Prince William County ECONOMIC INDICATORS NEWSLETTER Volume 7, Issue 4 October - December 2007

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1 Prince William County ECONOMIC INDICATORS NEWSLETTER Volume 7, Issue 4 October - December 2007 Highlights Fourth quarter GDP: 0.6% compared to 4.9% in previous quarter. National unemployment rate: 5.0% in December, an increase from November s 4.7% County real estate market remains down sales are low, inventory still high over 15 houses on the market for every home sold County and area labor markets healthy with unemployment at 2.5% (November 2007). At-place employment: 104,719 (2 nd Quarter 2007) 1.0% increase from the previous quarter Economic Focus The past year, 2007, saw entrenchment and expansion of the real estate downturn that spread into other areas of the economy, notably credit and banking markets. This downturn was experienced nationwide, but perhaps most acutely in those communities that saw the most dramatic increases in housing markets over the past several years. Housing starts are approaching zero in many markets where speculative buying and overbuilding were most prevalent. While some of this downturn was the progression of a normal market adjustment and a predictable result of overheated exuberance, the impact on Prince William County s ability to meet its fiscal projections is evident. Foreclosures in the nation increased dramatically as adjustable rate mortgages and other exotic types of loans were reset beyond the ability of some troubled homeowners to pay; Prince William County saw nearly a ten-fold increase in the number of foreclosures from 2006 to With the downturn in the housing market, the construction industry, particularly in residential construction, became a troubled sector. Residential construction across the nation declined at a 25 percent annual rate in the fourth quarter 2007 and remains troubled in early With an unwinding housing market and the attendant troubles in credit and mortgage industries, investors and traders have become increasingly jittery. The New Year got off to a worrisome start with weaker than-expected reports on manufacturing and employment; the stock market started 2008 with its worst first five trading days ever, on an S&P500 basis. Despite uneasiness in many markets, and the frightening prospect of recession with a dose of stagflation thrown in, there is still hope that the worsening economic conditions can be managed into a soft-landing of sorts. Federal officials in the executive and legislative branches of the federal government are focusing on plans for economic stimulus and aid to the mortgage and credit sectors. Central banks from other nations have joined with the Federal Reserve with infusions of liquidity in attempts to shore up flagging spirits and feint hearts. In Northern Virginia, and in Prince William, unemployment continues at substantially lower than the national rate. The predominance of the federal government and Prince William s enviable proximity to it will greatly ameliorate any downturn in economic activity. However, the importance of real estate revenue in Prince William County s fiscal considerations, particularly from residential real estate, serves as a major cautionary note over the next several years and factors into all fiscal discussions.

2 According to data from Metropolitan Regional Information Systems (MRIS), home sales (single family, townhouses and condominiums) in Prince William County totaled 4,642--a 29.3% decline from the 6,570 units in 2006 and a 58.9% decline Home Sales & Average Prices in Pr. William Co. offtowards the end of the year. In April 2007, a total of 1,103 distressed properties were reported in Prince William County, including 70 preforeclosed, 448 auction and 585 bank-owned. This number climbed rapidly during the first half of the year, reaching over 2,000 by the end of June. By the end of December, there were approximately 2,500 distressed properties in the county. As the next group of adjustable rates was reset during the last two quarters and with the requisite three months or more of missed mortgage payments, another wave of distressed properties was anticipated in early Source Metropolitan Regional Information System from the peak year of 2005 when 11,301 homes were sold in the county. In the five-year period an average of 9,334 homes were sold annually in the county; in 2007 approximately half that number were sold. The average sale price of homes sold in 2007 was $395,616--a 6.5% decline from the peak year of 2006, when the average sold price was $423,023. A further indication of the troubled real estate market is the number of distressed properties, meaning homes in pre-foreclosure (mortgagee has missed at least 3 mortgage payments), auction (property has been publicly advertised and put up for auction) and bank-owned (lender has foreclosed). Realtytrac.com is an on-line service that tracks this type of activity across the nation.in Prince William County, the number of distressed properties increased dramatically throughout the first three quarters of 2007, before leveling Distressed Properties in Pr. William Co. Source: Realty Trac.com National Economic Conditions National economic indicators exhibited a range of positive and negative trends during the quarter. Job growth in December was 18,000, an 83% decrease from November s 115,000. Real Gross Domestic Product (GDP) is the broadest measure of economic activity in the United States and is a reliable indication of the overall strength and performance of the national economy. The 2007 annual rate of 2.5% is slightly less than the average over the last 4 years of 2.8%; the Fed s target is 3.0%. U. S. Gross Domestic Product began 2007 with a rather anemic 0.6% in the first quarter, but then outperformed most predictions with healthy growth in the second (3.8%) and third (4.9%) quarters. Fourth quarter 2007, however, saw a worrisome return to the 0.6% of the first quarter. Factory orders advanced by 1.5% in December, while durable orders declined by 0.1%. The bottom line is the risk ahead if business investment shows another stall given the expected slowing in economic growth. Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) declined $20.5 billion in the third quarter 2007, in contrast to an increase of $37.6 billion in the second quarter. The Fed rate reduction of 75 points (higher than some predicted) was an attempt to calm markets and will improve borrowing rates, but will have little effect in the short-term on housing woes. Economic Indicators Newsletter 2

3 Labor Market Job growth in December was 18,000, an 83% decrease from November s 115,000. Initial claims for unemployment benefits for the week of December 29 were 3334,000, still below the 400K weekly level which economists consider the benchmark for a weak job market. The unemployment rate in December was 5.0% an increase from November s 4.6%. Leading Indicators The index of leading indicators was -0.2% in December, a slight improvement from November s -0.4%, but the third consecutive monthly decline, which is considered a recession warning alarm. The index is designed to signal changes in economic activity over the next few months. Housing Industry Some million housing starts were reported in December 2007, a 14.2% decline from November. This represents a 56% decline since the January 2006 peak and the lowest level in 17 years (May 1991). Building permits registered an 8.1% decrease in December from November, with million new permits reported nationally in December New home sales followed housing starts and permits, reached a 13 year low in November with no sign of stabilization. Some 647,000 new home sales were reported nationwide in November, an 11.1% decline from October s 728,000. Existing home sales were reported at 4.89 million in December, a decline of 1.9% from November s 6.47 million. Higher mortgage rates, a crisis in the sub-prime and adjustable rate mortgage markets have reduced demand and severely impacted the housing market after the record high of June 2005 re-sales. The downward trend, following years of record growth, belies early predictions of a soft landing in the market. Indications are that a second wave of pre-foreclosed, auction and bank-owned properties is on the way that will substantially add to an already burgeoning inventory of unsold homes on the market. The data suggested that more Americans could lose their homes and that the housing market s troubles might persist longer than many analysts have been predicting. Inflation The Consumer Prince Index (CPI) for December was 0.3%, a 0.6 percentage point decrease from November s 0.8%. Medical care services and education are considered hot spots while energy prices, while easing from November s tremendous 6% gain to 0.9% in December, still remain a large underlying pressure on the CPI. The core CPI, which removes energy and other costs, stood at a 0.2% in December 2007, month over month. December s year over year core CPI stood at 2.4%, a slight easing from September 2006 when it reached a decade high 2.9%, but still troublesome in terms of inflationary pressure. The Producer Price Index (PPI), a measure of wholesale costs, declined by 0.1 % month over month in December, a drop from November s 3.2% gain. The core PPI increased by 0.2% in December 2007 from November s 0.3%. Prince William County Local Economic Conditions Prince William County economic indicators were mixed, with a serious and protracted fall in the housing market and increased commercial vacancies, but a remarkably resilient and productive labor force. Labor Market The civilian labor force (200,870 in November 2007) increased by 0.7% since October. Employed persons in the county (195,841 in December 2007) increased by 0.5% from the previous month. The unemployment rate for Prince William County was 2.5% in November compared to 2.4% in October. The national unemployment rate was 5.0% in November. At-place Employment - According to data from the U.S. Department of Labor and the Virginia Employment Commission, Prince William County has outpaced regional, state and national economies in business, jobs and wage growth over the last five years but has mixed results when comparing growth over the last year. In 2007 (2 nd Quarter) there were Economic Indicators Newsletter 3

4 6,642 establishments in Prince William County, a growth rate of 3.4% since 2006 and 26.8% since 2002 (2 nd Quarter). By comparison, Northern Virginia establishments grew by 2.3% in one year and 15.8% since 2002; statewide, establishments grew by 2.7% in one year and 13.3% since At-place employment in Prince William County grew by 20.5% since 2002 but declined by 0.4% in the last year. By comparison, Northern Virginia grew by 11.9% since 2002 and 1.0% in the last year. Employment growth in the Commonwealth grew by 7.9% since 2002 and 1% in the last year. The impact of the housing downturn can be seen in last year s employment decline in Prince William County as over 2,300 net jobs in construction were lost (-15.1%) between 2006 and Likewise, jobs in finance and insurance and real estate experienced a net loss of over 300 jobs (-9.6%) between 2006 and The average weekly wage in Prince William County grew by 3.2% in the last year and 23.8% since At-place average weekly wages in Northern Virginia grew by 4.3% in the last year and 23.7% since In Virginia, weekly wages grew by 4.5% in the last year and 22.7% since At-Place Establishments, Jobs and Wages Source: Virginia Employment Commission Commercial Inventory According to Costar Realty Group, a multiple listing service for commercial property, 2007 was a year in which the Prince William County non-retail commercial inventory moderated growth rates from previous years, probably in response to an overbuilt supply, increased vacancy rates and cautionary economic conditions. In 2007, 584,321 net new square feet of commercial space was added, compared to over 1.2 million the previous year and 3.38 million since This represents a growth rate of 3.3% in the past year, down from an annual average of 5.6% over the last 4 years. Twenty new nonretail commercial buildings were added in In 2007, 14 net new Office buildings were added to the inventory; 377,666 net new square feet of Office space were added, an Source: Costar Realty Group annual growth rate of 8.1%, compared to an annual average of 12.9% since One net new Flex building was added in 2007; 51,553 net new square feet of Flex space were added, an annual growth rate of 1.5%, compared to an annual average of 4.2% since Five net new Industrial buildings were added in 2007; 155,102 net new square feet of Industrial space were added, an annual growth rate of 1.6%, about half the annual average of 3.3% since Vacant space and vacancy rates climbed, largely the result of a dramatic increase in supply over the last four years that clearly has outpaced economic expansion. In December 2007 a total of 1.75 million square feet of vacant space was reported by Costar, a vacancy rate of 9.4%. This represents an increase of over 750,000 square feet since December 2006, when the total vacancy rate was 6.1%. In December 2007, 829,838 square feet of vacant Office space were reported, an increase of 81% since The Office vacancy rate was 16.1% in December 2007, compared to 9.9% a year earlier. Costar reported 474,749 square feet of vacant Flex space in December 2007, an increase of 26.9% since The Flex vacancy rate was 13.5% in December 2007, compared to 10.8% the previous year. Costar reported 447,940 square feet of vacant Industrial space for December 2007, an increase of 67.8% since The Industrial vacancy rate was 4.5% in December 2007, compared to 2.7% in December Economic Indicators Newsletter 4

5 Newsletter Notes: The Quarterly Economic Indicators Newsletter reports on national, regional and local economic conditions as they impact Prince William County. Key national indicators, such as job creation, housing data and retail sales will have clear meaning at the local level. Other national indicators, industrial production, gross domestic production and consumer confidence, for example, may seem more prosaic and less important at the local level. However, given the county s proximity to the federal government and its participation in the metropolitan Washington economy, Prince William County is profoundly affected by the ebbs and flows of national conditions. Local indicators are presented with at least two gestures in mind: a wink at monitoring on-going trends in the county (housing, population and costof -living, for example) and a nod towards their impact on the citizens of Prince William County (labor and housing markets) and the county s ability to provide goods and services to its residents. Published By: Department of Finance, Prince William County Editor: Bill Vaughan bvaughan@pwcgov.org Economic Indicators Newsletter 5

6 Prince William County ECONOMIC INDICATORS NEWSLETTER Volume 7, Issue 4 October - December 2007