Housing Gains Trigger Uneven Small Business Recovery
By all accounts, it looks like the long-awaited economic recovery is finally under way for small businesses. But there's a caveat.
The stock market is back to pre-recession levels, housing prices are recovering nationally, the unemployment rate is trending lower, and business confidence is improving.
But things may not be as great as they seem. Just as the wealthiest were least affected by the economic meltdown, the recovery for small businesses is most noticeable for a narrow subsection of business owners who were positioned to benefit from gains in assets such as the stock market and, more notably, the run up in real estate prices. Mostly, that means business owners who already had the capital to buy into the desirable higher-priced markets that have recovered fastest.
"A very small proportion of the economy is benefitting from the rebound in home prices," says Mark Vitner, senior economist for Wells Fargo in San Francisco. While home prices are increasing, there are about 100,000 fewer home owners now compared to a year ago, Vitner says, adding that the small businesses most likely to benefit from the run up in stock prices are ones that cater to high-end customers.
One entrepreneur who has benefitted from increasing home values is Russell Lundstrom, who along with his sister Julia, launched Simple Smart Science, a supplement company that will sell brain nutrition products. The duo launched the Denver, Colorado company about a month ago, after they secured a $125,000 home equity loan from a regional bank.
Lundstrom says the value of his house, which he bought for $450,000 in 2007, has returned to its pre-recession value, with most of the increase--about a 10 percent jump--coming just in the past year.
And the home equity loan, with a rate under five percent, was a better deal than other sources of lending, such as bank loans, which would have been more difficult to get, Lundstrom says.
"The Small Business Administration does not do pre-revenue funding, and startup funding is nearly impossible," Lundstrom says.
Home prices in 98 of the 100 largest cities increased 9.5 percent year over year for May, according to Trulia Price Monitor's latest survey of cities with asking price increases. Increases in the 10 most affordable cities, including Atlanta, Dallas, and Detroit, rose about seven percent.
While entrepreneurs with sterling credit ratings, full-time jobs, and money in the bank have continued to secure loans and credit lines, banks have been pulling in their home equity lines of credit for years. Home equity balances at all commercial banks decreased by more than eight percent to $498 billion in April 2013 compared to the same month a year earlier, according to the most recent Federal Reserve Board data.
And at large banks such as Bank of America, home equity originations fell 23 percent to $2.8 billion for 2012 compared to the previous year. Quarter over quarter, outstanding balances for home equity loans fell 4 percent to $105 billion for the quarter ending March 31, 2013.
"Going back to 2010, the home equity loan market has been collapsing, and it's been down significantly in every quarter" since then, says John Dunham, managing partner of John Dunham & Associates, an economic consultancy in New York.
Home equity loans are traditionally a major source of capital for small businesses--making the last few years' declining values a double-whammy for business owners tho are also homeowners. Those who managed to secure credit lines before the crash began have held onto them tightly. During the tepid recovery, the majority of small businesses have either started up or done what little expanding they've accomplished using personal resources or free cash flow, rather than loans, experts say.
Bruno Francois, founder and chief executive of Cycloramic, a smart phone application development company, based in Atlanta, applied for a home equity loan about a year ago from the Private Bank of Buckhead.
Francois was fully employed at the time as a computer scientist for a private company. The bank extended him a $250,000 line on a house he'd bought in 2010, and the line allowed him to leave his job and start his company. Cycloramic, which has three employees, is profitable and on track to have $750,000 in revenue this year, Francois says.
"I could not have done this without the line of credit," Francois says. "I had to live without a salary while I was developing the product, and I had to pay for programmers."
Similarly, Tim Murphy, the co-founder of Motion Works Physical Therapy, in Neenah, Wisconsin, recently tapped a home equity line he and his wife got when they purchased their house for $415,000 in 2009.
Home values in the area soon dropped by about 10 percent. Though Murphy says he hasn't recently had his house appraised, he said he thinks values are rising, as owners are starting to sell houses in the area and more houses are being built in the area.
They've used the $50,000 line, plus a $125,000 loan from SBA, to help build out their new office space, including adding treatment rooms, computer equipment, and other items necessary to run the business.
The terms on the home equity line of credit were better than SBA loan, Murphy says, with the former offering a rate around five percent and the latter charging about seven percent.
"We have been doing really strong business pretty much this whole year, form January to now, so we are cautiously optimistic that things will stay strong through the summer," Murphy says.