Slow Sales Continue to Drag Down State Revenue

Dramatically slumping real estate sales across Washington State continue to drag down State revenues, adding to an already bleak budget picture.

From the latest state revenue collection report (pdf):

Taxable real estate activity remained weak in February. Real estate tax activity reported by the counties was 56.4 percent below their year-ago level. January receipts had declined 47.1 percent year-over-year. Taxable real estate activity has declined twenty-five of the last twenty-seven months on a year-over-year basis.

The weakness in real estate activity is evident both in the number of transactions and in the value per transaction. A breakdown of the number of transactions and value per transaction is not available for February but for the month of January the number of transactions was 19.4 percent below the year-ago level while the average value per transaction declined 34.4 percent. The number of transactions has declined on a year-over-year basis thirty-seven of the past thirty-eight months. The value per transaction has declined on a year-over-year basis for sixteen of the last seventeen months.

Although real estate excise tax revenues came in 5% higher than forecast for February, they made up just 3.8% of the total General Fund-State revenue.

Compare this to the March 2007 Economic and Revenue Forecast (pdf):

The real estate excise tax is the General Fund-State’s fourth largest revenue source. Real estate excise tax receipts are expected to increase 44.9 percent in the 2005-07 biennium compared to 17.6 percent for total GFS revenue. Revenue from the real estate excise tax is expected to account for 7.0 percent of GFS revenue in the 2005-07 biennium, up from 5.7 percent in the 2003-05 biennium and 4.1 percent in the 2001-03 biennium. Next biennium the real estate excise tax is expected to account for 6.0 percent of total GFS revenue.

Slumping RE excise taxes are by no means the primary cause of our state’s budget woes, but they certainly aren’t helping matters. It would appear that perhaps it wasn’t such a good idea to make plans based on an ever-increasing number of real estate transactions. Who knew.

Hat Tip: Adam Wilson @ The Olympian

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

17 comments:

  1. 1
    Kary L. Krismer says:

    As I’ve mentioned in the past, the excise tax revenue for King County SFR properties is just barely over 20% of what the peak was.

    February revenue from SFR in King County was up because the mean was up about 20k over January.

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  2. 2
    Scotsman says:

    I don’t know much about the structure of WA’s revenue stream, but if the fourth largest source, real estate taxes, is only 7% of the total then it sounds like WA is pretty well diversified in terms of sources. The shortfall is simply the result of overly optimistic forecasts, and an unwillingness to admit that the economy as a whole is hurting. Remember the rhetoric during the election? Chris repeatedly said there was no deficit.

    The same issues are hitting on the federal level too:

    WASHINGTON (MarketWatch) – The U.S. federal government budget (deficit) widened to $192.8 billion in February as tax receipts plunged to the lowest level in 14 years, the Treasury Department reported Wednesday. It’s the second largest monthly deficit on record, exceeded only by $237.2 billion gap in October. For the first five months of the fiscal year, the deficit has increased by a half trillion dollars to a record $764.5 billion. Outlays were flat compared with a year earlier at $280.1 billion, while receipts dropped 17% to $87.3 billion, the lowest since February 1995. In February, individual income taxes fell 64% to just $8.7 billion. That’s the lowest monthly total for individual income taxes since May 1985.

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  3. 3
    Kary L. Krismer says:

    That 7% figure is apparently only the excise tax portion. The valuation tax is presumably much more, but it at least is revenue neutral as prices rise and fall.

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  4. 4
    Plymster says:

    Kary L. Krismer @ 3

    The valuation tax is presumably much more, but it at least is revenue neutral as prices rise and fall.

    Presumably, as median prices fall, valuations will fall, and that tax will soon run into shortfalls. People aren’t going to stand for being taxed for a 400k home that will only sell for 350k (or 300 or 200 or whatever).

    Does anyone know how much of the state’s budget the RE valuation taxes comprise?

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  5. 5
    Scotsman says:

    Tim’s references have the stats, but here’s a picture: ;-) Save us all 1000 words…

    http://www.ofm.wa.gov/trends/charts/ch503.gif

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  6. 6
    Kary L. Krismer says:

    By Plymster @ 4:

    Kary L. Krismer @ 3
    The valuation tax is presumably much more, but it at least is revenue neutral as prices rise and fall.

    Presumably, as median prices fall, valuations will fall, and that tax will soon run into shortfalls. People aren’t going to stand for being taxed for a 400k home that will only sell for 350k (or 300 or 200 or whatever).

    Does anyone know how much of the state’s budget the RE valuation taxes comprise?

    No. The tax rate is determined after they determine the value of all the properties in each taxing district. If everyone’s valued doubled in one year, the tax rate would be cut approximately in half. I believe they cap the increase in revenues at 1% a year, but I’m not sure of that. You can also have other items added or dripped, like school and firefighter bonds, etc.

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  7. 7
    Gene says:

    I would have to guess that a number of people who have stopped paying their mortgage, will also stop paying their taxes. While that money will “eventually” be collected, it may lead to shorter term shortfalls or delayed income, no?

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  8. 8
    patient says:

    “perhaps it wasn’t such a good idea to make plans based on an ever-increasing number of real estate transactions. Who knew.”

    One who didn’t was the same person who proclaimed that Seattle’s job market was predicted to remain very strong with massive creation of new jobs and that there was absolutely no reason to be comcerned about buying a home here. This was pretty much at the top of the bubble and the person who proclaimed it was our beloved Govenor.

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  9. 9
    Kary L. Krismer says:

    By Gene @ 7:

    I would have to guess that a number of people who have stopped paying their mortgage, will also stop paying their taxes. While that money will “eventually” be collected, it may lead to shorter term shortfalls or delayed income, no?

    It has a first priority and accrues interest at 12%. At one time it was only 6% and people (big developers) purposefully delayed paying their taxes.

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  10. 10

    RE: Gene @ 7

    If you don’t pay your mortgage, your home will ultimately get foreclosed on. Property taxes are due twice a year, and like Kary said, it is a first priority, so the lender would very likely pay off the property taxes due before the county auctions it off for back taxes.

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  11. 11
    Dave says:

    Scotsman@5 — I think your graphic is very instructive. As you can see, the primary difference between Washington and the rest of the states (I’m NOT interpreting “U.S.” as the federal government) is that Washington lacks a corporate/individual income tax, whereas most other states have one. From your graph, the presence of an income tax results in all other tax sources being equal or lower than in Washington (way lower in the case of sales taxes). Plus, the income tax has the added benefit of being less volatile, as it does not rapidly decline in a down economy (as our sales and property taxes are currently doing). People may spend less in a recession, but they don’t necessarily make less (at least those who still have a job). i think that us Washingtonians should at least consider the benefits of the income tax over our current system. I think it would serve us all better than what we have now.

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  12. 12
    Ray Pepper says:

    Piece by piece the BUFFET IS COMING TO AN END!

    http://www.realogy.com/

    http://www.cnbc.com/id/29640663?slide=16

    Put a fork in it!

    The Goose is COOKED!

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  13. 13
    Pierce Anon says:

    I’m sorry Dave, I’m afraid we can’t do that. There is no way in he11 that the voters trust the legislature with another source of revenue like an income tax accompanied by a lot of false promises of reductions elsewhere.

    Having endured state income tax forms in CA and OR I can tell you that one of the main problems was that they became as complex as the federal forms. The game of special pleadings for exemptions and social engineering results in a convoluted income tax system that rewards the panderers and not the producers.

    Frankly I would rather put up with paying sales tax on my numerous internet purchases than have to deal with a state income tax.

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  14. 14
    Kary L. Krismer says:

    RE: Ray Pepper @ 12 – I haven’t looked at the second link, but I commented on Realogy’s troubles last week when a Bellevue firm connected with one of their trade names.

    My take there is that the problem with it isn’t related to real estate as much as merger mania. They were bought in a leveraged buyout by someone who apparently thought several competing trade names were worth billions of dollars. The financial problems are related to paying off that debt, not operations (to the best of my knowledge). The company that bought it probably has to keep them alive for some time, or face fraudulent conveyance litigation, which is perhaps why they’ve promised to fund through the end of the year.

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  15. 15
    Kary L. Krismer says:

    Ray, I see you didn’t actually link anything useful (Firefox wouldn’t open the second link for me due to NoScript).

    Here’s what I linked elsewhere:

    http://www.bloomberg.com/apps/news?pid=20601103&sid=apUg_t0_EpGA&refer=us

    This isn’t new news. They’ve been in the news since at least September. As I mentioned in one of Aubrey’s posts, the second choice that pops up when you type Realogy into Google Toolbar is Realogy Bankruptcy.

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  16. 16
    Ray Pepper says:

    Both links work for me Kary.

    Kary, piece by piece the brick and mortar is coming down. Fewer offices in an effort to consolidate into major hubs to diminish expenditures across the nation.

    In the short term (less then 5 years) you will walk into the major Brokerages and the door will swing two ways. To the left you will see “assist your agent in looking for/selling your home” and receive…………………..and on the other side full Agent support to buy (get 1% back) and in selling 2000-2%. The offices will advertise ” Buy from this Renton office and get 1% back at close”

    When this begins happening (on a broader scale-its already happening now) the FLOODGATES will open and the BIG Brick and Mortars will be replaced by 1000’s of smaller Brokerages.

    Long term(5-10 years)–a collapse of the MLS system as we know it and we will enter a far better system for Buying and selling!

    Bank on it friends! The mighty G is coming!

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  17. 17
    Kary L. Krismer says:

    RE: Ray Pepper @ 16 – Both links worked for me in IE, it’s just that neither one really says anything. Your link shows they have $7.5B in outstanding debt. My link shows that Apollo paid $6.8B for the company. Put two and two together.

    It’s a company that sells franchises. There’d be little opportunity to run up that kind of debt but for a leveraged buyout.

    Don’t get me wrong. A lot of local agencies are going to be in trouble with the low volumes. This just isn’t an example of that. This is an example of a bad investment.

    Here’s a story on the companies bond ratings being cut before the sale even happened because it was a leveraged buyout.

    http://www.reuters.com/article/companyNewsAndPR/idUSN0216770320070402

    Here’s a link to Aubrey’s piece on the local company becoming part of Realogy, and my comments there:

    http://blog.seattlepi.nwsource.com/realestatenews/archives/163501.asp

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