Posted: Sep. 28, 2008

A corporate executive was about to buy a new $700,000 house in Waukesha County last week, but then had second thoughts.

The uncertainty of the Wall Street financial crisis and the misgivings it’s stirred about the overall economy prompted him to hold off, said Brian Wickert, president of the Butler-based Accunet Mortgage.

“He said, ‘Like millions of other Americans, I’m worried about what’s going on, so I’m not going to do anything,’” Wickert said. “Here’s a guy who’s perfectly secure in his job, has hundreds of thousands of dollars in the bank, and that’s the kind of chilling effect that you have. Even well-qualified buyers are backing away from the table.”

The crisis on Wall Street has spurred a lack of confidence on Main Street. And it comes at a time when Americans already were retrenching because of a slowing economy, financial professionals say.

Some economists insist the U.S. already is in a recession, even though it hasn’t met the traditional definition of two consecutive quarters of contraction in the Gross Domestic Product.

“Although we haven’t had two down quarters of GDP, we’ve had eight months in a row of declining jobs, which only happens in a recession,” said Bruce Bittles, economist for Milwaukee’s Robert W. Baird & Co.

In any slowdown, but especially one that can be traced back to falling housing prices and a record number of foreclosures, Wisconsin — which tends to avoid market extremes — should fare better than a lot of states, business people and public officials say. But it’s far from exempt.

Some fallout so far:

• Although banks say they have plenty of money to lend, more consumers and businesses have to meet tougher credit standards or pay more to get loans.

• Businesses, sensing a downturn or having higher finance costs, are more reluctant to invest in new equipment. Some, such as condo and subdivision developers, could have trouble finding banks offering new loans at all.

• Consumers are increasingly nervous about their jobs and their personal financial situations — a worry heightened as they’ve watched their retirement investments stumble amid turbulent markets.

Normally, economic weakness is at the root of a stock market’s downturn. But in this case, it’s been turmoil in the stock and credit markets themselves that is hurting the economy, Bittles said. The nation hasn’t experienced a similar situation since the 1930s, although safeguards like deposit insurance and the Federal Reserve’s ability to add liquidity to the system are mitigating factors, he said.

The result is that consumers and businesses are anxious.

“I think in a situation like we have now, people really are being more careful in terms of their spending,” said Cynthia Jasper, a University of Wisconsin-Madison consumer science professor.

Consumer spending, which represents about 70% of the U.S. economy, holds enormous sway over which way it goes.

The wheels of commerce continue to turn around the state, but more cautiously.

Lou Banach, a banker who just joined Schenck Business Solutions in Milwaukee to co-lead its merger and acquisition practice, said credit is still available in Wisconsin.

“I think there’s been a tightening, but not a freeze,” Banach said.

He said many banks are internally focused right now, making sure their capital levels are strong and identifying any potential bad debt on their books, rather than in their normal mode of pursuing new business lending.

“I think the dial kind of moved away from loan growth to portfolio management,” Banach said.

Michael T. Crowley Jr., chairman and chief executive of Bank Mutual Corp., Brown Deer, said money’s available to lend, but business borrowers are learning “things are changing.”

“The people who have a good business plan or have a viable operation, they can get credit,” Crowley said. “A lot of them are not borrowing, though, because they are not investing in new equipment because they are not sure they can get paid back for that investment based on the economy.”

Banks are pickier about business loans and aren’t competing very hard with other lenders.

“Banks are not going to take on some other bank’s problems,” said Banach. “They are going to be looking for pristine loans, and under their terms and conditions.”

Jeff Hall is president of Real Estate Recycling Inc., a Minneapolis-based firm that specializes in buying environmentally contaminated lots, cleaning them up and building new buildings on them. Two years ago, Hall said, developers could get as much money as they needed from lenders. “You had banks handing you money,” he said.

In some cases, commercial loans were covering up to 90% of the value of the development, he said. That was “crazy aggressive,” Hall said.

Now, some lenders are only willing to loan up to only 65% of the development’s value. That’s “crazy conservative,” he said. “It will reach equilibrium at some point,” Hall said.

With the Christmas shopping season approaching, some retailers are carefully managing inventories, wary that consumers may be less inclined to shop if they feel uncertain about their financial security.

Crowley said any business that relies on consumers’ discretionary income could see a falloff in business.

“You’ll see that in the restaurant business, in some of the specialty clothing stores, the full-price retailers,” Crowley said.

How long the slowdown will last is anyone’s guess, but it’s difficult to find experts who think it will be soon. Crucial to an economic turnaround is for falling house prices to hit bottom. That will make it easier to price mortgage-backed securities that have been at the heart of the credit crisis, and should begin a revival in home buying.

Sara J. Walker, who is an economist and senior vice president and investment officer for Associated Wealth Management in Milwaukee, said there aren’t any signs pointing toward an early end to the downturn.

“I think consumers have pulled back on spending, and if the job market weakens from here — which I think it could — I don’t think we’re going to see a real snap-back for some time,” Walker said.

Baird’s Bittles said he expects economic conditions to improve by mid-2009. Crowley thinks it could take longer than that. “Maybe at the end of 2009 it will start perking up,” he said.

But that doesn’t mean the economy will grind to a halt or that no one will buy a house.

“You can walk into any bank today and get a mortgage if you have decent credit scores and you’ve got a job,” Crowley said.

Accunet’s Wickert said his mortgage company actually is having a strong year, but that a lot of business is coming from refinancing instead of home purchases.

“Buying a home, especially if it’s your first one, takes confidence,” Wickert said.

That means confidence in keeping a job, that savings and investments are secure and that the home will retain its value, he said.

“In reality, it’s a very good time to buy a home in southeast Wisconsin,” Wickert said. “There’s plenty to choose from, sellers are willing to deal, and 30-year fixed rates are hovering around 6%. But the large majority of people make their financial decisions with their heart, not their head. If they’re worried, the natural response is to sit still.”

Tom Daykin of the Journal Sentinel staff contributed to this report.