Seattle Bubble

Looks like that slowdown in state government revenues that Washington State’s chief economist ChangMook Sohn has been consistently warning us about really has come to pass.

Sharp declines in predicted revenue from the real estate excise tax and a mild national recession have led the state’s top economist to downgrade his revenue forecast by $423 million.

But Washington’s economy will not fall into recession because of strong growth in aerospace, high tech and international trade, said ChangMook Sohn, executive director of the state’s Economic and Revenue Forecast Council.

“The outlook for the state economy is significantly brighter than for the U.S. but we will be affected by the national slowdown as well as our own housing market problems,” Sohn said Friday.
…
Though lawmakers had been predicting a decline in projected revenue for some time, the news came as a blow to Democrats who had hoped to pass a supplemental budget that would leave more than $1 billion unspent.

Most now concede that that level of savings is no longer realistic.

That $423,000,000 drop in the forecast is compared to the previous forecast, which was made only three months ago. Will our lawmakers continue to ignore the obvious warning signs, and spend Washington into a corner, even as revenues continue to decline? Probably.

Don’t forget, while the housing bubble has been inflating revenues, our state’s legislative and executive branch have been spending it just as fast. Since 2004, state spending has increased 33 percent (source). I don’t think it’s likely that they’ll suddenly start cutting back as revenue growth slows to a halt and possibly reverses. But I’m cynical.

(Chris McGann, Seattle P-I, 02.15.2008)

Everybody’s pal Christine Gregoire gave a pep talk to the Washington Realtors last week in which she made some interesting comments.

Gov. Chris Gregoire told about 400 Washington Realtors on Thursday that she has been working to meet goals the group has for transportation, affordable housing, education and quality of life.

Gregoire, who spoke a day after Republican gubernatorial challenger Dino Rossi went before the group, cited a report in Fortune magazine and said the state is a good place to do business. She also offered encouragement for an industry slowed amid recession fears.
…
“The only thing we have to fear is fear itself,” Gregoire said, quoting former President Franklin Roosevelt and referring to national recession fears. “It is a very frustrating time, I know, for you, and it is for me. … I’m struggling to get the message out to Washingtonians. The economy is strong. Buy your home.”

From the Associated Press account of the same meeting:

Addressing the politically powerful Washington Realtors, the Democratic governor said she sometimes wishes people wouldn’t watch the evening news because of all the “doomsday” talk of a home mortgage meltdown and a pending recession.

Gregoire said that in actuality, the state economy has seldom been so strong, with record low unemployment, 222,000 new jobs created in the past three years, and national publications praising the business climate here.

She conceded that the national news is having a psychological effect on home buyers, even though there are relatively few mortgage failures here.

“This is a very frustrating time,” the governor said, adding “Our economy is strong — buy your home. … There is no good reason for a slowing of home purchasing in the state of Washington today.”

Now why do you suppose Mrs. Gregoire would promoting the idea that Washington State residents go out there and throw caution to the wind, ignore the warning signs of declining prices, and jump into that real estate market right now? Obviously one likely reason is the usual pandering of politicians telling people what they want to hear. In this case, the people in question are a room full of “professionals” whose income depends on suckers consumers continuing to buy homes all the way down the declining price slope.

I think there may be another reason though. I think Mrs. Gregoire may really be on the Realtors’ side here, not just talking the talk. Here’s a story that appeared in yesterday’s P-I… (emphasis mine)

Gov. Chris Gregoire and leading Democrats in the House and Senate have reached one early agreement in this year’s budget negotiations: It’s time for a reality check.

Anticipating a bleak revenue forecast, they’ve agreed to start looking for places to trim the $33 billion budget they passed last year. They say they want to have their priorities in order in case the slowing economy forces them to find efficiencies or even cut programs altogether.
…
Gone are the halcyon days of a skyrocketing real estate market and a ballooning economy that had led to back-to-back-to-back upward adjustments in the state’s revenue forecasts.

And gone is the free and easy feeling about spending, the unflinching commitment to “targeted investments” that Democrats have enjoyed for the past three years.
…
Gregoire already has called for frugality this election year and has asked lawmakers to adopt her budget that leaves $1.2 billion unspent.

But her budget also calls for $244 million worth of new spending.

Is it really any surprise that Mrs. Gregoire, who has overseen a 33 percent increase in state spending since taking office (source), would want people to ignore the “doomsday talk” and just buy, buy, buy? What do you suppose has enabled spending to increase by so much? Could it perhaps have been the high-flying home prices and red-hot pace of home sales in 2004-2006 (every one of which puts more money into the state coffers)?

And now Mrs. Gregoire wants us to ignore reality so she and her pals can fund their pet projects. Yeah, that sounds like a great reason to keep this bubble alive. Who’s with me?

(Brad Shannon, The Olympian, 01.25.2008)
(Associated Press, KGW.com, 01.25.2008)
(Chris McGann, Seattle P-I, 01.28.2008)

Haven’t seen this one mentioned on the other local real estate blogs, but it’s definitely of interest to anyone out there that already owns a home (or a home loan, as the case may be). Depending on who you believe, a new bill floating around down in Olympia may either help home owners reduce their property taxes, or saddle them with hundreds of millions more.

It’s an election-year, no-new-taxes, fiscal-responsibility legislative session, but that’s not stopping lawmakers from contemplating a bill that could ultimately saddle homeowners with the largest property tax increase in state history.

House Bill 2977 and Senate Bill 6517 would make it easier to dispute local property tax assessments — an easy sell in a region that has seen property taxes increase as real estate values have gone through the roof.
…
But King County Assessor Scott Noble said the real impact is buried beneath the stated good intentions, and it would amount to a tax break for big business paid for by the state’s homeowners, because the burden would simply shift.
…
“In our budget-based property tax system, reductions of valuations will produce tax shifts onto other taxpayers, and my experience with advocates from our large commercial taxpayers suggests a large increase of appeals and lawsuits from these property owners who have sizable resources,” Noble said in the e-mail.

Homeowners have historically been much less likely to appeal property value assessments because they have less to gain, he said.

If you’re a home buyer in Washington State, or intend to become one in the not-too-distant future, it would be to your benefit to pay attention to issues like this. Despite the supposed benefits of home buyers having “fixed payments” (vs. increasing rent), the ‘T’ in the PITI increases rather steadily, and is at the mercy of new legislation such as this, written by politicians that rarely have your budget in mind when making their decisions.

(Chris McGann, Seattle P-I, 01.21.2008)

As home sales in the Seattle area (and state-wide) plummet and prices stagnate and begin to decline, it looks like government revenues are following suit:

On top of November’s wet weather and the Northwest’s cooling housing market, the state’s top economist had dreary news for state leaders Thursday when he announced that Washington would be taking in about $132 million less than expected in his quarterly revenue forecast.

Washington’s housing and construction sectors are doing better than those in most other states, but ChangMook Sohn said the real estate slowdown is occurring sooner than in the most recent prediction. The subsequent change in the revenue forecast has a lot to do with predicted declines in real estate excise-tax collections.

This is exactly what Mr. Sohn has been warning would happen for some time now (see related posts here). I guess he didn’t get the memo from the Washington Realtors though, because they told me that Washington State has a strong economy and we’re adding tons of new jobs, making our real estate market “the envy of the nation,” and practically unsinkable. (Yes, George beat me to the punch on that joke, but I intend to get a lot of mileage out of these Realtor ads.)

“Though the decline in projected revenue is very small, this forecast reinforces the need to continue to save money to make sure we have the resources to maintain the services expected by Washington citizen,” Gregoire said.

I completely trust the government to manage our money wisely as the housing market continues to drag down state revenues, and the shortfall turns from “very small” to “surprisingly large.” Because saving money is what they’re good at.

(Chris McGann, Seattle P-I, 11.16.2007)

Remember that slowdown in state revenues that we were warned about by our state’s chief economist ChangMook Sohn last year? Well guess what? It’s here!

Washington’s construction industry continues to expand, but real estate tax collections are $18 million below expected levels.

The state Revenue Forecast Council says taxable real estate activity in the past month was nearly 26 percent lower than a year ago, the sharpest decline in 12 years.

In related news, despite the fact that King County government (and Ron Sims specifically) have seen the revenue slowdown coming for nearly two years now, we’re now being faced with new taxes to cover the real estate shortfall.

King County Executive Ron Sims proposed three new taxes Monday, even as he warned that a slowdown in housing construction will strain the county’s general fund during the next two years.

Sims said in his annual budget address to the Metropolitan King County Council that he told his staff to “go back to the drawing board” in September after financial advisers warned that a downturn in construction would hit the county hard. The revised budget, which also calls for higher bus fares, trimmed 2008 spending in order to soften an expected 2009 budget shortfall.

…

Construction downturns are particularly challenging for the county because property taxes are the biggest source of money for the general fund.

Too bad nobody in King County government thought to restrain spending during the times when real estate was flying high and money was flowing in. Not that this is anything other than government business as usual, but it’s still annoying.

(Associated Press, The Olympian, 10.11.2007)
(Keith Ervin, Seattle Times, 10.16.2007)

Seattle Times writer Melissa Allison seems a bit too excited about today’s report that retail spending in Washington State grew by 10.5% from spring ‘05 to spring ‘06.

Those were the days, back in the spring when the flowers bloomed and the housing market sizzled.

Washingtonians had such confidence last spring that they spent with abandon on computers, hotel rooms, jewelry and other items.

They spent 10.5 percent more than they had a year earlier, the largest increase for taxable retail sales in Washington since 1990, according to April-to-June data released Monday by the state Department of Revenue.

Rising gas prices didn’t wreck the mood and are not included in the retail-sales data.

Economists say the spending has calmed since then, doused by a slowdown in the housing market and slower employment growth.
…
The state’s economic growth and therefore the spending are propelled by employment gains, particularly in high-wage sectors such as aerospace, software and construction, Sohn said.

So, the spending is “propelled by employment gains,” but when it “calms” it’s because of a slowdown in the housing market? What a delightful contradiction. I fail to see how a 10.5% retail spending increase can be attributed to “employment gains.” Were 10.5% more jobs added? Did everyone get a 10.5% raise? Smells like false assertion to me. I think it’s much more likely that the spending increase is primarily the result of home equity extraction and a declining savings rate.

Maybe it’s just me, but the news that people are spending increasingly more as incomes stay practically flat doesn’t seem like something to celebrate.

(Melissa Allison, Seattle Times, 10.31.2006)