State-Journal.com - Editorial: Debt crisis hits home

Frankfort is not an island. Any presumption that the capital city is somehow above the economic turmoil afflicting other communities around the nation should be dispelled by news that sales of single-family homes in the local market hit their lowest volume in 10 years during the first three months of 2008. Over the past three years, transactions for the first quarter have declined from $27 million in 2006 to $21.7 million in 2007 to $17.3 million this year.
The U.S. Commerce Department, meanwhile, reported last week that sales of new homes in March reached their lowest level in 16 years nationwide, and the median price for a new home fell the most in nearly 40 years.
The mythical nature of Franklin County's "depression-proof" economy was apparent more than a year ago. Even then, when many around here were only vaguely aware of "subprime" mortgages causing problems elsewhere, the county was seeing an increase in the number of foreclosure auctions, in which property is sold on the courthouse steps to recover unpaid debts. By the end of the year, the debt debacle had brought the nation to the brink of recession. Normally upbeat real estate agents were saying conditions for the buying and selling of homes were the worst they had ever seen, even in Frankfort.
Jack McDonald, a former builder and real estate agent who now operates HMC Associates, a local market research firm, says it's best to remain positive in his business, but he concedes, "sales are not up." Ever the optimist, he suggests the lousy weather in March could have contributed to the downturn.
As bad as it may seem, the local housing market is still steadier than in some places where sales were blowing hot before the party ended. State Journal reporter John Zambenini interviewed Dr. John Charalambakis, a professor of business and economics at Asbury College, who said Central Kentucky should not feel the degree of pain that has occurred in those locales, provided the credit crisis does not get worse.
This mess all started when buyers eagerly snapped up luxury homes, confident the rising values would soon turn big debtors into big investors. "Subprime" lenders opened the door for people without the wherewithal to buy half-million-dollar mansions. Then the low "teaser" rates on their mortgages went through the roof, leaving some owing more than their homes were worth. Next stop, the courthouse steps.
"Some people shouldn't have bought a house, anyway," in McDonald's judgment.
A bright spot is that the median sales price in Franklin County is continuing to increase, although the rate of appreciation is the lowest in 10 years.
Beyond the debt crisis, the next question is whether state government can continue prop up the Frankfort economy. The new budget assumes that thousands of state workers will exit through an enhanced-retirement window by the end of the year and many of them won't be replaced, thereby saving the commonwealth bundles. If that happens, it could lower demand for housing over the long term.
"Obviously state government isn't about to pack up and move out of Frankfort," said Michael Gammon of the Wilson Appraisal Group. No, but there's always the fear that the government bubble, like others before it, can burst, with dire consequences. These are times of sobering uncertainty for a town that's been accustomed to consistent if unspectacular growth.