Seattle Bubble

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)

February, 2008:

Gov. Chris Gregoire, at a Seattle economic forum Thursday, boasted she has found that Washington is “literally the envy of other states.”

“I ask all of us to make sure that we do not buy into, or even for that matter, listen to, the dire talk internationally and nationally, because it can become a self-fulfilling prophecy for us,” Gregoire said. “We must be optimistic. We must understand our economy is strong and growth is going to continue to be the future.”

August, 2008:

Gov. Chris Gregoire is telling state agencies to cut hiring, travel and fuel costs as the weak economy continues to take its toll.

In a memo released Monday, Gregoire tells agency directors to cut gas consumption by five percent. She also orders freezes on hiring, out-of-state travel, service contracts and extra equipment.

It would seem that when economic reality fights blind optimism, economic reality wins.

Luckily, we’ve been preparing for this.  Oh wait no, no we haven’t.

Update: Things aren’t looking so great around Seattle either: King County budget shortfall at $86.5 million for 2009

A sharp drop-off in sales-tax revenues and a “dramatic increase” in the cost of living in June have pushed King County’s 2009 funding shortfall to $86.5 million, Budget Director Bob Cowan told the Metropolitan King County Council Monday.

The gap in the $658 million general fund — forecast at $60 million in March — has widened as inflation and turmoil in the nation’s housing and financial markets have grown in recent months.

Speaking of the economy, here’s a headline I never expected to see in The Seattle Times, let alone above the fold on the front page of the Sunday paper:

I guess this is a surprising discovery for some people—something that is considered big news. Here are some choice excerpts from the article:

“If things get really bad, we’ll have all sorts of problems,” said Dick Startz, an economics professor at the University of Washington, who thinks a recession is still unlikely.

Michael Parks, publisher of Marple’s Pacific Northwest Letter and the dean of regional economy watchers, said, “We’re obviously not immune to what’s happening in the national and global economy. We [the nation] came awfully close to systemic failure over the weekend” of the Bear Stearns debacle.

And these are the optimists.
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WaMu’s troubles endanger a major corporate headquarters, meaning a potential loss of large numbers of well-paid jobs and local giving. And that’s what Wall Street would consider a good outcome — a buyout, which looks unlikely. Otherwise, WaMu will be left to work out its troubles, leaving the area without the economic boost from the institution’s growth years. And if history is a guide, it will still be acquired at the end of the process.

WaMu won’t be the only part of the local backbone to suffer if the recession is prolonged.

Boeing, already stunned by the loss of the Air Force tanker program, could begin to pay a serious financial price for delays in the 787, undercutting its best selling point as fuel-efficient.

Cuts in consumer spending also could damage such leading companies as Microsoft, Amazon and Starbucks.

These companies are responsible for vast wealth creation, through everything from payrolls and the returns for their many local shareholders to their contracts with local vendors.

A continuing credit crunch will reach Washington businesses and could even influence venture capital, a key component of Seattle’s innovation machine.

All these “what ifs” might have seemed alarmist even two months ago. Not now.

Of course none of this really comes as much of a surprise to anyone that has been really paying attention to this irresponsible run-up over the last few years. Smart people like Peter Schiff and Bill Fleckenstein have seen all this coming miles away. Here’s a quote from Peter Schiff in August 2006:

The United States economy is like the Titanic and I am here with the lifeboat trying to get people to leave the ship …I see a real financial crisis coming for the United States.

Some people seem to want to draw some sort of distinction between the impending recession and the housing bubble. That is nonsense. The housing bubble is a direct result of the credit bubble. All sorts of insane risks were taken, loans for hundreds of thousands of dollars were given to people simply because they asked, and now the consequences are finally catching up with us.

Those that say “Seattle didn’t have a housing bubble,” apparently think that the rapid, reckless expansion of credit and all the temporary benefits that came from it did not have any positive effect on Seattle’s real estate market or general economy, and therefore the inevitable retraction will have little to no negative effect here. Again, that is nonsense.

What began as the pricking of a housing bubble has spread over the past seven months into most parts of the economy. Even solid companies and municipalities have had trouble getting loans or selling bonds. The complexity of many financial instruments and the interrelationships among banks have made it difficult to root out the bad bets and keep them from contaminating the system.

The housing bust presents perhaps the most serious obstacle to recovery, according to Douglas Cliggott, chief investment officer for Dover Management. “It’s hard to have an interest rate that makes it attractive to buy an asset that’s going down,” he said.

Indeed. Amazingly, these economic realities hold true everywhere, even here in Seattle.

(Jon Talton, Seattle Times, 03.23.2008)

Please vote in this poll using the sidebar.

If you think our “strong local economy” is going to protect the Seattle area from feeling a pinch in the housing market and elsewhere as recession looms on the horizon, think again. The pinch is here.

With a cooling economy pinching tax revenue even as government costs rise, King County faces a $45 million budget deficit in 2009 unless services are cut below current levels, county officials said Tuesday.

That projection is gloomier than the $25 million general fund shortfall for 2009 forecast by County Executive Ron Sims in October. And the years beyond 2009 look worse still, county Budget Director Bob Cowan said.
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The general fund relies primarily on sales and property taxes. The recent rapid growth in sales tax revenue is slowing with the economy. Property tax growth also is faltering: Although overall tax increases on existing property are capped at 1 percent in any event, new construction is exempt from that limit, and the housing slowdown has put a crimp in that revenue source, Cowan said.

So much for our special immunity. But as long as Microsoft and Boeing keep hiring, everything will work out, right?

How about instead of sticking our heads in the sand and pretending everything will just be okay, we get in gear and start looking for ways to work through the hard times that are almost certain to be just around the corner?

Along those lines, I received an email from a reader that wanted to discuss “where people should spend their tax rebate checks in a way that will truly benefit our economy.” Personally I think the problems with our economy are beyond the point where putting a few thousand dollars in everybody’s pocket is going to help things. I’d suggest using the money to pay off a little debt, do a little contrarian investing, or just plain save it… pretty much anything but spending it.

Anyway, how do you think individuals, families, and local governments can best prepare for a serious economic slowdown?

(Gregory Roberts, Seattle P-I, 03.11.2008)