaise."

The sellers of 16 homes, and three land parcels, have agreed to reduce their asking price by 10 percent during the sale period. The agency is kicking in promotion and a coordinated open house event.

"We know there are buyers out there, they just need a compelling reason to take action," said Mr. Federowicz. "I think sellers have come to the realization that they can't hold themselves out reaching for the brass ring. They have to be more in line with what the market will bring."

While the local market can be very lucrative for real estate professionals, with many properties in the seven- and even eight-figure range, it is also a complex process, made more complex by the current turmoil in financial markets. Mr. Federowicz says buyers entering the Vineyard market for the first time often bring assumptions based on past home buying experience.

"We've got apples to oranges to pineapples, to bananas," said Mr. Federowicz, in describing the vagaries of real estate sales in Island towns. "In Vineyard Haven and Oak Bluffs, some properties are being sold under assessed value. In Chilmark, it's at value. Edgartown, there's a premium to assessed value. There is lots of negotiation; every deal seems to be a challenge."

Housing hit

Business leaders say the upheaval on Wall Street is not directly impacting local construction and real estate interests, but the resulting plunge in confidence is already having a significant effect.

The well-documented downturn in new construction across the country has caught up with Martha's Vineyard in the past six months. "There aren't many 'spec' houses getting built," said Mr. Wheeler.

If the national trend in rising unemployment is to be felt here on the Vineyard, it will likely be in the construction sector, but local builders are just beginning to see evidence of that. "It's not that people don't have work, it's that there's less resiliency, less backlog," said John Abrams, president of South Mountain Company in West Tisbury. "Some clients are slowing or postponing some projects. That is of course a concern to us, because we have to keep 30 families in work."

Mr. Abrams does not expect the financial turmoil to affect employment at his firm in the foreseeable future, adding that the door is not closing on the construction industry, it's just tightening a bit. He said that a politically popular sweetener added to the $700 billion financial bailout bill signed into law last week was a renewal and an increase in the tax incentives for renewable energy. "Our renewable energy and energy efficiency business is booming. People are coming to us, both business and residents."

John Jones, a Vineyard Haven contractor, says his firm has shifted its focus away from residential construction, to larger projects such as the new Martha's Vineyard Hospital, and state-approved contracts in order to soften the effects of the downward trend.

"We kind of saw some of this coming," said Mr. Jones. "Everything I've heard says that things are really tight. I've heard that guys that don't normally have to bid are bidding. There is a lot of competition. If you weren't known for quality, you're probably sitting at home."

He also sees evidence of a growing unemployment rate among construction tradesmen.

"I probably had a hundred calls in the last three months, from people looking for work. I get at least two a day," said Mr. Jones.

Location, location, concern

In real estate, the financial decline is evident in the number of houses on the market. Usually, there are about 300 properties for sale on Martha's Vineyard at any one time. At the end of September, there were 844 properties for sale, with a small percentage of those under agreement to purchase, according to LINK Martha's Vineyard, a listing of available properties used by local real estate firms. There were 611 single-family homes on the market. According to figures compiled by LINK last month, the average sale price of single-family homes has fallen approximately 26percent, when compared to the same year-to-date period last year. While those figures can be skewed by the sale of a few properties in one sub-category or another, it is clear that prices are falling in some sectors of the market.

Sean Federowicz, a principal at Coldwell Banker Landmarks Real Estate, says many potential clients, who were already at some stage of the house hunting process, are telling him one of two things. "They're putting it off, or they're going to come and look, but they're not going to execute by the end of the year," he said.

Once an asset manager for several Wall Street investment firms, Mr. Federowicz added, "I've yet to find credit being a problem just yet. A buyer already knows what they can afford, but no question people are taking a wait and see attitude. Some of the folks who were expecting to leverage their portfolios (cashing in investments to buy homes) have lost 20-30 percent in this craziness."

Tom Wallace, a principal in Wallace & Company Sotheby's International Realty, says he is reasonably optimistic about the future. "I think we're going to see market changes, you're going to see people being very conservative in their decisions," he said, adding that the limited supply of properties, a lower rate of debt, and the upscale image of Martha's Vineyard are several factors that may insulate Martha's Vineyard from a severe downturn. "You certainly can't go to waterfront properties and say they're selling for 25 percent less. The appeal seems not to be diminishing."

Sharon Purdy, president of Sandpiper Realty, said the disruption of financial markets earlier this month had a definite effect on the local real estate market, but she sees it as part of a cyclical trend that began in 2005. She cited the number of sales across Martha's Vineyard that show a downward trend, from 564 in 2005, to 423 in 2006, and 394 in 2007. Sales so far this year are on pace to show another dramatic decline.

"If you look at the numbers of sales, it's very evident that buyers have been sitting back, not just in this recent debacle, but prior to that," said Ms. Purdy. "If you look at the past 30 years of real estate, you typically had a 10- to 12-year cycle. We were way over due. That run kept up because of sub-prime lending and the financial markets that enabled it."

No budget bailout

In Oak Bluffs, finance director Paul Manzi is watching events closely, and shifting his strategy from conservative, to "as conservative as possible." He says the town completed the sale of bonds to fund several large town projects before the turmoil peaked, getting lower interest rates because of an improvement in the town's credit rating.

"Timing is everything," said Mr. Manzi. He says the town's cash reserves are more than adequate, with the recent certification of $324,000 in free cash available for town approved expenditures, and approximately $1.3 million in a stabilization fund for unexpected costs.

The town does not normally borrow money to fund operations as some large cities and states do, but Mr. Manzi took steps last week to make sure credit lines are in place if needed, and also to reduce town's risk.

"I did move some of the money from Sovereign Bank," he said, "to diversify our funds."

But there are rumblings about spending cuts at the state level that will likely trickle down to Island towns. Governor Deval Patrick recently said that cuts in local aid (the tax revenue the state returns to cities and towns) are a last resort.

September totals for collecting state revenue are among the highest of the year, but revenues were down 4.9 percent this September, compared to September 2007. A large part of that decrease is a 13.4-percent drop in revenue from corporate taxes, indicating that the state's largest businesses are not making nearly as much money as they did last year.

"You're going to feel this in services and people are going to feel this in the state payroll," Governor Patrick said, according to the Statehouse News Service. "This is not going to be easy or pleasant."

At the local level, the governor's comments are being interpreted as a clear signal that belts must be further tightened.

In Oak Bluffs, department heads have been told they must come up with level-funded spending plans for the next fiscal year. That means increases in fixed costs, including salaries, must be offset by cuts somewhere else.

A sense of urgency is already apparent. "We usually don't go through this process until November, December," said Mr. Manzi. "We've started the budget process a couple of months early."

Charity chill?

Patrick Manning, executive director of the Island Affordable Housing Fund, says that he has seen a direct correlation between recent fundraising and the turmoil on Wall Street. Over the last several months, the fund was overseeing the raffle of a market-rate home that was build as part of the Jenney Way affordable housing project in Edgartown. Only 600 tickets were to be sold. Mr. Manning said the raffle attracted a lot of publicity, and sales went well over the past two months, with his organization selling five or six $1,000 tickets per day.

Beginning September 7, however, when the federal government took control of mortgage lenders Fannie Mae and Freddie Mac, ticket sales decreased dramatically. "Right about that time is when things ground to a complete halt," said Mr. Manning. "For us it was just a fun way of selling the house in a very slow real estate market. There are highs and lows in the economy, and this is a low. We need to be realistic." According to the rules of the house raffle, at least 550 tickets needed to be sold for the raffle to go forward. Short of that target, the Housing Fund board decided to end the raffle, and return the money for tickets already sold.

Mr. Manning says so far, wealthier donors and foundations are holding steady, but people donate from their discretionary income have become more reluctant. "Those who might give us $100 or $500 are thinking twice," he said. "They're trying to figure out 'do I keep that money in the bank, or am I okay to give that out.'"

Mr. Manning says fundraising over the past six months has been more difficult. "It's working three times as hard to show their dollar is well spent," said Mr. Manning. "It's working three times as hard for the same result, but we're okay with doing that."

Christine Todd, director of the YMCA capital campaign, takes an equally pragmatic approach to the downturn in financial markets, and how that might affect donors who want to help fund a new building for the "Y."

"Of course everybody is concerned, but we remain optimistic," said Ms. Todd. "There are a lot of very generous people out there. You have to look at what's happening, take a deep breath and plunge forward. I don't think it makes any difference if you worry or not. If you start to focus on that, you take your eye off what you might have accomplished."