RECESSION ON THE HORIZON

I don’t know how anyone can argue against the fact that a recession is coming. The only question is how severe. Friday’s employment report showed a jump in unemployment of .3%, from 4.7% to 5%. I heard, on CNBC, every time since WWII that unemployment jumped this much a recession followed. The low unemployment has been keeping the consumer flush with cash and they do nothing but spend that money. The problems all stem from the housing and liquidity crisis.
The state of Arizona is in shock over the looming $1 Billion dollar budget deficit. How did they not see this coming? New home sales are down dramatically. Let’s look at how this affects tax collections. Every new home is taxed at about 5%, this tax is paid to the state as sales tax. So, in 2006 we built approximately 50,000 new homes with an average cost of about $325,000; then how much tax was collected? Well 50,000 x 325,000 x .05 = $812,500,000. And if in 2007, we sold 30,000 homes with an average cost of say $300,000; how much tax would that create? Well that would be 30,000 x 300,000 x 0.05 = $450,000,000. Therefore, the difference between $812,500,000 and $450,000,000 is $362,500,000. There is 1/3 of the budget shortfall.
Next look at the 40,000 Realtors and see how they can affect the budget. So, if on average they paid in $500 each that would be 40,000 x 250 = $10,000,000. Now with potentially 40% of the agents out of business you can add another $4,000,000 to the shortage. Not huge, but it keeps adding up. Now there are the loan officers, appraisers, title agents and all their assistants. Easily ½ but probably all of the $1 Billion state tax shortage can be traced back to housing.
I guess I went off on a tangent again!