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Global instability, interest rate insecurity and economic indicators for Georgia property tax revenues

  • Global economic indicators do not universally support a national contraction.
  • Fed’s interest rate increases, emerging market declines and a stronger U.S. dollar are weakening demand abroad, but the weakening is disproportionately borne by energy and heavy industrials like Exxon.
  • In 2015, Georgia realized a net gain of 92,900 new jobs, home sales up 7%, along with population and employment growth that is outpacing the domestic figures.
  • Interest rates have hurt property values in the past, but in Georgia, a shortage in supply and aforementioned economic factors should overshadow downward pricing pressure from interest rates.
  • Analysis concludes that national (and even more so local) economic fundamentals point toward further expansion of property values—and therefore property tax revenues—through 2017.

Executive Summary

Recent events in global markets have led to speculation that the expansion of the US economy has ended. China’s growth continues to decline (along with other emerging markets) and with the U.S. currency strong, weaker economies are dampening the demand for U.S. exports.

But indicators do not universally support a national contraction. Interest rates have seen their first increase in ten years indicating the Federal government’s renewed confidence in the U.S. economy. Additional rate increases will further strengthen the U.S dollar, adding to the global imbalance.

Despite international instability, Georgia remains a preferred choice for foreign financial investments and business expansions, bringing with it significant job growth. The flywheel of job growth compounded by an influx of new young workers compounded by more job growth is a well-worn path in Georgia economic development circles and is running full steam now.

Jobs and workers require housing and Georgia’s housing market is still showing gains over the previous year, with existing home sales up 7%. Rising interest rates typically reduce affordability and provide downward pricing pressure, but Georgia’s supply shortage of homes and positive economic velocity are expected to overcome any downward pressure in home pricing.

Home values will continue to rise through 2017, thereby increasing property tax revenues at the local level.

The Long Arm of the Yuan

Three factors contribute to economic pessimism as of late. First, much of the world is struggling with low or declining growth, including the world’s second-largest economy, China. China is expected to slow further this year with doubts in Beijing’s ability to make the Chinese economy more reliant on domestic consumption. We expect that national leadership in China will divert some portion of U.S. investment toward shoring up local economies and job creation. China created 7M new jobs in the first half of 2015 and that figure is expected to expand rapidly into 2016.[1] The Eurozone (struggling to manage a debt crisis) and Japan are only expected to grow 1.7% and 1%, respectively in 2016, while Russia and Brazil are both forecasted to weaken. [2] Emerging markets like Brazil, South Africa, Thailand and Turkey are especially vulnerable with problems with either financial or political weakness.

Second, the strong U.S. dollar, coupled with weak economies internationally, can cause trouble. The dollar is at a near-term high against an index of other currencies. While the U.S. Federal Reserve recently implemented a modest increase in interest rates, other central banks outside the U.S. are easing their monetary policies. Additional increases to our interest rate are still yet to come, further strengthening the dollar. Since oil is priced globally in dollars, when the dollar is strong, oil becomes more expensive for other countries, dampening their demand for oil. Furthermore, a stronger U.S. dollar makes it more expensive for other countries to buy U.S. goods, thus lowering U.S. exports.

Thirdly, the U.S. is experiencing a decline in Industrial production, a potential warning sign of recession. Production in the U.S. has declined in 10 of the past 12 months and is still down 2% from what it was over a year ago.[3] Manufacturing, in particular tends to lead the economic cycle of instability and it’s struggling, according to Thomas Costerg, Sr. Economist at Standard Chartered. But unlike past dips in production, today’s decline is driven primarily by the collapse in the oil industry. Oil production (among private producers) is up, but global demand is down, resulting in layoffs, particularly in the energy industry. Some energy producers have already gone bankrupt.

Despite this, University of Georgia experts predict a better Georgia economy in 2016. What accounts for the optimism? First, Georgia has had incredible success at attracting corporate relocations and expansions in recent years, a continued upcycle in the housing recovery and has enjoyed lower gas prices compared to the U.S. overall. Georgia will see more rapid population growth than the national average and its economy will grow faster than the nation’s next year, just at a slower pace than in the past, according to the Georgia Economic Outlook Report.

Several new facilities have been announced for Georgia in the past few months. Among these, the Netherlands-based CSM Bakery Solutions plans to move its global headquarters to Sandy Springs, bringing with it a $5.5 million investment and creation of 120 jobs. Atlanta’s manufacturing sector is also getting a boost, as Swiss-based pharmaceutical company Alcon Laboratories is expanding its manufacturing plants in Atlanta’s northern suburbs, creating another 250 jobs. Baxalta’s new $1 billion biologics plant is slated to be completed this year and expects to employ 1,500 workers by 2018. As the recent slate of corporate expansions can attest, Georgia remains a favored destination for foreign-direct investment.

Georgia’s housing market posted modest gains over the past year. Sales of existing homes in Georgia through the first eight months of 2015 are running nearly 7% ahead of last year’s pace.[4]

Georgia should see much faster population growth than the nation[5], and employment is at its highest level ever. Atlanta is 1 of the 12 largest MSAs, and among those, Atlanta showed the fastest rate of job growth (3.4%) as of this past November.[6] Over the past 12 months, Georgia has added a net of 92,900 payroll jobs (3,700 payroll jobs from October to November 2015). Georgians can also look forward to an average wage increase of 5.7%.2 Georgia’s unemployment rate has also continued to decline, boasting the lowest since 2008. [7] UGA experts predict a better Georgia economy in 2016, but should see a slowdown in the rate of job growth.

The Federal Reserve recently announced its first (yet modest) interest rate increase since June 2006, and is expected to be the first of more increases to come before the end of 2016. The Fed’s decision reflects a confidence in the U.S. economy, after seeing substantial improvement in labor market conditions. And while things may be uneven across regions of the country and different industrial sectors, our nation’s economy is on a path of sustainable improvement.[8] Consumers can look forward to seeing more of a boost with their savings, especially with return on low-risk investments for our aging community.

However, an increase in interest rates has also raised concerns. The U.S. dollar is at a near-term high, while international economies are weakening. A stronger U.S. dollar makes it more expensive for other countries to buy U.S. goods, thus lowering U.S. exports. Additional increases to our interest rate would further strengthen the dollar.

This has caused manufacturing factory owners to struggle to fend off foreign competitors due to our strong currency. While it makes imports cheaper, U.S. exports become more expensive. For stock investors, low interest rates have made investing in bonds less attractive, allowing them to push more money into the stock market.

As rates increase, more money may shift out of the stock market and back into bonds. Consumers borrowing money with credit cards and home equity loans may also find themselves paying more, and many believe the rise in interest rates would lower home values (and prices), simply by reducing the ability of new home buyers to mortgage a home.

So what does this have to do with municipal finances?

Interest rates and property values have a direct effect on property tax revenue for local and state governments.

Property taxes are based in part on the assessed value of property, and economic factors such as the interest rates and the current housing market can affect the fair market value.

Economists believe that today’s housing market is supported by far more than low mortgage rates — namely steady job and economic growth. Mark Fleming, chief economist at First American Financial (FAF) says he has faith the housing market will modestly adjust to a gradual increase in interest rates, that are reflective of a strengthening economy. The strong economic fundamentals, including robust job growth, better-paying jobs, rising wages and strong consumer demand will, in fact, increase demand for homes, according to Fleming. “In other words, rising rates are indicative of increased home sales and upward pressure on prices.”

Economists also believe that adjustable-rate mortgages could increase by about a half a percentage point, but it would not deter most buyers.[9]

A far bigger restraint on home sales is a limited housing supply that should push up prices by nearly 5% through 2016, according to Doug Duncan, Chief Economist of Fannie Mae. As a result, Duncan expects home sales to actually increase by 4% in 2016, with the higher interest rates holding back only 1% to 2% of deals.

Despite rumors of a pending global financial crisis that has monopolized recent headlines, the U.S. job market is one of (if not THE) best recession indicators. And the reality is, the number of U.S. jobs have grown– up 2.7 million over the past year and by 292,000 just this past December.[10] Unemployment is now at 5%, half of the 10% rate it hit in 2009, during the worst job crisis. Examples of strong job growth locally, and across the U.S. (around 2,000 a month) are one of the reasons why many economists remain confident the U.S. is a becoming healthier and can avoid a recession.

Georgia, in particular is ahead of the curve in its economic stability and continued growth, and rising interest rates should not dampen that pattern of growth with respect to the housing market or property values.

Wrapping it up…

Hard as the Yuan and the rest of the world may try, fundamental strengths in the U.S. economy remain unbent. Further softening of the global economy could change that, but economists appear nonplused by recent events. Georgia, in particular appears fueled for continued growth with a backlog of major projects and committed headquarter relocations that will drive real estate product scarcity for at least another 18 months. While Chinese reinvestment in job creation and domestic spending may increase and limit liquidity, rate fluctuations should not overcome positive growth in pushing fundamental real estate pricing higher. In general, we expect the party to continue through 2017 (due to the lagging indicator of property valuations on tax bills) without a fear of running out of steam.

Link to whitepaper

[1] http://www.businessinsider.com/china-has-already-created-7-million-jobs-this-year-2015-7

[2] Zumbrun, Josh “Warnings Mount, but Recession May Not Come to Pass.” The Wall Street Journal 25 Jan. 2016

[3] O’Driscoll, Gerald, Jr. “The Chances of a Global Meltdown.” The Wall Street Journal 26 Jan. 2016

[4] U.S. Department of Commerce and Wells Fargo Securities, LLC “Georgia Economic Outlook: November 2015”.

[5] UGA Today. “UGA experts predict a better Georgia economy in 2016, but slower job growth.” Available online at http://news.uga.edu/releases/article/economic-outlook-2016.

[6] U.S. Bureau of Labor Statistics. November 2016

[7] Federal Reserve Bank of Atlanta Regional Economics. January 7, 2016, “Data Digests.” Available online at https://www.frbatlanta.org/economy-matters/regional-economics/data-digests.aspx

[8] GPB news “Federal Reserve Announces Hike in Short-Term Interest Rates.” December 16, 2015. Available online at http://www.gpb.org/news/2015/12/16/federal-reserve-announces-hike-short-term-interest-rates.

[9] USA Today “How Fed Rate Hike Affects Housing, Autos.” December 16, 2015. Available online at http://www.usatoday.com/story/money/2015/12/14/fed-rate-hike-impact/77300960/

[10] U.S. Bureau of Labor Statistics. November 2016