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Friday, September 22, 2006

Housing Continues To Buoy State Budget

Here's the latest news on the state revenue front. Housing continues to be the life vest keeping the state budget afloat.

The state budget picture got even brighter Wednesday when its chief economist predicted the state would close out its books for the current two-year spending cycle with a surplus of more than $1.8 billion.

ChangMook Sohn, executive director of the state Revenue Forecast Council, said tax collections for the 2005-07 budget period will be $350 million higher than expected, now reaching $27.3 billion.

Collections for the following two-year period will be $62 million higher than previously thought. High employment, strong home sales and more business spending are fueling the growth of tax collections, he said. Although the national housing market is starting to slow down, it’s still strong in Washington, Sohn said.

That means that state is collecting more real estate excise taxes, which are paid on the sale of homes. It also means the construction industry is still producing a lot of jobs. In addition, the kinds of jobs being created in Washington are the higher-paying variety, such as those in construction and aerospace.

On the other hand, consumers are still spending a lot more than they’re earning and that can¹t continue indefinitely, Sohn cautioned. Consumers are tapping into their home equity, credit cards and loans to pay for their spending spree, he said.
Mr. Sohn has been has been warning for a good while now that the pleasant budget picture is unlikely to continue once the housing market in the state really slows down. One would hope that those in Olympia are listening, but personally I'm not going to hold my breath.

Interestingly, the Seattle Times has a different take on the matter. Business reporter Alwyn Scott claims that:
Washington's growth is being fueled by strong aerospace, software and construction employment, and people moving to the state, which helps underpin demand for houses.
Saying that strong construction employment is (indirectly) fueling demand for houses seems like circular logic to me. But let me take a moment to ponder a few facts about aerospace and software, which are really just code words for Boeing and Microsoft. Together, those two companies provide just under 100,000 jobs in Washington State (Microsoft: 33,000, Boeing: 66,000). I don't have the totals for all the smaller companies, but if you assume that together they double the total number of jobs in those fields, you're talking about roughly 200,000 jobs. According to the Office of Financial Management, annual migration is currently at 81,000 people per year. Unless the aerospace and software industries are growing at a rate of 20% per year (40,000 new jobs), it seems like a stretch to me to claim that they are the primary fuel of Washington's growth. For reference, Microsoft had an unusually high jump in its local workforce last year, increasing their ranks by 13%.

That being said, way down at the end of the article, Alwyn does manage to admit that housing might slow down, and bring the state economy with it:
The biggest risk to the economy is the possibility that house prices will stop climbing, economists said. Washington is the nation's sixth-hottest housing market, with prices rising 17.4 percent in the year through June. However, high prices and rising mortgage rates are making homes tougher to afford, [Dick]Conway said.

Washington's home sales already are slowing. Now, with prices slowing down nationally, the question is, "Will Washington state be far behind?" in seeing price gains slow down or decline, Longbrake said.
That's the question of the hour, isn't it? Are we super special and magically immune to the housing ills afflicting other cities & states around the country, or are we just the last ones to catch the housing bubble flu?

(Joe Turner, Tacoma News Tribune, 09.20.2006)
(Alwyn Scott, Seattle Times, 09.21.2006)

5 comments:

Anonymous said...

With many economists expecting prices to go back to year 2000 levels, isn't it a stretch to think that, while that's happening elsewhere, prices in WA will keep magically surging ahead?

synthetik said...

Excellent article. I went to a luncheon downtown on weds to listen to the Governor speak.

She claimed that her programs took the 2.5B shortfall into a 2.5B surplus today. That gov't took on a limited role to help grow private industry, etc. I wasn't here so I don't know what happened.

No mention of Real Estate.

It sounded like she's gearing up to spend a lot of those tax revenues. Her 3 main initiatives in order of importance are:

1. Free Healthcare for everyone
2. Make Education a priority
3. Better economic opportunity for everyone (kinda vague no?)

I don't know donkey about what you guys went through after 2001, but I know it wasn't pretty. Sometimes politicians just catch a lucky break - right place/right time.

Other highlights from the speech:

1 in 3 WA jobs depend on foreign trade, 180K jobs created since 2004; wants to get rid of passport requirement re:canada; wants system to check all incoming cargo to port; supports guest worker prog, supports offering tax incentives to lure foreign investment but with job accountability.

Several ppl in the audience wanted to know why it was so hard to get visas for the workforce they were trying to bring over. That's a clear indication we need some serious edumacation.

She also mentioned that in her meetings with other countries the two biggest questions for the region were education (will they be able to find intelligent life forms here?) and transportation (will they be able to get them and their products to work).

So do you guys feel that her programs had nothing to do with the surplus? That was my impression, but, again, I'm new.

Eleua said...

While I understand the rationale with prices rolling back to the beginnings of the current bubble, why not roll back prices to where they were prior to the previous bubble?

The next recession will be the catharsis for both the stock bubble and the housing bubble.

I'm thinking we will need to square the aftermath ugliness. This would be uncharted territory, so it's anyone's guess.

Prices could go back further than '97.

settle price drop said...

Eleua-

I'm thinking that by this time next year, these economists will be predicting a retrench back to '97 prices.

In fact, about a month ago there was one group that was already bandying that notion around. To be exact, they said "10 years" which puts us at '96.

Interesting to watch the relationship between the "how many years you need to stay in your house to make the purchase worthwhile" camp and the "how far back in years prices will retrench" camp.

Both are walking in lock-step. And both are increasing in # of years.

Eleua said...

SPD,
I think this shows that economists have no idea what is going to happen in 6 months, much less 6 years.

12 months ago, it was clear sailing to $1M homes, with no retrenchment whatsoever. Now, all that has been broomed.

What changed? I would say nothing. This, and similar blogs, have chronicled all the problems facing the housing market, and we have not changed our tune over the entire life of this blog. I'm the biggest broken record here (save 'shug).

Economists make predictions that change like weathervanes. They want to look good NOW, and making a radical prediction is a risk they won't take.

This should suffice to show how the average J6P should not base major economic decisions on the musings of professional economists, or anyone that stands to be enriched by their actions (re agents, loan sharks, get-rich-quick book schleppers, etc.)