February 27, 2003

Seattle’s economy: Out of sync?

  • Pressing issues affect local real estate markets
    University of Washington


    I recently had a couple of opportunities to speak on the topic of “The Boom and Bust Cycle of Seattle’s Economy: Sync or Swim?”

    While this title was designed to pique the interest of potential attendees, it also had a ring of truth to it. We are faced with a fundamental question of what to do about Seattle’s economy.

    For example, do we continue to do our own thing and ignore the rest of the country? Alternatively, do we work to diversify our economy to make it more in sync with the rest of the country? These issues are much more than just economics; they cut to the core of what we are, of our very essence as a metro area and to our future.

    As a relative newcomer to Seattle, I figured I’d better go “back to school” and try to understand the underlying issues. This insight was especially important to me, since I was drawn to Seattle in part based on its reputation as an area that was able to both manage growth and nurture urban vitality.

    Many of Seattle’s most critical issues are regional in scope, and cannot be resolved via local initiatives.

    As all diligent researchers do when confronted with the unknown, I decided to seek input from experts. Thus, I conducted several surveys of professionals and economists who would understand the subtleties of the myriad issues I had to address. That way, I could always blame my naiveté on insiders’ opinions rather than my own ignorance.

    Much to my chagrin, my survey results suggested I would find no safe harbor. Not only were almost all of the issues deemed critical by the respondents, but they gave the region’s performance on them a failing grade.

    With more than a little trepidation regarding my role as the proverbial “messenger,” I walked into the room realizing the funniest element of my speech was probably the title. Fortunately, we began to see through the clouds to some of the fundamental questions. Here’s what I learned.

    First, many of our most critical issues (e.g., economic competitiveness and traffic congestion) are regional in scope, and cannot be resolved via local initiatives. This position resonated with some two-thirds of the respondents. Thus, while local initiatives are healthy and a natural by-product of a multi-nucleated market such as Seattle, unless coordinated, they can amount to infighting and amplify an already difficult situation.

    Second, the seeds of decline were planted a long time ago and have been allowed to spread unfettered, much like the wild blackberry vines that have taken over portions of our wooded lot.

    Many of the issues can be traced to fiscal neglect, and the failure to budget for our future during the boom periods of the 1990s. Examples of such neglect include our University of Washington system, which lost significant ground against its peers, and our roads and highway system, which was significantly under-funded relative to population and traffic growth.

    Now, as we wallow in the “economic bust” that ripples across our state, regional, local and household budgets, we are hard pressed to try to “buy” our way out of these festering problems. Unfortunately, our recovery from this situation will lag the U.S. economy, a point unanimously shared by our respondents.

    Third, the brain drain is real. But, it is not a UW problem alone. It is pervasive, rippling across our entrepreneurial and business scene to our secondary and primary schools that are struggling for resources.

    Furthermore, once students graduate from high school, their access to higher education within the state is becoming more limited. As our sons and daughters are forced out of state, we risk losing our home-grown talent; a more insidious type of brain drain.

    Fourth, as the majority of respondents agreed, we are in a housing bubble. This situation can be attributed to two cyclical phenomena. One is the prolonged boom period we enjoyed that fueled prices due to in-migration and household earnings growth. The other is the downward trend in interest rates that remain well below long-term averages.

    When interest rates inevitably trend back upward, they will place downward pressure on appreciation rates, and could even erode current values. This is not to say a housing bust is on the horizon, but to raise a flag to buyers getting in at the peak.

    Finally, according to a vast majority of respondents, we are suffering from a leadership crisis. This crisis is pervasive, spreading from the UW, with the untimely departure of our president, to Olympia, with its penchant for punting the tough issues back to the voters.

    How serious are these issues and can’t we just wait them out? The answers are a resounding, “very critical” and “no.” We’ve already tried the “waiting game” and it obviously doesn’t work. Unless we step up now, things will get much worse.

    So, what do we do? On the regional front, we must push for more broad-based approaches to our problems. These approaches will not be easy to coordinate, and will have to engage both in the public and private sectors.

    With respect to our budget woes, we are going to have to get extremely creative. We will have to make some tough decisions on long-term solutions, rather than short-term bandages. On the “brain-drain” front, we must step in and stem the tide. Unless we act now, our “hallowed halls of learning” will become our “hollowed halls.”

    With respect to housing, we must come up with ways to address the affordability issue. In addition, we will have to deal with the location of affordable solutions to help alleviate traffic congestion, long commutes and pollution.

    Finally, on the leadership front, we need to create viable and visible public-private partnerships that can make believers out of an understandably cynical public.

    It all boils down to this decision: will we synchronize our efforts and return to our rightful glory or will we flounder? The good news is we still have a choice. I know my vote.

    James DeLisle is the Runstad Professor of Real Estate and the director of the Runstad Center for Real Estate Studies at the University of Washington.

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