U.S. Domestic Programs Fail to Jump-Start the Economy-Snapshot Oregon

U.S. Domestic Programs Fail to Jump-Start the Economy
( Around the Nation with a Snapshot of Oregon’s Housing Industry)
(Volume 1(1), July 2010)
by Mary Ayala, Ph.D.
merryay@gmail.com
www.mary4money.com

Around the Nation

Let's face it. The news reports about the national economy for the past six months have generally been dismal. The ‘American Reinvestment and Recovery Act’ (ARRA) and other federal programs designed to improve the nation's economic outlook have not been terribly successful due in large part to an underestimate of the serious state of the global financial market that banks and financial intermediaries created by failing to expose the high-risks of securities they sold to investors, and by over-exposing their own investment portfolios to other types of high-risk securities. The federal government’s bailout of the major stakeholders in the financial industry was necessary to keep them solvent; but a major reason that the federal economic revitalization programs have not been entirely successful is that they have not addressed the problems that the financial meltdown and the recession have created for the American Middle Class.

Historically, the wealth of the American Middle Class and the ingenuity of entrepreneurs have stimulated the economy and created jobs. However, the American Middle Class lost some of its wealth when it thought it was purchasing investment-grade (AAA-rate) securities from the financial institutions that the federal government bailed out. Coupled with a loss of wealth from these investments, the collapse of the stock market, the lack of credit when needed to meet short term cash-flow requirements, the loss of equity in their homes, and for some, the loss of jobs and businesses, it may take several years before the Middle Class can recover from the current recession.

To its credit, Congress did enact a set of measures that helped first time homebuyers purchase homes or remain in otherwise unaffordable homes;and it did help many consumers obtain credit to purchase automobiles. The ARRA successfully put people back to work for a short period of time; and the federal Emergency Unemployment Compensation legislation has been an automatic economic stabilizer during the current and many previous recessions. During the current recession, however, the President and Congress initially thought, or at least expressed the opinion, that the recession would run its course in roughly one year. Therefore, Congress may not have anticipated that a longer recession would have negative impacts on the Middle Class.

The ARRA that resembled FDR’s New Deal, was designed on a much smaller scale; and the funding for ARRA projects had to be spent over a much shorter time period. Therefore, given the status of the recession today, Congress may decide to consider extending the effective dates of ARRA until the recession actually ends; and it may continue to consider extensions to the Emergency Unemployment Compensation legislation until unemployment rates are substantially lower. However, since these federal programs were not designed to respond to the problems that the recession has created for the American Middle Class, this is a major problem that Congress should address if these Americans are going to survive the current recession unscathed. If these Americans are going to continue to be the key to America’s economic growth and future employment opportunities, then Congress must find a way to nurture and protect them from disruptive economic shocks with the same degree of effort and passion that it exerts towards protecting other vulnerable members of our society.

Oregon and Its Housing Market

Funding for federal programs is insulated partially from the effects of a recession because Congress can approve budget deficits. Unfortunately, states do not have this authority. States and local governments must balance their budgets each year. Therefore, it is critical to evaluate the severity of a recession at the state or municipal levels. Data is usually limited for this purpose; but we can look at regional economic conditions by focusing on different markets.

The remainder of this article focuses primarily on Oregon’s residential construction industry or, more generally its housing market. Between 2005 and 2007, as home mortgages became readily available to the sub-prime market, home builders accelerated construction, but it could not respond fully to the demand for homes. As a result, home values in Oregon surged upwards.

Today, the severity of employment losses in the construction industry reflects an excess supply of homes attributable in part to the overbuilding that occurred between 2005 and 2007 and in part to a downward shift in the demand for homes that occurred when people started to realize that could not afford their homes. In 2007 and 2008 as home foreclosure rates began to rise particularly in the sub-prime segment of the housing market, the financial industry started to unravel. The Congressional bailout legislation aimed at preventing a meltdown of the U.S. financial industry in October 2008 was successful; but it could not restore domestic credit markets immediately which thrust the economy into its current recession. Therefore, home foreclosures, vacant housing and the recession have had an enormous impact on total employment including the construction industry. For comparison, the employment impacts are listed in Tables 1 and 2 below for Oregon and three other Western coastal states.

Table 1- The Labor Force and Unemployment Rates for Western Coastal States

Table 2- Construction Employment

Table 1 (source: Bureau of Labor Statistics (BLS)) indicates that the labor force in all four states increased between 2005 and May of 2010. However, the number of unemployed increased by a greater percentage which increased all of the states' unemployment rates. In Oregon, the unemployment rate nearly doubled and in California (CA) the rate more than doubled. Focusing on the construction industry, Table 2 reveals that the the number of employed construction workers declined substantially in all four coastal states. In relative terms, the decline was most evident in CA where construction employment as a share the labor force dropped 2.2 percentage points from 5.2% percent in 2005 to 3.0 percent in 2010. Oregon followed closely behind CA with a percentage point reduction of 1.8% It is doubtful that employment will remain at 65,000 in Oregon after the recession ends (Source, BLS). But,tighter credit and lending requirements, unemployment, and depressed home values do not lend themselves to a healthy housing market that stimulates employment in the construction industry. In fact, if the ARRA federal funding program had not created temporary employment for construction of non-residential capital projects, the unemployment rates in this industry would have been higher.


As noted above, prior to the collapse of the financial market in 2008, the median home value of owner-occupied homes in Oregon escalated. According to the U.S. Census Bureau, the median value of Oregon’s owner-occupied mortgaged homes in 2005 was $211,400. Table 3 reveals the growth rates for the value of these types of homes in Oregon and three other western, coastal states. In Oregon, the annual growth rate for the median value of these homes was 16.4 percent in 2006, clearly an unsustainable rate given the fact that the average family’s income of $52,700 in 2005 did not grow by more than 6 percent in 2006.

Table 3- Growth Rates of Owner-Occupied Mortgaged Homes

Over the next two years, median home values in Oregon continued to appreciate faster than family income: 11.2 percent in 2007 relative to income growth of 5.8 percent and 3.6 percent in 2008 relative to income growth of 2.6 percent. These changes weakened the housing market in Oregon by 2008.

The strength of Oregon's housing market is presented in Table 4 for three different years ending in 2008. Negative values reflect weakness in the housing market, whereas positive values reveal strength. Higher positive values are associated with better conditions in the housing market as measured by local factors that contribute to its strength (e.g., housing affordability, the share of homes that are not mortgaged, and the share of homes that have both first and second mortgages). Relative to the other 3 Western coastal states listed in Table 4, the strength of Oregon's housing market by 2008 was better than CA's housing market; but the markets in WA and Alaska were substantially stronger.

Table 4 - Housing Market Conditions Index, Selected States

The U.S. Census Bureau has not published data for 2009 that is needed to update Table 4; but it will become available after the results of the Decennial Census have been compiled and analyzed. In the meantime, other data must be used to ascertain current conditions in the housing market. Two sources of other data are realtytrac and the U.S. Census Bureau. Realtrac generates foreclosure data and the U.S Cenus Bureau generates monthly estimates of housing permits. Both sources confirm weakeness in Oregon's housing market.

The share of home foreclosures in Oregon defined as bank repossessions (REOs) rose from roughly 5,900 in 2008 to 10,300 in 2009. For the first five months of 2010, the number of foreclosures in Oregon including first notices of delinquency, auctions and bank repossessions (REOs) totaled roughly 30,000. Historically, the REO share has been about 40 percent (12,000).

For the first five months of 2010 the median sales price of foreclosed homes in Oregon was $205,000, down 5.4 percent from one year earlier. We can compare this value to the U.S. Census Bureau’s historical estimates of the median value of owner-occupied mortgaged homes. The estimate for 2008 was $283,500. Declining sales prices of foreclosed homes and short sales tend to depress the sales prices of similarly designed and aged homes in similar neighborhoods. Therefore, until the foreclosures and short sales drop substantially and until vacant homes are sold in neighborhoods, the median value of owner-occupied mortgaged homes in Oregon will probably lean towards $205,000. This change implies a negative growth rate of 28 percent since 2008. (i.e., -14 percent on an annualized basis if the sale prices of foreclosed homes for the remainder of 2010 do not continue to fall). A decline of this magnitude would push the median value of owner-occupied, mortgaged homes in Oregon back to its value in 2004.

Oregon's homeowners do not benefit from the sale of foreclosed property at depressed prices because these sales represent gains for buyers at the expense of other households who have lost their equity and or ability to make their mortgage payments. Moreover, declining sales prices on foreclosed homes do not produce incentives to build homes. As Table 5 confirms below, the volume of housing permits in Oregon has dropped significantly since 2005.

Table 5- Housing Permits Issued in Oregon, YR-to-Date Totals thru May

Conclusions

National recessions are associated with business cycles. However, the recessions can also be started by disruptive shocks such as frozen credit markets that occurred during the early stage of the current recession. Therefore, a recovery from recessions cannot always be accomplished by relying on traditional theories and programs that have worked in the past. Boosting employment temporarily during the implementation of the ARRA could not end the recession or restore the economy to pre-recession employment levels because the ripple effects of the financial meltdown of the U.S. economy were grossly underestimated. The federal government’s bailout of major U.S. banks and financial intermediaries was necessary to keep them solvent; but it was not intended to be a plan to restore the distribution of wealth to the Americans or to restore pre-recession levels of employment.

Historically, the American Middle Class has been the growth engine for this nation’s economy and the source of employment opportunities for workers. Therefore, some of the important federal programs that are needed to recover from current recession must attempt to deal with the financial losses this group group has incurred. The federal tax credits to first time home-buyers, the subsidies for automobile purchases, and the programs to help refinance homes did not target America’s Middle Class.

As measured by higher unemployment rates, among Western coastal states the recession has been more severe for Oregon and CA. Focusing on Oregon’s housing construction industry, employment as a share of the labor force declined from 5.1 percent in 2005 to 3.3% percent in May 2010. This change is consistent with a decline in construction activity as measured by a reduction in the number of housing permits that have been issued in Oregon.

During the first 5 months of 2010, the median sales price of foreclosed homes in Oregon was roughly $205,000, or 28 percent below U.S. Census Bureau’s 2008 estimate of the median value of all owner-occupied mortgaged homes in Oregon. Depressed home values coupled with an increase in home foreclosures in Oregon and the persistence of Oregon’s double digit monthly unemployment rates do not provide any signals yet that Oregon’s economy has recovered from its recession. However, the signals may change.*

*Watch for future updates of this report!