Washington continued to defy the multiple drags on the U.S. economy in February, as state payrolls added 3,500 jobs and the unemployment rate held steady at 4.5 percent.
“We’re really different from the national economy at this point,” said Evelina Tainer, the state’s chief labor economist.
Few sectors illustrate that difference better than construction. Overall, the nation has lost 222,100 construction jobs over the past 12 months, as the collapsed boom in housing idled thousands of carpenters, roofers and drywallers.
But in Washington, construction continued to add jobs — 400 last month, and 1,600 since February 2007. Weakness in residential construction has been outweighed by robust nonresidential construction activity — office buildings, malls, factories and the like.
Much of the growth in construction jobs last month occurred in Eastern Washington, Tainer said. Two large projects, the nuclear-waste vitrification facility at Hanford and the expansion of a polysilicon plant near Moses Lake, together are employing hundreds of workers.
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Job growth in Washington has been decelerating for several months; the average growth rate in 2007 was 2.5 percent. In the four-county Puget Sound region, year-over-year job growth in February was 2.1 percent, down from an average 2.8 percent last year.
Still, said Tainer, “Slow good news is better than bad news.”
Indeed. I don’t wish for our state to start shedding jobs, but it should be noted that despite the common myth to the contrary, overall job growth has little to no relation to home price increases or decreases.
Since I was on KING 5 News last night and KOMO 1000 radio this morning*, I thought it would be good to write up a slightly more detailed post aimed at answering the question: “What is Seattle Bubble about?” So, here’s a summary of the important points.
The Bottom Line: Now is not a good time to buy a home in Seattle.
Here’s why:
Irresponsible, loose lending drove prices to artificial highs, pricing out responsible individuals and families that just want to make a decent down payment and get a traditional loan on a reasonably priced house.
We are presently seeing a return to responsible lending standards, as the banks experience the consequences of writing loans to people who did not have the ability to pay them off. As lending standards continue to tighten, further downward pressure will be placed on home prices.
Macro-economic factors drove home prices up, and will in turn bring prices back down (yes, even in Seattle).
Home prices in Seattle did not rise as fast or as far as other places in the US, and likely will not fall as far. However, they will most likely fall.
Why will prices fall? Because the current level of local home prices is not supported by any of the fundamentals that drive a healthy housing market:
All of these factors are indeed positive for the Seattle area, but prices began to rise out of control while Seattle was still recovering from being hit particularly hard by the dot-com recession. Thanks to the aforementioned easy lending, home prices during and since Seattle’s economic recovery have risen much faster and higher than these positive fundamentals support.
There are lots of people (like myself) who have little to no debt, great credit, and a good down payment, but are not willing to buy into an inflated housing market. We are not against home ownership. We are against taking out massive, dangerous loans to finance an otherwise unaffordable and overpriced asset. We are perfectly content to wait out the declining market, and will not be suckered by real estate salespeople who perpetually repeat claims that “now is a great time to buy.” They said that about the national housing market, and they were wrong. Once the home price drops were irrefutable, they began declaring that “the market has hit bottom” every three to four months.
Don’t take anyone’s word when it comes to what will likely be the largest financial decision of your life. Do the research, and determine if the market is right for you. That’s what Seattle Bubble is for: providing a resource where regular people can assess the local housing market on their own.
P.S. (I’d like to improve / refine this post and make a copy to link at the top next to “Home” and “Forum” as an “About” page. If anyone has any suggestions for improving this post with that end in mind, such as additional posts that should be linked or main points that I left out, please share your ideas in the comments. Thanks!)
* I tried to record the interview through the online stream of KOMO 1000, but halfway through they cut into the feed with an ad for a casino that ran for the entire remainder of the call. KOMO host Nancy Barrick is going to email me the audio tomorrow morning, and I will post it here sometime thereafter.)
Update: Here’s the audio from the interview on KOMO today:
Unlike the other cities across the country that experienced surging prices and are now seeing price declines, Seattle will be immune from such forces. Why? Because of our strong employment, of course! Here in Seattle, our job market is so much better than the rest of the country, there’s no way our home prices could falter!
Wait, really?
Let’s check out the latest unemployment statistics to see how that claim holds up. In the table below, I have compiled the September unemployment rate and the Case-Shiller HPI YOY change (as of July). For the nationwide statistic, the Case-Shiller HPI refers to the 20-city average. Metro areas are sorted by unemployment rate, in descending order.
Is it just me, or does that data appear to be all over the place, with little to no correlation between unemployment and the trend of housing prices? Let’s take a page out of Deejayoh’s book, and check out a scatterplot:
Nope, not just me. There appears to be little to no correlation between unemployment statistics and home prices. Since unemployment statistics are generally considered to be a decent measure of the relative strength of an area’s job market, I think we can yet again conclude that “strong employment” is not sufficient to prevent home price declines.
Turns out we’re not the only ones that harbor some doubt about Microsoft’s ability to single-handedly shelter Seattle from a housing downturn. That exact subject was the topic of a recent Times editorial by Brier Dudley.
Microsoft may not be minting millionaires anymore, but it’s growing at a time when Seattle’s glad for anything that can keep its housing market from crashing like in other parts of the country.
The company has buffered the region before. But the question I have, as we watch for darkening clouds, is whether Microsoft will have that same effect if the economy hits a truly rough patch in the future. It no longer has the same flexibility, now that its growth is slower, its investors are more restless and its latest venture — advertising — is more cyclical.
Being an opinion article, it is understandably light on hard facts and research, but it gets across the point that while Microsoft’s effect on the region is certainly positive, it’s probably not positive enough to save us from the inevitable.
One of the most frequent arguments you’ll hear if you ask someone to try to justify Seattle’s high home prices is job growth. It usually sounds something like this: “We’ve got Boeing and Microsoft, and all these highly-paid, high-tech jobs are continually being added to our strong economy.”
Well, as you all know, we’ve beatthissubject to death around here, but Seattle Times business reporter Drew DeSilver brought some excellent statistics to the table yesterday that simply cannot be ignored.
Four years into the recovery from the steep recession of the early 2000s, the state’s economy is by most accounts humming like a well-tuned V-6 engine. More Washingtonians are working than ever before, the state unemployment rate hovers near a 30-year low, and last year the state’s average wage rose 5.3 percent.
But those top-line measures don’t tell the whole story: A Seattle Times analysis of state jobs data shows that most of the new jobs created in the current expansion don’t pay all that well, and fewer high-wage jobs have been generated than during the late-1990s boom.
Consider:
Of the 240,000 jobs created in Washington between 2002 and 2006, almost 70 percent were in fields where the average weekly pay was less than $832 a week (or $43,264 a year). That’s the income calculated as a “living wage” in Washington for a family of two adults and two children, according to Penn State’s Poverty in America project.
Several of the fastest-growing job categories — in retail, hospitality, agriculture and social services — were at the lower end of the wage scale.
For instance, more than 26,000 administrative and support jobs have been created, with an average weekly wage of $605 — about $31,500 a year. General retailers added almost 9,900 jobs, paying on average $460.53 a week, or less than $24,000 a year. Bars and restaurants generated more than 20,000 jobs, paying an average of about $280 a week, or $14,550 a year, though those workers rely on tips for much of their pay.
The current recovery has so far generated far fewer high-paying jobs than the last boom, which ran roughly from 1995 to 2000.
those heady dot-com years
During those heady dot-com years, businesses statewide created more than 99,000 jobs paying more than $50,000 a year — 30.6 percent of all new jobs — primarily in Internet, telecommunications and other high-technology fields.
But between 2002 and 2006, just 57,000 jobs paying above $50,000 were created in Washington — 23.7 percent of the total.
Many high-paying industries — notably telecommunications, electronics manufacturing and air transportation — have continued shedding jobs during the current recovery. Statewide, those three sectors combined to lose more than 11,000 jobs, with an average weekly wage of $1,275.59, between 2002 and 2006.
Keep in mind that in order to afford the median house in King County ($470,000 as of June), an family must have a gross yearly income of $95,000, assuming they have the $94,000 down payment. If they’ve only got enough for 5% down, it would take $115,000 in yearly income.
If the Times’ analysis is to be believed, there is pretty much no way that high-paying jobs have been the driving force behind Seattle’s housing boom. In fact, it’s just the opposite:
As a rule, economists say, higher-wage jobs support lower-wage ones: The Boeing machinist buying camping gear helps sustain the sales clerk who sells it to him. As high-paying jobs boomed during the 1990s, so did those further down the wage scale: The same tech boom that generated 14,485 software jobs (average pay, including options payouts: well over $250,000) created 36,430 administrative-support jobs (average pay: about $23,560).
But until fairly recently in the current expansion, lower-paying jobs were being created without much of a bump in higher-paying jobs. So where was the support coming from?
Housing. More specifically, the housing boom that has boosted home values across much of the state and sent Seattle-area home prices into the ionosphere.
As house values soared and mortgage rates fell, homeowners had the best of both worlds. Even if you lost your dot-com job and were temping to pay the bills, you could refinance your mortgage or tap into your home’s equity to maintain your spending levels. And tens of thousands of people did just that.
“The housing boom definitely brought about a different kind of growth,” said Andrew Gledhill, who tracks Washington for the research firm Moody’s Economy.com. Especially early in the recovery, he said, retail jobs grew much faster in Washington than in the nation at large.
“There’ve been few other periods in history when home values were appreciating so much and people were borrowing so aggressively on the value of their homes,” Gledhill said.
Until about 2005, the state’s fastest-growing job categories tended to be either real-estate related (construction, mortgage banking, real-estate brokers, etc.) or in the retail and hospitality industries.
But as Kriss Sjoblom, an economist at the business-oriented Washington Research Council noted, “Construction can carry an economy in the short term, but not in the long term.”
That sounds pretty similar to what I said about the whole jobs situation back in May of last year:
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. Lastly, high tech jobs—including Microsoft—are not growing at a fast enough rate to rescue us when/if construction and real estate experience a significant slowdown.
In conclusion, high-paying jobs at Boeing and Microsoft are not going to keep Seattle home prices afloat. It’s not that such jobs don’t exist, it’s just that they’re such a tiny percentage of the total number of jobs being created, that their effect on the housing market is extremely limited.
Take us home, Drew.
However, many of the state’s core industries — those that both employ a lot of people and pay well — haven’t grown at the pace seen in previous years.
Consider aerospace again. The last time the industry went on a hiring binge, between 1996 and 1998, it added 33,100 jobs in the span of 2-½ years.
Boeing, which employed 104,000 Washingtonians at the peak of the last cycle in June 1998, reported just 71,781 Washington workers at the end of July — despite the big buildup for the new 787 Dreamliner jet. The leaner payroll is a consequence of the company’s aggressive streamlining of its production processes and outsourcing of much work previously done in-house.
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Even software, which barely took a breather during the recession, isn’t adding to payroll the way it used to. The software sector routinely posted job growth in double digits during the 1990s, but since the end of the recession growth has been mostly in the 6 to 7 percent range.
