Presentation to the Tidewater Builders Association

By John W. Whaley

Deputy Executive Director, Economics

Hampton Roads Planning District Commission

February 2006

Topics• Economic Indicators

• 2006 Forecast

• Defense Issues

• Impact of Housing Project

• Housing Economics• Forecasting Permits

• Impact of Construction Industry

Economic Indicators

The U.S. Economy

The U.S. Economy Continued to Grow in 2005

Annual Percent Change in Real Gross Domestic Product

-4

-2

0

2

4

6

8

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Average = 3.5%

The Hampton Roads Economy

Regional Employment Continued to Grow but at a Slower Rate

Twelve-Month Percent Change in Hampton Roads Civilian Employment

-2%

-1%

0%

1%

2%

3%

4%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Twel

ve-M

onth

Per

cent

Cha

nge

The U.S. Economy Has Been Slow to Create Jobs

U.S. and HR Payroll Employment

99

101

103

105

107

109

111

1999

2000

2001

2002

2003

2004

2005

Inde

x =

100

in J

anua

ry 1

999

U.S.

HR

The Taxable Sales Growth Rate Slowed

Hampton Roads Deseasonalized Taxable Sales

$1,100,000,000

$1,200,000,000

$1,300,000,000

$1,400,000,000

$1,500,000,000

$1,600,000,000

$1,700,000,00020

00

2001

2002

2003

2004

2005

Tax

able

Sal

es

Auto Sales Have Weakened

Seasonally Adjusted Auto Sales in Hampton Roads

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Num

ber o

f Veh

icle

s

The Number of Homes Sold in Hampton Roads Has Begun to Decline

Number of Homes Sold in Hampton Roads

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

1998

1999

2000

2001

2002

2003

2004

2005

Mon

thly

Hom

e Sa

les

Residential Construction Has Slowed

Deseasonalized Value of HR Single Family Housing Permits

$10,000,000

$30,000,000

$50,000,000

$70,000,000

$90,000,000

$110,000,000

$130,000,000

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Do

llars

Home Prices In Hampton Roads Have Increased Faster than Inflation Since 2001

A Comparison: Home Prices in Hampton Roads and Inflation

90

110

130

150

170

190

210

230

250

1998 1999 2000 2001 2002 2003 2004 2005

CPI

and

Hom

e Pr

ices

Inde

xed

to 1

00 in

199

8

CPIAverage Home Price

HR Home Prices Have Outpaced the U.S. Increase for the Past Two Years

Four Quarter Percent Change in Home Prices

-5

0

5

10

15

20

25

30

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Perc

ent C

hang

e U.S.

HR

Average: U.S. = 5.0% HR = 5.2%

There have been 63 four-quarter changes in HR home prices since 1990 - only two exhibited a decline

The Average Selling Price of Area Housing Increased Because …..

• Demand Was Strong

• Low Mortgage Rates

• Military Pay Increases

• Innovative Financing

• Homes of Higher Value Were Constructed

• The Supply of Housing Was Slow to Respond to the Increase in Demand

The Pace of New Home Construction Has Not Responded to the Increase in Home Prices

The Number of Hampton Roads Residential Building Permits

0

5,000

10,000

15,000

20,000

25,000

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Num

ber

of B

uild

ing

Per

mit

s

The Increase in Housing Values Has Driven Up the Regional Cost of Living

ACCRA Cost of Living Index: Composite and Housing

80

85

90

95

100

105

Composite Index

Cos

t of

Liv

ing

(100

= U

.S. M

etro

Ave

rage

)

19992004

Forecast

The Economy Will Slow Modestly in 2006 Due to ……

• Higher Interest Rates

• Slower Growth in Home Equity

• High Energy Costs

• High Consumer Debt

• Less Residential Construction

• Less Stimulus from the Defense Department

Long-Term 2005Average* (Year to Date) HRPDC ODU

U.S.Real GDP 3.2% 3.5% 3.1% 3.3%

Short Government Rates NA 3.2% 4.4% NALong Government Rates NA 4.3% 5.0% NA

Hampton Roads

Real GDP 3.1% NA 2.8% 3.0%

Civilian Employment 2.5% 1.6% 1.3% 1.0%

Retail Sales 4.2% 9.8% 4.7% 5.0%

Auto and Truck Sales 1.2% 4.2% 2.0% NA

Value of Residential Building Permits 4.9% 5.2% -6.0% 1.5%

Unemployment Rate 4.5% 4.2% 3.9% 4.0%

Hotel Receipts 4.1% 4.9% NA 4.9%

* Length of average varies depending on the availability of data and the relevance of historic periods

History2006

2006 Forecast

Defense Sector Challenges

#1 Defense Spending Has “Peaked”

Annualized Defense Outlays

180

200

220

240

260

280

300

320

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Billio

ns o

f Con

stan

t 198

2-19

84 D

olla

rs

#2 Potential Relocation of Carriers

• Carrier John F. Kennedy may be retired

• Norfolk-based carrier could replace the JFK in Mayport

• Norfolk-based Carrier George Washington will be sent to Japan in 2008 (or elsewhere in the Pacific depending on distance

to Taiwan)

• Cost of losing a carrier is large

• Carrier without air wing: $225 million GRP

• Carrier battle group and air wing: $980 million GRP

#3 BRAC Impacts

• Base Realignment and Closure Commissions decide on the future of domestic bases

• Current BRAC recommendations have been accepted by the President and Congress

On-Base Employment Will Decline by Nearly 2,400 Jobs If Oceana Remains Open

Direct Employment Impact of BRAC 2005 on Hampton Roads(Excluding Oceana)

-4,000

-3,500

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

Nor

folk

NS

A

Lang

ley

AF

B

Nor

folk

Nav

alS

hipy

ard

For

t Eus

tis

Littl

e C

reek

AB

Oce

ana

Ope

n

Yor

ktow

n N

WS

Nor

folk

Nav

alS

tatio

n

Por

tsm

outh

Nav

y M

edic

alC

ente

r

For

t Mon

roe

Net Impact = 2,355 Jobs Lost

How Will BRAC Impact the Regional Economy?

• Used REMI Model• Nation’s most powerful regional economic model

• Assumption• Direct effects were allocated across five years

• Ten percent of the direct effect in 2007 – 22.5 percent in each of the years from 2008 to 2011

BRAC Impacts will be Large

The Employment Impact of BRAC 2005 on Hampton Roads

-30000

-25000

-20000

-15000

-10000

-5000

0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Oceana Remains OpenOceana Closes

When Will Impacts be Felt?(Builddown/Carriers/BRAC)

• 2006: slight impact

• 2007: modest impacts

• 2008 – 2011: largest impacts

Two Scenarios2008 - 2011

Best Case

Lose 2400 on-base jobs

Slower increase in defense spending

Worst Case

Lose 2400 on-base jobs

Lose one/two carriers

Close Oceana

Large cuts in defense spending

Impact of New Communities

Impact of New Subdivision: Population and Employment

Impact of Constructing a Residential Subdivision of 1000 New Homes: Population and Employment

0

500

1000

1500

2000

2500

3000

3500

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Uni

ts

Total EmploymentPopulation

Impact of New Subdivision: Employment by Sector

New Residential Subdivision with 1000 New Homes: Jobs Created

0

200

400

600

800

1,000

1,200

1,400

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Jobs

Construction

Retail tradeServices

GovernmentOther

Impact of a New Subdivision: City Gross Regional Product

Impact of Constructing a Residential Subdivision of 1000 New Homes: Gross City Product

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

$80,000,000

$90,000,000

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Gro

ss C

ity P

rodu

ct in

Con

stan

t 200

0 D

olla

rs

Housing Economics

The Change in Interest Rates and the Pace of Local Economic Growth are Important Predictors of

Residential Construction in HRPredicting HR Home Building

(Building Expressed by the Annual Number of Residential Building Permits Issued)

6,000

-1,400

2,500

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Baseline Demand Percentage Points of Change inMortgage Rates

Percentage Points of Change in TotalEmployment (Military Included)

Nu

mb

er

of

Bu

ildin

g P

erm

its

Rs = 0.8

Scenario One

Forecasting Example

One percent increase in mortgage ratesOne percent increase in HR employment

Forecast = 6,000 + (-1,400) + 2,500 = 7,100 units

CalculationReplacement Demand = 6,000 units

Mortgage Effect = +1 x -1,400 = -1,400 unitsEmployment Effect = +1 x 2,500 = +2,500 units

Forecast = 6,000 + 5,000 = 11,000 units

Scenario TwoNo change in mortgage rate

Two percent change in HR employment

CalculationReplacement Demand = 6,000 units

Mortgage Effect = 0Employment Effect = +2 x 2,500 = +5,000 units

Output $7.6 Billion

Gross Regional Product $3.9 Billion

Jobs 80,000

Impact of the HR Construction Industry

The End