Seattle Bubble

Jon Talton wrote a great article for the Times a few days ago that goes deeper than the usual “Boeing! Microsoft! Pink Ponies!” type articles and explores all the ways the Seattle region is exposed to the slowing economy: For local economy, it’ll be a long slog.

…the national slowdown is finally hitting the Puget Sound region, slowing job creation as well as pressuring would-be home-sellers, the construction industry and credit-strapped homeowners.

As recently as last year, employment growth here was more than twice the national average, according to Dick Conway, a Seattle economist and co-publisher of the Puget Sound Economic Forecaster. Now, he forecasts it will decelerate from a peak of 3.2 percent in the first quarter of 2007 to less than 2 percent this year. On a quarter-to-quarter basis, job creation could be essentially flat, something backed up by recent state job numbers.

It’s nice to read a somewhat realistic article once in a while, instead of constantly being fed the feel-good fluff stories about how special and different we are in Seattle.

What are the chances of a state like Washington… avoiding a recession?

…the economic model of Pacific Northwest economies maintained by Jeremy Piger, associate professor of economics at the University of Oregon, showed a 99.4 percent chance of recession for Washington in its latest reading. The model is based on data from the Federal Reserve Bank of Philadelphia.

So you’re telling me there’s a chance… Yeah!

My one problem is that Talton quotes Dick Conway as some sort of expert on the local economy and housing.

“The picture did change substantially with housing,” Conway said. “Ours held up pretty well for a while. We’ve finally succumbed.” Price appreciation has stalled and inventory is swelling as potential buyers try to time the bottom of the already favorable market.
…
Conway compares today’s climate to 2001’s and uses the term “rubber-band effect.” The faster you drop into recession, the faster you bounce out. This has been a slow slide. He said the Puget Sound region may touch bottom in the next few months and begin growing again.

I’m not sure why he would be quoting Dick Conway as any sort of expert, considering how off base he has been with his 2008 real estate predictions so far this year.

Conway anticipates average Puget Sound-region home prices will decline less than 1 percent next year, and sales will be down about 5 percent, before rebounding in 2008.

Let’s see… According to NWMLS July data, “Puget Sound-region” (King, Pierce, Snohomish, Kitsap, & Thurston Counties) average prices are already down nearly 5 percent, while sales are down over 35 percent. Even if you just look at King/Pierce/Snohomish, prices are down over 3 percent and sales have dropped 37 percent.

The bottom line seems to be that the local economy is not bulletproof, despite what the papers and real estate agents have been saying for the last few years.

(Jon Talton, Seattle Times, 08.26.2008)

The last time we checked in on unemployment data for the Seattle area, local data was rapidly catching up to national stats, with statewide unemployment jumping from 4.7 percent in April to 5.3 percent in May, and Seattle-area unemployment bumping up seven-tenths of a percent to 4.1 percent.

Well, it didn’t take long for Washington to catch up with the nation.

Unemployment in Washington state last month jumped to its highest level in 3 1/2 years, as job seekers surged into an economy that is having trouble generating enough new jobs for them.

The state jobless rate was 5.7 percent in July, up from a revised 5.4 percent in June (it was originally reported at 5.5 percent), according to figures released today. Washington now has the same jobless rate as the United States as a whole, after 13 straight months of outperforming the nation.

The state’s economy gained 3,300 payroll jobs in July, after losing a downward-revised 1,800 jobs in June. July was the fifth straight month of little to no change in the nonfarm payroll figures, suggesting that Washington’s jobs engine is stuck in first gear.
…
In the Seattle metro area, the unemployment rate rose to 4.3 percent last month from 3.9 percent. About 8,500 people reported entering the labor force in July, but only 1,800 of them found work right away.

When/if our unemployment rate reaches 5 or 6 percent, I wonder if local real estate agents will still be extolling the virtues of our “strong employment” that “holds up the local housing market?” Or maybe they will start to realize that the strong housing market has been at least partly responsible for holding up the area’s strong employment.

(Drew DeSilver, Seattle Times, 08.12.2008)

Update: Here’s a more in-depth article from Drew DeSilver in today’s Times.

I thought we could use a thread to discuss the insanity that reigns in the financial world today. You all already know the news. IndyMac taken over by the FDIC in the third-largest bank failure in US history. The bailouts of Fannie & Freddie have begun.

Here’s another take on the weekend news:

Now here’s the problem - while Fannie and Freddie are claimed to be all 80/20 full-doc loans this is in fact a lie.

In fact, a huge percentage of the loans they took on or guaranteed in the last five years were packed with fraud or serious deficiencies in underwriting in some form, whether it be appraisal fraud, claimed income fraud, LTVs as high as 100%, or all three!

So how bad could this get?

Very bad.
…
In reality I believe that Fannie and Freddie could suffer as much as $900 billion in losses as this all plays out. This assumes that 10% of their portfolio turns out to be essentially worthless and 20% is impaired by at least 10%, with the rest being 100% “money good.”

Frankly, I think that’s a bit optimistic…
…
See, there are reportedly 75 (or more) banks on the “troubled” list. The FDIC doesn’t publish that list. Gee, I wonder why, especially after Friday, when IndyMac went under.

Not that this should have been a surprise to anyone, given that it was trading at well under a buck for about a week. Do ‘ya think that’s a good stock price?

No, the real 900lb Gorilla is that IndyMac was not on the FDIC’s “troubled bank list”!

So here’s a thread to talk about the banks. Was the IndyMac failure the worst of it, or have we just seen the tip of the iceberg?

P.S. (RE: the title of the post - original comment (#10) / ongoing conversation / Sorry Ardell, I just couldn’t resist.)

Mike Benbow reports from The Everett Herald.

[Addition from The Tim]
As noted in the forums, local construction equipment manufacturer Genie Industries is also laying off “120 full-time workers and an undisclosed number of temporary workers.” The P-I has the story.

Genie employs roughly 3,000 people, making it the second-largest employer in Redmond. For what it’s worth, it is also where I worked until January (when I left of my own volition).

Please vote in this poll using the sidebar.

It looks like the housing bust may have finally caught up to us up here in the Northwest. According to the latest data from the Employment Security Department, unemployment in the Seattle metro area jumped 7/10 of a point last month alone. Here’s an excerpt from the Seattle Times:

Unemployment in Washington state took its biggest jump in nearly 28 years last month, as employers cut payroll jobs for the third straight month.

The unemployment rate rose to 5.3 percent in May from 4.7 percent in April, after adjusting for seasonal variations, according to the state Employment Security Department. In the Seattle metro area, unemployment leapt seven-tenths of a percentage point last month, to 4.1 percent.
…
“This report may skewer the notion that Washington is immune to the downturn,” said Bill Conerly, an economist and business consultant in Portland. “The state has done better than the nation for a number of reasons, but immune — no.”

Dang. I guess everybody must have ignored Gregoire’s advice and bought into the self-fulfilling dire talk. We should have tried to believe harder.

The P-I also has a story on the spike.

The primary reason for the job numbers is the housing slowdown, which has turned the booming industry of construction into a lagging one and spills into other areas of the economy. Year-over-year construction employment fell in May, particularly in the residential sector. Financial services jobs are also taking a hit.

It sounds like they’re saying that the argument that a strong economy will prop up the housing market is backward, and in fact the housing market was propping up the economy. I believe that we have been warning of that since 2006:

So here’s my thesis: Jobs (at least partly) drive housing. The job situation in Washington (and the Seattle area) has been doing pretty well lately. However, a large amount of the job growth has been in housing-related industry. Therefore, when housing slows due to other forces (such as increasing interest rates or higher lending standards), the job market will slow, thus causing housing to slow further.

That sounds like exactly what’s happening right now. And before someone breaks out the “stopped clock” nonsense, note that in 2006 we didn’t say “the slowdown will happen this year,” we just warned that the economy was propped up on housing, and when housing slowed down, the economy would too.

As an added bonus, here’s one more local take on the spike.

Major cutbacks in the building industry in Snohomish County are blamed for a sharp increase in unemployment in May, the state Employment Security Department reported Tuesday.

Local unemployment increased from 3.6 percent in April to 4.6 percent last month.

“We dodged a bullet for quite a while,” said Donna Thompson, a regional labor economist with the department. “But unfortunately, it’s catching up with us.”

Thompson was talking about the national housing crisis.

Thompson said the local construction industry is doing poorly because of the slowdown in home sales. “There are a high number of homes that haven’t sold and are still in the market,” she said, noting that those homes need to be cleared out before builders can start on new ones.

Last month, the county lost 300 construction jobs. During the past year, it’s lost 3,300. “Construction workers are losing their jobs and it’s really having an effect,” Thompson said.

It sucks, but it’s not like we can say it comes as a surprise.

(Drew DeSilver, Seattle Times, 06.18.2008)
(Andrew James, Seattle P-I, 06.17.2008)
(Tim Ellis, Seattle Bubble, 05.17.2006)
(Mike Benbow, Everett Herald, 06.18.2008)