Alaskanomics

Alaska Economic Update- Part 4

By Mark Edwards

Home lending activity flat - The Alaska Housing Finance Corporation (AHFC) released its third quarter report on Alaska housing indicators. It tracks new loan activity for single family homes and condominiums in Alaska. The data is based on a survey representing approximately 95% of mortgage lenders in Alaska and also includes AHFC loans. The survey covered mortgage lending activity in the first nine months of 2015.

It reported 6,511 loans were originated statewide for single family homes and condominiums for a total amount of $1.77 billion. This is a slight decrease in volume relative to the first 9 months of 2014. Loans were done with an average down payment of 11% for the last five years. Single family homes accounted for 88% of statewide mortgage lending activity with 49% of those loans occurring in Anchorage. The Mat-Su contributed 18% of the volume, 10% in Fairbanks, 8% in Kenai, 5% Juneau, 2% Kodiak, and 1% in Ketchikan.

9% of total mortgage activity for the quarter was for condominiums and only 3% was multi-family. 85% of condominiums were financed in Anchorage. Juneau accounted for 5%, and the Mat-Su, Kenai and Fairbanks combined for another 5%.

Refinance activity slowed rapidly in 2014 and has leveled off this year - 30 year conventional fixed interest rate mortgage loans have been getting less expensive for three decades. In 1981 they peaked at 16.6% and have undergone a slow and steady decline ever since. In early 2009 rates dipped under 5% on average for the first time and a surge in refinance activity began.

According to AHFC statistics, there was about $400 million in refinance loans completed in Alaska in 2006 and 2007. In 2008, the average rose to $1.6 billion. Then in 2009 the activity spiked to $3.7 billion when the average 30 year interest rate declined nearly 1.5% in six months.

In 2010, the refinance volume declined to $2.4 billion, followed by $2.1 billion in 2011. 2012 saw an unexpected decrease in interest rates again to an all-time historic low of 3.3% by the end of the year. This led to an increase to $3.1 billion in refinance activity.

Rates increased throughout 2013 and have maintained close to 4% over the last two years. Most recently they were 3.89% as of November 2015, resulting in a low level of refinance activity because rates have not really improved for consumers in the last few years. Nearly everyone who could have benefited from a refinance likely has by now. According to AHFC, annual refinance activity fell to $1.6 billion in 2013 and only $500 million in 2014. Through three quarters of 2015 there has been $647 million of refinances in Alaska.

Housing statistics still good relative to the U.S. – The recently released survey by the Mortgage Bankers Association shows that Alaska continues to have some of the lowest levels of foreclosures and delinquencies on residential mortgage loans in the United States. At the end of 2015, Alaska ranked 4th and 2^nd best in the nation out of 50 states in foreclosures and delinquencies of all home loan types.

The total inventory of foreclosures in process is 0.7% in Alaska, while the country still has a larger lingering foreclosure inventory at 1.8% due to higher rates during the recession and longer resolution times. These rates are an improvement from five years ago when Alaska’s rate was 1.4% and the U.S. foreclosure rate was 4.6%. Housing markets appear to have stabilized in many parts of the country.

Delinquent loans are more than 30 days past due, but not yet in foreclosure. Alaska is second best in the overall level of delinquent loans. Alaska’s delinquency rate is 2.7%, while the U.S. average is 5% for all home loan types. This is an improvement for Alaska from 4.8% five years ago. The U.S. delinquency rate has also come down more dramatically from 9.4% at this time five years ago.

The National ‘Great Recession’ largely spared Alaska, as shown in the below table:

Subprime lending to traditionally non-qualified borrowers was a large contributing factor to the national mortgage problems. The survey covers 93,384 mortgages in Alaska. 5,829 or 6.2% were considered subprime, compared to 7.2% nationally. The rate of delinquencies and foreclosures on subprime loans is significantly higher. However, Alaska is in a far better position and has the lowest level of foreclosures and delinquencies for this important category. Subprime foreclosures in Alaska are at 1.7% while the national average is 7.8%. Alaska’s subprime delinquency rate is 6.3% compared to the national average of 16.2%. State across the country, including Alaska, have shown steady improvements in reducing the subprime problems over the last five years.

Building permits still historically low - According to the U.S. Census Bureau, the number of building permits for new, privately owned housing of 1 to 5 unit buildings remained low for the 9^th straight year. It had been under 1,000 units since 2007, but in 2013 it grew 9% to 1,081. 2014 saw a jump up to 1,509, with a small decrease to 1,291 last year.

A larger number of single family homes and multi-family structures were built in 2014, while slightly more duplexes and 3 to 4 unit homes were built in 2015.

The biggest challenge has been making new construction affordable enough to meet buyer’s income levels. The newly implemented Anchorage Title 21 regulations will provide further upward price pressure on new construction due to increased regulatory requirements. There is a shortage of low cost housing in Anchorage. Housing vacancy factors are very low and the number of existing homes under $350,000 is in short supply. There is less than two months of inventory available in all price ranges below $350,000. Anchorage is expected to follow other growing cities by becoming denser, building vertical and redeveloping older properties.

Alaska Multiple Listing Service (MLS) shows the average sales price of single family homes has grown each of the last four years. Since 2011 the average price has grown from $321,958 to $366,585 in 2015. That is total growth of 13.9% in four years. In 2015 rate of change was up 2.3%.

 

Alaska Economic Update- Part 3

By Mark Edwards

Population remains virtually unchanged in 2015 - The most recent Department of Labor estimate for Alaska's population is 735,625. That is an increase of 271 people net for the year.

Over the last decade we have been averaging about 11,000 births and 3,500 deaths for a net natural increase of about 7,500 per year. Natural increase was 7,427 in 2014 and 7,045 last year. For the last two years there has been a much larger than normal net out migration of people, -6,739 and -6,774 respectively. This is the highest level seen since there was a net loss of -19,245 people between 1986-87 and -15,710 people from 1987-88. The driving factor is likely to be the relative improvement of the U.S. and world economy compared to Alaska. Also, the aging baby boom population may be slowly retiring out of Alaska.  

The total growth in the last two years has been only 1,009 people. To put this in perspective, the average population growth for the prior decade was 9,587 per year from 2003 to 2013.

The monthly average of payroll jobs increased 0.5% in 2015 – According to the State Department of Labor’s January Economic Trends report, Alaska's payroll job count increased by 0.5% on a monthly average last year. This does not include uniformed military and the self-employed. It is important to note this is a preliminary estimate. The final year end numbers will be revised in April of 2016.

The unemployment rate finished the year at 6.6% - The seasonally adjusted unemployment rate in Alaska for December was 6.6%. This is a slight increase from 6.4% at the end of November. Alaska typically sees seasonal increases in unemployment as a result of the expected changes in tourism and weather-related construction and natural resource extraction jobs.

As mentioned above in the population numbers, the out-migration of nearly 7,000 people likely represented citizens of all ages. It would have been a mix of working-age residents, their children and some retirees. However, they were replaced by a nearly equal number of babies, who are clearly not yet in the workforce. Unemployment statistics can vary as workers move to part-time jobs. Nationally this is a trend as many companies are shortening work hours in response to major changes in health care laws. Also, when people give up looking for work entirely they are not counted in the workforce and thereby can help reduce unemployment rates.

U.S unemployment rates improving much faster than Alaska - Alaska's seasonally adjusted unemployment rate was 6.5% in December, compared to the U.S. rate of 5%. The comparable national rate improved considerably from 5.6% year over year.

As seen in the graph below by the Alaska Department of Labor, for over five years Alaska had been doing better than the U.S. in terms of unemployment. The rate in Alaska in blue has been relatively stable, despite the national recession and the U.S. rate spiked much higher. Now the U.S. rate is improving relatively faster than Alaska. This appears to already be affecting population migration trends as jobs are more easily found in the lower 48.

The unemployment rate is better in Alaska’s largest communities. The preliminary, not seasonally adjusted, rate for Anchorage was 4.9%, Juneau 4.7%, and Fairbanks at 5.6%. The Mat-Su rate was the exception at 8.1%, as local jobs are harder to find and many people commute into Anchorage for work.

Ketchikan and Sitka are the two newest markets for Northrim. They show moderate rates of unemployment at 7.5% and 5.5% respectively in November.

High levels of unemployment still persist in several rural areas of Alaska. The worst situations are the Kusilvak Census Area (formerly Wade Hampton) 20.6%, and the Municipality of Skagway at 22.6%.

Personal income rises 4.7% - Total personal income for Alaska was $41.8 billion annualized in the third quarter of 2015, according to data released by the U.S. Department of Commerce - Bureau of Economic Analysis. This is an increase of $1.9 billion compared to one year ago, or a growth rate of 4.7%. That equates to per capita income of $56,803 in Alaska. This is slightly lower than the 6% growth rate the prior year.

The growth rate in personal income for Alaska between the 2^nd quarter and the 3^rd quarter was 0.6%. This is compared to the national average quarterly change of 1.3%. Alaska’s slower improvement actually ranked us last at 50^th of the 50 U.S. states.

Alaska Economic Update Part 2

By Mark Edwards

As a continuation of the Economic Update, today we look at Alaska’s State Government.

State government will have to make prudent spending cuts and raise new revenues - The most impacted sector from a decline in the price of oil is the State of Alaska government. We are the most structurally imbalanced government in the country in terms of the diversification of revenue sources.

Major volatility occurs in State revenues due to two factors outside the government’s control: fluctuations in oil prices and changes in market conditions for our investment portfolios. In fiscal year 2015, 75% of the state’s unrestricted spending came from oil taxes and royalties. The State budget estimates for the price of oil have been set too high and fail to account for the extreme volatility in oil prices that occur regularly. As the price of oil has dropped the current deficits have become even larger than expected.

Earnings from the State’s investment accounts are the only other major source of revenue sufficient to offset the loss of oil revenue. However, they have traditionally been off limits for the government to spend, other than for dividends from the State of Alaska Permanent Fund (Permanent Fund) to residents. Instead, politicians have preferred spending from savings accounts like the Constitutional Budget Reserve Fund (CBRF) to bridge periods of low revenues to cover budget gaps until they are bailed out by oil prices rebounding.

This practice has worked now for decades and it appears many legislators have become complacent. Unfortunately, the paradigm has shifted for two primary reasons. First, the savings accounts are being depleted at a faster rate than ever with deficits of over $3 billion a year. Secondly, oil production has fallen from a peak of 2 million barrels a day in the 1980’s to now approximately 500,000 barrels a day. That means we are more sensitive than ever to low oil prices because we are further straining a diminishing pool of assets, while the size of government keeps growing.

Recent windfalls in oil revenue were a result of not only oil prices hovering over $100 for an extended period, but also from progressive oil tax rates that dramatically increased the State’s share during periods of high prices. These forces masked the continued decline in oil production levels. Lower prices sharply reversed the progressive production tax that the State had become accustomed to spend and made the decline on the downside even more painful.

The State’s Revenue Source book published recently helps quantify this volatility. Total State revenue is derived from four primary sources: petroleum, non-petroleum, investment accounts, and Federal contributions. The Federal take has been a steady $2 billion to $2.5 billion for the last decade. Non-petroleum has been between $0.9 and $1.2 billion since 2006 from sources such as fisheries, tourism, mining, alcohol, tobacco and fuel taxes.

As expected, investment accounts have fluctuated wildly. They have twice returned over $8 billion in the last 10 years, but also lost -$1.3 billion and -$6.6 billion in 2008 and 2009 when the national recession began. Petroleum revenues reached a high of $11.3 billion in 2008 and were a low of $2.4 billion in FY15. When these two categories move in concert the revenue shock can be dramatic. In 2008, total State revenues from all sources totaled $13.1 billion then fell to a low of $2.5 billion in 2009. In 2009, petroleum revenue declined by $5.2 billion from the prior year and investment accounts lost $6.6 billion. In FY14 the State earned a total of $17.2 billion, only to see a 51% drop in total revenues to $8.5 billion in FY15.

Faced with this dire budget situation, the Governor has announced his new “Sustainable Alaska Plan”. The primary goals are to take action now by making cuts to government while protecting essential services. He consents to using Permanent Fund earnings as long as we protect the fund’s corpus and preserve a modified dividend program for residents. The spending cuts he suggests include $600 million in reductions through 2019 and 600 fewer employees compared to last year. This is a bit over 2% of the State government labor force, though most would be from elimination of unfilled positions and attrition. Other changes would come in formula funding programs with increases funded in the short run by higher Federal contributions. The energy tax credit program would be reduced and a new $200 million loan fund would be added to support oil exploration. More of the capital budget would be supported through GO bonds.     

The largest change would come from an increased use of the Earnings Reserve portion of the Permanent Fund. New contributions to the fund would come from a one-time transfer of all money in the CBRF, continued transfer of Permanent Fund earnings, and an increase from 25% to 50% of all natural resource revenues. The other 50% would go to pay the dividends, which will reduce the size of dividends.

The last major component of the plan will likely not be addressed for two years. The Governor proposes new taxes for both businesses and individuals. The Governor’s suggestion is to tax 6% of a person’s federal tax liability, which is expected to average about 1% of income for a typical family. There would also be taxes for out-of-state workers, S-corporations and partnerships.

2016 Alaska Economic Update- Part 1

By Mark Edwards

As is tradition, Northrim Bank will publish the annual Alaska Economic Update. The full publication will be available later this spring, but we wanted Alaskanomics readers to get a sneak peek at the issues facing Alaska and its economy. We will break the report into sections and in the near future, post the full report to the ‘Resources’ section for your convenience.

The largest economic issue facing Alaska in 2016 is the falling price of oil. As of the end of January the price for a barrel of Alaska North Slope crude was $31.72.  This is following an extended period where oil remained above $100 a barrel between April of 2011 and July of 2014.  The dramatic decline has created a multi-billion dollar budget deficit for the State government; led to some cut backs in industry spending and employment; and created uncertainty for investors and businesses.  The major question is how long the low price environment will last.

January of 2015 began with prices averaging $48.87. The first half of the year saw a steady climb up to an average of $64.42 in June.  However, since that time prices have consistently retreated into the current $30 range.  Traditional logic states the over-supply of oil that led to the recent price drop should moderate as higher cost producers are not able to operate profitably.  Companies can only attract capital or finance losses in the short-term.  There is concern that many government-owned oil companies have reached such a low level of income that they are forced to ramp up production, even at low prices, to generate cash flow.  This oversupply response only creates a downward spiral for prices. 

However, demand for oil continues to increase as the global population nears 7.5 billion people and their standard of living improves. Low prices also lead to more consumption as people worry less about fuel efficiency, ride sharing and they travel more. The market should rebalance oil inventories and prices are expected to rise as unprofitable producers stop supplying oil and these demand forces grow.