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)

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.
…
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)