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National, State and Regional Economy
The national economy unexpectedly slowed during the second quarter to an annualized growth rate of 1.6 percent. That’s well below the long-term average and is a poor harbinger for an economy emerging from a steep recession.
“Unexpectedly” is a word that has often appeared before “slowed” or “poor” in recent months’ newspaper articles about the economy and its vital statistics. Most of the last year’s economic growth was from the restocking of retail inventories and government stimulus; with inventory growth slowing, federal government stimulus diminishing, cutbacks in state and local government spending, and exports unexpectedly faltering, economic growth will likely remain sluggish in the near future.
The overleveraged American consumer, one of the major causes for the recession, has only just begun to reduce his/her debt load. The graph below which goes back to 1975 shows just how much debt Americans are carrying compared to historic averages.
Just before the recession began in 2007, the level of household debt peaked at over 90 percent as a percentage of GDP, compared to a range of 40-60 percent up until the mid-1990’s. If this data series reverts back to its long-term average, households will continue to pay down debt and be less likely to spend, especially if GDP growth falters.
The graph below is a measure of the amount of homeowners’ equity in the United States from 1975 to the present compared to the total value of residential real estate. A higher percentage indicates more equity, while a lower percentage indicates more debt.
The collapse of the housing bubble is apparent beginning in 2007 as home values decreased while debt levels did not. The partial recovery in 2009 and 2010 was caused by an uptick in national real estate values from unprecedented government support including the now expired homebuyers’ tax credit, the expansion of low down payment FHA guaranteed loans to include higher value properties, and the reduction of some mortgage debt through foreclosures, short sales, and repayment.
Both of the previous graphs illustrate the imbalances the U.S. economy has developed from many years of excessive borrowing. Consumer spending is unlikely to grow strongly until debt levels move closer to their long-term averages. We’re far from that point. Since consumption makes up approximately 70 percent of GDP, growth may be affected for many years. In the parlance of the bond fund PIMCO, we may have entered into a “new normal,” a period in which growth may slow below the long-term average and where unemployment is likely to remain high.
Other economic measures have recently showed unexpected weakness in the economy. The national unemployment rate has remained stable at 9.5 percent for the last several months, in part because many job seekers have given up looking for work, and as such, are not included in the rate. Virginia’s unemployment rate of 7.0 percent is slightly off its peak, and Alexandria is doing much better with a rate of just 4.8 percent, a touch lower than last year at this time. Nationally, the number of new weekly unemployment claims has begun to increase again after stabilizing at around 450,000, a figure close to the peak of the 2001-2002 recession. In a healthy economy, the number of weekly claims should be less than 350,000. The core consumer price index is hovering at less than one percent, another sign of economic weakness, as businesses must compete for choosy customers by reducing prices.
Alexandria's Economy and Revenues
Alexandria’s economy exhibits relative strength compared to the national economy. Receipts from the transient lodging tax have continued to improve. For the first time since the inauguration, the year-over-year increase in the 1 percent lodging tax has exceeded the increase in the $1 per room tax. According to Stephanie Brown of the Alexandria Convention and Visitors’ Association (ACVA), one possible reason for the shift might be that the City’s hotels are starting to turn away group business that spiked occupancy in the Spring, stabilizing revenues from the City’s $1 per room tax, while increasing the portion of the City’s tax that derives from room rates.
Also, the City’s meals tax collections increased in the three month period ending in April by 1.5 percent compared to a year earlier. That’s particularly impressive in view of the fact that this year’s three month period included the two snowstorms in February.
On the other hand, the number of new business licenses issued continues to be sluggish. In May, the year-over-year change in the number of licenses issued turned positive, but has since faltered.
The real estate market in Alexandria continues to be mixed. As expected, after the expiration of the homebuyer’s tax credit, sales of residential homes fell in Alexandria in July by 19.6 percent compared to July 2009. However, the average sales price of $501,821 increased by 1.7 percent compared to one year ago, which may paint a better picture for changes in appraised residential values in 2011 compared to recent years.
The graph below shows the average sales price of home sales in July on a three month trailing average.
In the wake of the expiration of the credit, the July housing market has weakened compared to last year. However, it will be difficult to get a true picture of the strength of the housing market until this fall after the effects of the housing credit’s stimulus have receded into the past. Any negative knock-off effects from the expiration of the tax credit will be partially offset by continuing extraordinarily low interest rates. As of the week of August 18, Freddie Mac announced the average rate on a 30-year fixed-rate mortgage was only 4.42 percent. Additional signs of weakness in the national economy could decrease rates further.
The City’s commercial real estate market remains weak, but is showing signs of improvement in at least one area. In the second quarter, the City’s vacancy rate for office buildings fell for the first time in two years from 12.4 percent to 11.7 percent. The vacancy rate during the second quarter of 2009 was 10.3 percent.
The City has begun to use a data series from CoStar rather than Grubb & Ellis for tracking office vacancy rates in Alexandria. Unlike the Grubb & Ellis data which includes all business property available for lease (even if it is currently occupied but available because the current occupant has not vacated the property), CoStar data only includes property that is currently vacant. Also, unlike the Grubb & Ellis data, it includes small office buildings of less than 20,000 square feet, owner occupied buildings, and medical buildings. The additional of these categories of office space more than doubles the measured capacity of the office market in Alexandria. We believe the CoStar data is a better representation of the office market than the Grubb & Ellis series. CoStar data is what the AEDP now uses to portray office market conditions in Alexandria. AEDP had previously used the Grubb & Ellis statistics.
The volume of commercial real estate sales continues to be sluggish, and as measured by the level of building permit applications to the Department of Code Enforcement, there is presently little new commercial construction in the City.