Seattle Bubble

Housing in the Northwest has continued to experience a climb in prices this year as other parts of the nation have stalled, but some are starting to see some cracks in the foundation, and predict that next year the housing market will “cool, but not collapse.”

Nationally and locally, the sizzling housing market has been one of the major props of the economic recovery. Homebuilding has turbocharged the Northwest construction industry: As of November, 19.5 percent of all new jobs created over the previous 12 months in Washington and Oregon were in construction, even though that sector accounts for just 6.2 percent of all jobs.

Housing activity has also aided the region’s lumber industry and boosted retail and professional-service jobs (all those new homes have to be furnished and paid for, after all). Soaring values have allowed consumers to tap the equity in their homes to support their spending: Last year, funds from home equity hit $599.5 billion and accounted for nearly 7 percent of all disposable income, according to the Federal Reserve.

So what’s in store for housing next year? Will growing pressure on consumers slow down appreciation? One economist actually admits this is likely:

But as mortgage rates creep higher and the Fed continues to tighten interest rates, nearly all observers expect the housing market to cool off next year. The big question is how fast it will do so.

“A year ago, I was saying ‘No, we’re not in a bubble — fundamentals are driving it,’ ” said William Conerly, a Portland-based economist. “Now, I think we are.

“So many people are buying houses for investment purposes, or they’re buying a vacation house because their stocks haven’t been doing very much and they see everyone else getting rich in real estate.”

I think it will be interesting to see what happens. If you have any specific predictions for the Seattle area in 2006, feel free to share them here.

(Drew DeSilver, Seattle Times, 12.20.2005)

Okay so that headline was a bit of hyperbole, but I’m allowed to have a little fun now and then. I just couldn’t help it after reading about the “Horizons Economic Forecast breakfast” in Pierce County:

With two weeks remaining, 2005 looks to have been a year of healthy, strong and fruitful economic results. Next year looks good, but not quite as good.

Such was the message delivered Thursday at the Tacoma-Pierce County Chamber’s 18th annual Horizons Economic Forecast breakfast.

The theme of the morning was magic, evidenced by a pair of strolling magicians as well as tricks – money and fire suddenly appearing – performed by master of ceremonies Joseph Beaulieu, senior vice president of Venture Bank.

What’s the economic forecast? Why it’s magic! More jobs, more money, happy times for everyone! Why? Because we say so, that’s why. And that “bubble” thing? Don’t worry your little head about that.

Lawrence Yun, managing director of quantitative research for the National Association of Realtors, said an increase in corporate profits in 2006 will mirror an increase in available jobs.
…
Yun lambasted reporters who have fostered an irrational fear of the “housing bubble,” wherein high home prices are said to be likely to implode.

“Scary news sells papers,” he said.

Yes, price growth is softening elsewhere, he said. But “in this region, prices are actually accelerating.”

And in fact, he predicted, the number of new-home sales will mark the fifth consecutive year of record growth. Prices will reach another all-time high.

If a representative of the National Association of Realtors says it, it must be true. Okay, I’ve had my helping of sarcasm for the day now.

(C.R. Roberts, Tacoma News-Tribune, 12.16.2005)

With unemployment holding steady last month at 5.6%, the Seattle Times brings us the details of the employment numbers’ relation to housing:

For the past year, the construction industry has been the main driver of economic growth in the state, accounting for a whopping 19.4 percent of all new jobs. Not so in November.

In what may be a sign of an impending cooling in the state’s red-hot housing market, construction firms hired 400 new workers last month compared with 2,400 during November 2004 and notably less than the average 1,075 monthly gains of the past year.

Although some anonymous commenters on this blog believe that the claims of construction accounting for ~20% of recent new jobs are “bogus,” that doesn’t change the reality that construction has been a major driving force in Washington’s economic recovery. And as such, I find it interesting and possibly meaningful that November saw such a relatively small number of new construction hires. Does this mean Washington has finally seen the peak of its housing market?

“It’s hard to tell what’s going to happen,” said Rick Kaglic, chief economist at the Employment Security Department. “We’ll need a few more months of data to know if the long awaited slowdown is upon us.”

Homebuilders assure it’s not.

“If homebuilders have one complaint, it’s the backlog of work they’re facing, not a decline in demand,” said Sam Anderson, executive officer of the Master Builders Association of King and Snohomish Counties.

I’m going to reserve judgment until I start seeing more signs than just one month of unusual numbers. If we start seeing numbers like this persist for 6 months then I’ll start to believe that we’re seeing a turn around. As I’m fond of saying, only time will tell.

(Josh Goodman, Seattle Times, 12.14.2005)

I was reading through a story about the King County Council’s 9-0 (4 absent) vote to increase county spending by $3.8 million on “pet causes” when I stumbled upon an interesting line:

Sims, though, said real estate tax revenue is down.

Considering all the stories I’ve been posting about government revenue going through the roof thanks to the housing boom/bubble, I find that a bit hard to believe. Either King County’s real estate tax revenues are declining while Washington State and nearly every local government within it is experiencing increasing revenue, or Ron Sims is just plain wrong. Also worth mentioning is a story I posted back in October which states in reference to King County: “Now, after several years of depressed revenues, sales-tax, property-tax and real-estate excise-tax payments are up.” If someone knows where I can access county budget records to uncover the answer, I’d love to hear.

In non-bubble related news, I found the following bits about Sims’ reaction to the spending amusing:

He said it erodes the “fiscal discipline” shown by the county in reducing its general fund by $137 million over the past five years to deal with revenue shortfalls.
…
“A veto is pretty dramatic.”

“I’m not interested in having warfare with the council,” he said. “At the same time, I am not interested in having to make serious cuts in the budget because of our appetite” for spending.

So, to sum up; Ron Sims is against excessive spending, and he might even do something to stop it. Maybe.

(Neil Modie, Seattle P-I, 12.14.2005)