Homebuilders, sellers, and buyers throughout the greater Puget Sound region have stayed resilient through the annus horribilis of 2020. Residential listing inventories continue to shrink, and prices are still rising after a rapid recovery by upstream suppliers and leading local employers. Yet the pain lingers for local retail and hospitality markets, as serial lockdowns and redistributive fiscal policies threaten the state’s historical tax advantages for resident small business owners and stockholders. Meanwhile, the number of inbound driver’s license transfers, a key indicator of new residents, shows a historic decline.
The virus, the reaction, and their impacts
The appearance of the COVID-19 virus coincided with two sharp stock market selloffs in March. The subsequent stay-at-home orders by Governor Inslee were unprecedented and their effects would be unknown. For a few weeks, market activity virtually halted. Early on, RSIR correctly anticipated that travel and leisure, food and beverage, and non-essential retail establishments and their owners would suffer most from the response to the outbreak.
Chart A
Suppliers bounce back
On the supply side, confidence quickly returned up and down the value chain. Major homebuilders and construction supply companies saw a V-shaped market shock and recovery path. This lasted roughly six months for the homebuilders, and as little as two or three months for the upstream supply companies. Home Depot, Lowe’s, and Boise Cascade all benefited as business owners modified physical facilities to comply with COVID-19 restrictions, and took precautions during the unrest that set in over the summer, prompting a shortage of lumber. (One-year stock charts for notable listed companies in this sector are shown among the appendices to this report: in Appendix A for the homebuilders, and Appendix B for construction supply firms.)
Bloomberg reported that nationwide, home construction reached a nine-month high in November, according to the Census Bureau and HUD.[1] The 1,186,000 single-family housing starts were the highest seen since 2007. Permit applications, and homes authorized, but not started, were the highest recorded since 2006.
Most leading employers are unfazed as smaller firms take losses
On the finished demand side, the effects were unevenly spread. Local tech firms Amazon and Microsoft recovered almost immediately, thanks in part to the essential nature of their services, and in part due to their flexibility to accommodate workers and teams under stay-at-home orders. Starbucks’ stores adjusted quickly to the crisis, shifting to mostly drive-through operations. Costco saw little downside and actually profited as families stocked up on household goods. These companies, their employees, and stockholders have emerged relatively unscathed by the COVID-19 crisis. Boeing’s decline was already baked in by the 737 MAX fallout, and this year they announced relocation of key operations to South Carolina. (One-year stock charts for these companies are presented in Appendix C.)
Governor Jay Inslee’s office attributed the economic damage inside Washington State to the virus itself, preempting criticism of his office’s response. In the overview to his 2021-23 budget proposal, the governor’s office admitted “as of November, the state had about 217,000 fewer jobs than in February, revenue projections for the next three years remained more than $3.3 billion below pre-pandemic levels, and the state’s economic forecasters warned us of significant fiscal uncertainty for the foreseeable future.”[2]
Chart B
Chart C
Chart D
Map A
Damage to retail sales did not spill over into residential real estate markets
On 10 December 2020, Governor Inslee renewed and further amended the state of emergency he first declared in his Proclamation 20-05 issued on 29 February as the extent of the COVID-19 outbreak was revealed. A month after that first declaration, the governor’s 23 March “Stay Home – Stay Healthy” Proclamation 20-25 announced restrictions on public and private gatherings as well as business activities, which were continuously modified and alternately phased out and back in through the end of the year.
The governor’s public health restrictions hit small business the hardest, especially travel and hospitality; sports, leisure, and recreation; full service restaurants; and high-touch retail. Towns with industrial concentrations in these sectors saw taxable retail sales revenue plummet by 15 percent or more. For example, the City of SeaTac saw 2020 Q2 retail sales drop by 53.8 percent year over year. Towns lacking high concentrations of vulnerable businesses fared better. Some towns at the exurban fringe actually saw their local sales increase. Across five counties in Western Washington, subject towns with higher and lower taxable retail sales are respectively tabulated in Appendices D and E.
The next three charts illustrate data for towns in five counties: King, Snohomish, Pierce, Kitsap, and Skagit.
Chart E
Chart F
Chart G
Observers might have expected home sellers to encounter resale challenges in those areas with the sharpest reductions in taxable retail sales, and that those where taxable sales rose were seeing those increases due to an influx of buyers. In fact, upon comparison of home listing inventories and median prices in the subject cities and towns, RSIR found no relationship between taxable retail sales and either inventory shifts or home selling prices. Inventory continued to contract everywhere at a steady pace despite restrictions and impediments on selling activity.
Chart H
Interest rates set to stay low
On December 16, Fed Chairman Jerome Powell announced that “the housing sector has fully recovered from the downturn, supported in part by low mortgage interest rates.” He further added that the Federal funds rate would remain between 0.0 percent and 0.25 percent until inflation had reached or exceeded two percent, which in exchanges with reporters he implied might take three years or more. Since low interest rates are less motivating to new home buyers than the anticipation of higher interest rates, this means that the Federal funds rate’s influence on buyers will be muted over the next year, and possibly for much longer. However, financing conditions are expected to remain favorable for home buyers whose purchases are otherwise motivated. As for investors, appreciation on premium real estate should continue to compete with returns on liquid assets.
Inslee leans on the familiar
Eyeing those returns is the Governor’s office, looking for a solution to fill the aforementioned yawning gap in sales tax revenues based largely on local business operations. With no end in sight to the governor’s restrictions, questions arise as to what their true purpose is and what path lies ahead for private business and state tax revenues. The governor’s own statements have muddied the water as to the intent of his measures.[4] Public remarks by President-Elect Joe Biden give no confidence that this phase of targeting the virus with lockdowns and other economically fraught measures will soon close.[5]
Among the governor’s plans to plug the $3.3-billion hole in the state budget is the governor’s revival of his 2018 nine percent capital gains tax proposal on sales of stocks, bonds, and other assets totaling $25,000 and up for individuals, and $50,000 or more for joint tax filers. The proposal would exempt sole proprietorships, retirement accounts, homes, farms, and private forestlands. The capital gains tax would not apply to earned income from salaries and wages.[6] Any proposed tax on income in Washington State will be subject to constitutional scrutiny.
Chart I
Out-of-state demand plunges
Some brokers have speculated that the sustained home selling is due to new buyers entering from out of state. Brokers especially have called attention to buyers exiting California. RSIR examined driver’s license transfer data, finding that they disconfirmed these suppositions. Not only are drivers’ license transfers to Washington from California 33 percent lower than a year ago, but such transfers from all other states and foreign countries were historically low in 2020. Furthermore, over the past decade, the number of Californians reportedly moving to Texas substantially exceeds driver license transfers from California to Washington—by a ratio of 2.36 to one in 2019.
Conclusions
The onset of COVID-19 coincided with historic market crashes in March. That in such a confluence of events, investors should see homebuilders, construction supply companies, and real estate itself as a safe haven likely reflects the kind of flight to quality seen toward the end of the dot-com bust two decades ago.
RSIR recently demonstrated how buyers driving to affordability or relocating to work from home have in recent years consumed much of the inventory in the exurban towns of western Washington State.
The observations about inbound relocations similarly should guide decisions about marketing of properties for sale, since a greater-than-usual share of sales evidently now draw buyers inside the state’s borders. A coordinated push for homeowner-friendly policies that differentiate Washington State from California and other “blue” states might also be in order.
As for Governor Inslee’s capital gains tax proposal, previously enacted state taxes on income have not survived court challenges in Washington. However, if this tax is held constitutional, it would impact returns on resales of second homes. Attorneys can advise whether sales of inherited assets will be eligible for basis step-ups that apply under federal tax law.
###
Appendix A: Homebuilder one-year stock charts
Appendix B: Home construction supply one-year stock chart
Appendix C: Major Puget Sound employer one-year stock charts
Appendix D: Towns with 2020 Q2 taxable retail sales revenue rising five percent or more year over year
Taxable retail sales revenue data source: Washington State Department of Revenue
Appendix E: Towns with 2020 Q2 taxable retail sales revenue falling 15 percent or more year over year
Taxable retail sales revenue data source: Washington State Department of Revenue
[1] “Monthly New Residential Construction, November 2020,” Release Number: CB20-194, U.S. Census Bureau and the U.S. Department of Housing and Urban Development; cited by Olivia Rockeman, “U.S. Housing Starts Rose for a Third-Straight Month in November,” Bloomberg, 17 December 2020.
[2] Office of Governor Jay Inslee, Proposed 2021-23 Budget & Policy Highlights, December 2020.
[3] “Fed Chair Jerome Powell Press Conference Transcript, December 16: Market Update,” Rev Blog, 16 December 2020.
[4] Two months after the “Stay Home – Stay Healthy” Proclamation, Governor Inslee appeared in a panel discussion hosted by U.S. Senator and two-time Presidential candidate Bernie Sanders. In his remarks, Governor Inslee stated the following:
This has always been an economic opportunity. But it is such a no-brainer at this moment with the COVID crisis that has precipitated this enormous economic challenge. And we should not miss an opportunity to drive home … that this has enormous backing in our constituents. To understand the economic necessity of this, and we should not be intimidated when people say, “Oh, you can’t use this COVID crisis to peddle a solution to climate change.” No! We have to recognize the necessity of this moment, that this will allow us to rebuild our economy and jumpstart it. It was a necessity before the COVID crisis, it is an absolute requirement now to rebuild our economy. And we shouldn’t be intimidated by Republicans about this at all.
Bernie Sanders, Varshini Prakash, Bill McKibben, Gov. Jay Inslee and David Wallace-Wells, panelists; Saving Our Planet from the Existential Threat of Climate Change, 13 May 2020.
[5] “Our darkest days in this battle against COVID are ahead of us — not behind us.” Joe Biden on Twitter, 23 December 2020.
[6] Office of Governor Jay Inslee, Proposed 2021-23 Budget & Policy Highlights,
[7] Dom DiFurio, “Elon Musk’s Relocation Follows 687,000 Other Californians Who’ve Moved to Texas in Last Decade,” The Dallas Morning News, 9 December 2020.
[8] William Hillis, “As Residents Of Other States Flee, Washingtonians Shop For Homes Nearby,” RSIR blog, 19 November 2020.