Financial pain hitting home
While Wall Street has been ravaged by wild (and mostly downward) swings in the Dow, the crisis is hitting American towns in very different ways -- and just about everyone is feeling the crunch.

By Catherine Holahan, MSN Money
Karim Ben-Fredj doesn't need the government to tell him there's a recession. In his 11 years in business, he has never seen such poor sales at the Scentsational Shoppe, his fragrant-oil store in Bergenfield , N.J.

Revenue is down 35% from last year, he says.

"People are just afraid to spend money," Ben-Fredj said. "They are not coming in. . . . Originally I thought it was just me, but everybody is crying."

Small-business owners on Main Streets across America tell the same sad tale. Middle-class consumers -- reeling from a stock market crash, layoffs, plummeting home values and the inability to obtain loans -- have sharply reduced spending. They're not shopping in local downtowns, and they're not placing online orders. They're not even browsing store windows.

"We don't go out so often. I cook more often, and I try to buy less clothes," said Christina, a passer-by in Bergenfield who said her husband was about to be laid off.

"Everybody is losing their job right now."

As consumers cut back, businesses far from the epicenter of the financial crisis are feeling Wall Street's pain. Retail sales were down 1% in September, compared with the same month last year, according to the U.S. Census Bureau. More declines are expected. Sales tax revenues, an indicator of consumer activity, are projected to decline 4% nationwide this year, according to a September report by the National League of Cities.

"We have an early sign that things may be worse than they have been," said Chris Hoene, the league's director of policy and research. "People are not making purchases because they are worried about what is happening with the economy."

What's happening is a perfect storm of economic problems. Declines in the stock market and the housing market -- the latter was down nearly 18% in September compared with last year -- have radically reduced the net worth of many homeowners who were happy with their financial positions a year ago.

Meanwhile, banks, anxious about massive losses in that industry, have clamped down on lending across the board, further discouraging spending by businesses and consumers. At the same time, prices for heating oil, gasoline and commodities have risen over the past two years, adding to the stress on household budgets and the bottom lines of businesses.

As spending decreases, businesses see lower revenues and respond by laying off workers. Laid-off workers can't pay their mortgages. When those workers default and lose their homes, the addition of those homes to the pool of unsold properties increases pressure on the housing market and drives down prices more. Further decreases in home values tend to reduce consumer spending.

"It is definitely a vicious cycle," said Daren Blomquist, the marketing communications manager at RealtyTrac, an online marketplace that focuses on foreclosures. The company saw a 12% rise in foreclosures in August, according to its latest report.

Bergenfield, in northern New Jersey , is a perfect example of the far-reaching effects of the downward spiral.

Home foreclosures in Bergenfield jumped 400% in August, according to RealtyTrac, with 30 homes in foreclosure, compared with six in the same month last year. That may not sound like much for a town with about 9,000 households, but the foreclosures are indicative of larger problems in Bergenfield 's housing market. Average sale prices have declined nearly 35% in the past year, according to online real-estate guide Trulia.com.

The decline in home values has been all the more upsetting because residents had seen prices increase steadily for years and had become accustomed to ferocious demand for housing.

Rosenaldo "Onnie" Maliwanag, the owner of RRM Realty in Bergenfield, says the community's homes once sold for well above asking prices, as buyers vied to outbid one another for a house in a pleasant suburb less than an hour's commute from New York City .

Two years ago, homes put on the market in Bergenfield were sold within two months, frequently at prices well above the asking prices, Maliwanag says. Now, sellers who purchased in the past several years are offering their homes for less than they paid. Even at reduced prices, homes sit on the market for nine months or more, Maliwanag says.

Bergenfield 's business district has been hit hard. Along South Washington Avenue , the main business strip, "for rent" and "for sale" posters are prominent in empty storefronts. Most restaurant tables remained empty during lunch hour one recent weekday. South Washington saw plenty of auto traffic that day but little of the foot traffic that brings sales to local merchants.

For business owner Ben-Fredj, it was a long afternoon.

"People just don't have the money with gas prices and everything," he said.

Other shop owners along South Washington used such adjectives as "horrible" and "slow" to describe recent business activity. From restaurateurs to the neighborhood dog groomer, all spoke of seeing fewer customers than in previous years.

"They ask to cut the dog's hair shorter so they don't have to come back as often," said groomer Dina Andriychuk, the owner of the Pet Beauty Institute.

The few shoppers on the avenue said they have had no choice but to cut back. One mom out for the afternoon with her three kids explained how higher prices are squeezing a stagnant household income. A clothing designer, she said her employer had seen fewer orders and that the slowdown had her worried about her job. She had begun clipping coupons and reducing spending to guard against a household budget crunch.

"The prices are so high on milk, meat, even a snack," she said. "It is getting pretty rough. If things get really bad and I do happen to need a loan, I don't think I'll be able to get a loan."

The town of Bergenfield is in the same boat. Fewer sales in local shops mean reduced revenue from sales taxes -- a challenge facing hundreds of cities across the country. When cities feel the pinch and cut spending on services such as road maintenance and police, home prices can sink further.

"This is all very cyclical. In the good times, states and localities spend more and boost the economy," says Jeffrey L. Esser, the CEO of the Government Finance Officers Association. "When the economy goes downward, they start cutting just like other sectors, and it has a further negative impact."

There may be hope on the horizon. If the federal government's efforts succeed in thawing the credit markets, bringing mortgage rates down, mortgages would be easier to arrange, thus boosting home sales.

But such a turnaround could take a long time.

"If we look at the last time we saw such a housing market decline, it was a good four or five years before we saw a growth period," says the National League of Cities' Hoene. "It was a very slow recovery."

Produced by Darragh Worland

Published Oct. 16, 2008