Written by Jeff Thredgold, President, Thredgold Economic Associates
Economic Consultant to Zions Bank

More Subdued

The more moderate growth pace that evolved in Idaho during 2007’s final 6-8 months is expected to continue during 2008. Economic slowing in 2007 was tied to much weaker new home construction, a modest decline in technology employment, and the implications of one of the nation’s tightest markets for labor availability. Even as the Idaho economy has slowed, however, it is likely to remain among the nation’s top 10 states in 2008 as measured by the growth pace of employment.

Labor Shortfall
Strong Idaho employment growth of the past 3-4 years has led to sharply lower labor availability, contributing to major challenges to be fully staffed for Idaho employers of all shapes and sizes. The Idaho jobless rate averaged 2.6% during 2007’s first 11 months (among the lowest in the nation) after averaging 3.4% in 2006 and 4.8% during 2002-2005.

The Idaho economy added 11,300 net new jobs during the most recent 12-month period, a growth rate of 1.7%. This more subdued growth pace was the smallest 12-month rise since early 2004 and is less than half the increase during 2006, when the Idaho economy added 28,300 net new jobs.

It’s All About Housing
Idaho has consistently ranked among the top seven states during the past 18 months when measuring home price appreciation. The latest data from the Office of Federal Housing Enterprise Oversight (OFHEO) noted that the average Idaho home (with a conforming mortgage not exceeding $417,000) rose 6.87% during the 12-month period ending on September 30, 2007, ranking sixth in the nation.

Utah, Wyoming, Montana, New Mexico, and Washington occupied the first five positions. In contrast, the average U.S. home value rose 1.79%. More than 20 states saw average home prices decline during the third quarter.

The OFHEO data noted the average U.S. home value rose 46.92% during the past five years. The average Idaho home value rose 64.10% over five years, suggesting Idaho homes are near full value.

Other national measures of home prices indicate sharper declines in current values, especially for new unsold homes. It could be another year before U.S. housing markets reach equilibrium between excess supply and realistic demand.

Five Challenges
Idaho has been impacted by five developments which have plagued the national housing market during the past 12-18 months. The first of these developments is the constantly negative tone of the national media in regard to the U.S. housing market. Many people are simply scared to buy a home, hearing frequently that if they wait longer, prices will be lower.

The second factor is the sharp rise in Idaho real estate values of recent years. A number of potential buyers who might have qualified with a lender to buy a home at a lower price 2-3 years ago do not qualify today. A third factor was the higher level of mortgage rates in 2007. Thirty-year fixed rate mortgages averaged near 6.50% in 2007, versus the 5.99% average during 2003-2006.

A fourth factor is the excess supply of both new and existing homes for sale in Idaho and around the nation. Near-record inventories of homes for sale greatly lessen the need for additional home construction, particularly for “spec” homes. Homebuilders will need to be aggressive in clearing excess inventories of new homes in Idaho and across the U.S.

A final factor is current credit market anxiety around the globe, particularly the “subprime” mortgage issue. Such anxiety has pushed many domestic real estate lenders to tighten standards, again pricing many potential buyers out of the market. One bright spot for both homebuilders and those seeking to build and occupy a new home was the sharp decline in construction material costs during 2007.

Idaho in 2008
Extremely tight labor availability (especially for skilled workers), reasonable new job creation, and a softer housing market seem likely for Idaho in 2008. The Idaho commercial real estate sector is doing well. Even as the economy has slowed, the state’s long-term economic potential rivals any in the nation.

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