Seattle Bubble

As the far-reaching economic consequences of the popping of the housing/credit bubble unfold, local governments are feeling the pain. Snohomish County faces a $9 million shortfall for 2009, forcing a hiring freeze. While down in King County, Ron Sims just announced that 255 jobs will be cut.

Financially ailing King County will send layoff notices to as many as 255 employees today, on top of 150 jobs already eliminated.
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Paring next year’s general fund to $644 million, Sims said, meant cutting $93 million from what would have been needed to maintain current levels of government service.
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The budget is out of whack because revenues from sales tax and investments have dropped while the cost of employee benefits, cost-of-living adjustments, fuel and new labor contracts have risen.

One large factor in the drop of sales tax revenues is probably the end of the housing ATM. As documented at Calculated Risk, Mortgage Equity Withdrawal plunged to near zero in the second quarter 2008.

Seattle Times columnist Jon Talton runs through some more ways that the economic crunch is weighing on Seattle.

In recent days, the gravity of the crisis for the Puget Sound region may have been overshadowed by the gut-wrenching gyrations of the stock market — itself a marker for the lost wealth in a place heavily populated by investors. But Microsoft’s announcement of re-evaluating its hiring situation is very big. Boeing and the striking Machinists, seeing the gravity of the moment, are talking again.

Nordstrom same-store sales falling nearly 10 percent in the five weeks ending Oct. 4 is a warning for what’s to come for other retailers based here. As retirement nest eggs are vaporized, jobs lost and houses foreclosed, those vaunted consumers can no longer prop up the economy.

Nor can we count on exports. The world economy is slamming into a recession, and last week the International Monetary Fund warned of “extremely serious” consequences, including famine.

Yikes. I guess when folks were going around touting Seattle’s economy as special and stronger than elsewhere, they didn’t really consider the far-reaching effects of the bursting bubble. The bottom line seems to be that this mess runs deeper than anyone really realized.

(Keith Ervin, Seattle Times, 10.14.2008)
(Calculated Risk, 10.06.2008)
(Jon Talton, Seattle Times, 10.12.2008)

Here are a couple of recent stories to drive home the point that the Seattle area economy is not in fact magically separate from the national/international economy, as some have made it out to be over the last few years.

Brad Wong, Seattle P-I: Tough economy forces cutbacks for area residents

The economic shocks to the nation’s banks, stock markets, credit industry and real estate business have forced Seattle-area residents to review their finances and save what they can.

Thoughts about how to pay for bills — from mortgages and rent to higher food and gas prices — have consumed area residents fearful their quality of life could diminish.

As residents — including those not in immediate dire straits — hatch new plans to weather the turmoil, even young people said they are learning how quickly national problems can affect daily life.

Donna Gordon Blankinship, AP: WA people worried but not desperate about economy

People worried about the economy are more likely to seek help paying their bills or feeding their families than turning to suicide or violence as one man did in Los Angeles this week, mental health experts in Washington state said Tuesday.

“I don’t think the average response to the downturn in the economy is more people thinking of suicide because they can’t pay their bills,” said Kathleen Southwick, executive director of the Crisis Clinic in Seattle.

Southwick said her nonprofit agency’s 24-hour crisis line has not seen an increase in calls these past few weeks, but the “211″ non-emergency line has seen about a 50 percent increase in the number of people calling to find out where they can get help paying the rent and keeping the lights on.
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The last time the help line saw such a sharp increase in calls was a few years ago “when the tech bubble burst,” Southwick said.

So much for the theory that we’re better prepared to weather the storm than we were when the dot-com bubble popped. Who could have guessed that seven years of pretending everything is fine and that we’re magically immune wouldn’t be enough to stop economic calamity from arriving in Washington State?

From today’s Seattle Times: Feds seize WaMu in nation’s largest bank failure

WaMu’s 43,200 employees won’t feel any immediate impact, though it’s likely JPMorgan will drastically shrink the thrift’s headquarters staff. More than 3,500 people work at WaMu’s 42-story headquarters at Second Avenue and Union Street, along with 800 people elsewhere in Seattle and 1,500 people elsewhere in Washington state.

WaMu is also downtown’s largest office tenant, with about 1.6 million square feet in the central business district. It put some space on the market in recent months, helping raise downtown’s vacancy rate.

JPMorgan reportedly sent e-mails to all WaMu employees asking them to report for work as usual today.

Not surprisingly, I’ve got a few friends that work at WaMu corporate downtown. I really feel pity for them. The fact that WaMu put itself into such a dangerous position was not the fault of the rank-and-file corporate employees, but they’ll be the ones to feel the brunt of this failure.

I’d like to be clear that I do not take any pleasure in knowing that 4,300 people in Seattle are likely to lose their jobs, or the effect that will have on Seattle’s economy.

Another interesting bit from the article:

JPMorgan, which earlier this year offered to buy WaMu for $7 billion in stock — a deal former CEO Kerry Killinger turned down in the belief he could salvage the company — was the high bidder in an auction the FDIC conducted Wednesday, Bair said. Three other banks submitted bids for WaMu’s banking assets.

So four banks were bidding on WaMu’s assets, and $1.9 billion was the highest bid. Dang.

(Drew DeSilver, Seattle Times, 09.26.2008)

Here’s a brief article from the Wall Street Journal that might be of interest: Weathering the Rain, And the Property Storm

The troubles facing most Seattle-area landlords are more like a Puget Sound drizzle than the stormy skies swirling around markets such as Phoenix or Orange County, Calif.

Certainly the economic turmoil buffeting the nation’s property markets has touched Seattle. The area’s median home prices are falling, and average commercial rent gains are slowing. The volume of large office, retail and warehouse sales has dropped dramatically this year, according to Real Capital Analytics. The area’s job growth slipped to 2.3% in July, down from 3% in the year-earlier month, according to the Bureau of Labor Statistics.

Moreover, tighter economic times are hurting some large employers and real-estate consumers in the region, home to about 3.4 million people. As Starbucks Corp. pulls back from an expansion and closes hundreds of stores nationwide, it is considering selling a downtown office building it is developing and an existing one it owns, both in Seattle’s Pioneer Square neighborhood
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But amid these pressures, the Seattle region’s office-, retail- and apartment-leasing markets still have outshined most major U.S. metropolitan areas by some key measures. While retail rents in most markets are falling, average Seattle-area retail rents are expected to rise 3% this year, the highest gain of 54 major markets tracked by Property & Portfolio Research, a real-estate research firm.
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“I wouldn’t say it’s recession-proof, but Seattle’s going to weather the recession a lot better than most markets,” said Stephanie Hession, a real-estate economist with PPR. Still, even with Seattle’s rents largely in positive territory, Ms. Hession says inflation will leave most landlords losing ground.

Sadly, the article is long on rosy talk and short on actual quantifiable facts. Why is Seattle “going to weather the recession a lot better than most markets”? Ms. Hession doesn’t say, and neither does the article. All we read is that Seattle has held up better so far, which is true thanks to our lagging housing market. If Seattle’s economy is based largely on software and airplanes, what specific arguments can be made that those two industries will hold up better than average in a recession?

It seems to me that when money gets tight, individuals and businesses will forego software upgrades, making do with what they’ve got, and cut back on travel. I have read quite a few articles that claim that somehow Seattle’s economy is poised to continue performing well through a recession, but I have yet to see a reasonable argument as to why this will allegedly be the case. If anyone here has a better argument than… well, better than nothing—then let’s hear it.

(Maura Webber Sadovi, Wall Street Journal, 09.10.2008)

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.
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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.
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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.