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 S A M P L E    R E S E A R C H    A R T I C L E

Border state study reveals how the U.S. recession has spread into the heartland

BY WI STAFF

Last month the Pacific Northwest Economic Region held its annual summit in Calgary and topping the agenda for some B.C. and Alberta reps was the current economic state of Idaho, which not only shares a border but accounts for more than $1 billion in two-way annual trade with Western Canada.

It is a troubling read, and an indication of how far the U.S. economy is from a full recovery.

With a population of 1.5 million and covering 82.7 million square miles, the 23rd-largest U.S state is anchored in agriculture and stuck in recession. It is also a net importer of energy, most of which is from Canada, and a bellwether for the state of the Midwest economy.

After an early 2000s biofuels boom that saw Idaho becoming the fourth-fastest-growing U.S. state, a stubborn recession has settled into the "gem state." In the past two years, a quarter of Idaho towns have seen a loss in population, a drought has hit the agriculture sector, housing foreclosures have soared and commercial real estate has stalled.

The Idaho governor is forecasting a modest turnaround starting next year.

"It has been a while, but it is beginning to feel like a recovery," Governor Butch Otter said in a recent address, but he didn't sugar-coat the forecast, warning of further cuts in public spending.

The Idaho legislature had set a revised budget for the current year that's $69.1 million below the state's official revenue forecast. Then the tax revenue numbers slipped even further: as of April 30, Idaho had collected $82.6 million less in taxes this year than projected. Because the budget had been reduced so far below the forecast it resulted in a net $13.5 million shortfall.

When that shortfall was announced, Otter said the state will be able to make it up through transfers from reserve funds and won't need further mid-year budget cuts.

Recovery seen

For fiscal year 2011, which began July 1, 2010, the governor recommended a no-growth budget that would have totalled about $83.8 million less than the revenue forecast for 2011. That's when the state forecasts show an economic recovery, with employment, personal income and even housing starts beginning to pick up.

Mike Ferguson, Idaho's chief economist, said the outlook is for economic growth, but the state would have to see twice the 3.6 per cent growth rate predicted in 2011 to hit its forecast, which he conceded was "not looking terribly likely at this point."

Biofuels bust

"At this point" includes the bust of the great biofuels boom, which as late as 2007 was seen as the future for corn, canola and other croplands in Idaho.

By last year, more than a dozen ethanol plants - including the unfinished Renova Energy LLC facility in Idaho - had filed for bankruptcy. The boom had been fed by huge federal government subsidies, but faltered on high prices for fuel crops, a glut of producers, and environment and automotive industry questions on the benefits of the heavily subsidized fuel.

There are some signs of a biofuel comeback. The Obama government has pledged federal support to the struggling industry, and this year the first Idaho biodiesel service stations will open.

Bob Coleman, president of Idaho-based Coleman Oil Co., said biodiesel produced locally from crops such as canola and soybean will be sold this summer at the retail level across the northern part of the state.

"Given current price levels for diesel fuel, it makes good sense to aggressively pursue alternatives such as biodiesel," Coleman said. "It not only lessens our dependence on foreign crude oil, but will also support the Pacific Northwest's agricultural base. With crude oil at $70 per barrel, biodiesel is economically viable now. This trend should continue as new production ramps up."

Farm incomes

Still, the downturn of biofuels has added to problems in Idaho's agriculture sector, which, in much of the state, is dealing with a fourth year of drought conditions. Five counties are reported as having "significant drought conditions," and farmers across the state complain of lower crop prices and higher input costs.

Last year Idaho agriculture's cash receipts dropped 17 per cent to $5.4 billion, the largest single-year decline in more than 40 years. A tough year for Idaho's dairy, livestock and some key crop sectors determined the industry's overall performance. Net farm income, the ultimate measure of performance for farmers and ranchers, dropped 47 per cent to $1 billion, compared to 2008.

Some farming recovery is expected in 2010 and 2011 due to higher produce prices and the winnowing out of dairy farms and cattle ranches, the majority of which are family-owned.

Foreclosures

Residential foreclosures continue to rise in Idaho, a sign the recovery has not gained solid traction. According to RealtyTrac Inc., which is a California-based company that tracks national foreclosures, Idaho foreclosures made up 34 per cent of all home sales in the first quarter and increased by 67 per cent over the first quarter of 2009.

One in every 226 Idaho housing units received a foreclosure filing during April, ranking it sixth among all states, according to RealtyTrac. Actual bank repossessions were down 14 per cent to 331 homes.

Notices of default, however, were up 30 per cent to 1,310 in April from 1,008 in March. Notices of trustee sale rose 10 per cent to 1,186 from 1,078 a month earlier..

Overall, the rate of properties in some phase of foreclosure was up 14.5 percent over April 2009.

CoreLogic, a real estate data and analytics company, said 35.1 per cent of all homes in the Treasure Valley area - which runs east from Boise, Idaho to Oregon - were in negative equity at the end of the first quarter of 2010. Negative equity means borrowers owe more on their mortgages than their homes are worth.

In Treasure Valley, 45,210 of all residential properties with a mortgage were in negative equity. In all of Idaho 57,093 of 240,613 mortgages, approximately 24 per cent, were underwater.

The median house price in Ida County, which includes the capital city of Boise, is now $155,000, down from $172,000 a year earlier.

Boise

Commercial real estate construction has virtually ground to a halt in Boise, Idaho's largest city. An attempt to build a new convention centre has stalled and the city is now pinning hopes on federal funds. The city recently declared itself an "economic recovery zone" to tap into federal bonds that would help with private construction financing.

So far, no good.

Since the U.S. Department of Treasury began the program last July, there have only been two applications in the entire state - a car wash that will use about $2 million, and a small tire retail outlet, said John Sager, chief financial officer of the Idaho Housing and Finance Administration, which issues the bonds.

With a lot of other regulations being put on banks, financing isn't falling into place, Sager said. And financing has to close by December 31, 2010, or the authority to issue these bonds vapourizes.

The Boise office market has vacancy rates in the 15.7-per-cent range, and lease rates of around $13.50 per square foot. Local realtors say this is an improvement over 2009.

Industrial space in the Boise area is at its lowest vacancy level since March 2009, now at 11.3 per cent. The drop (from 11.7 per cent) can be largely attributed to Best Bath's purchase of a 100,000-square-foot building, and lease-up this spring of 48,000 square feet in west Boise.

Retail vacancy rose from 13.7 to 13.9 per cent in 2010, due in part to the closure of a 29,000-square-foot Rite Aid in west Boise, one of several empty storefronts in the city.

Agents confirm Boise has an oversupply of commercial space compared with demand. The supply of space is projected at three years for office and industrial space and four years for retail, based on current absorption.

It will likely take three to four years or longer for the area to return to pre-2006 sale, vacancy and lease levels.

"If the past year is indicative, I don't see a quick bounce," said Steve Emerson, an executive vice-president with Home Federal, Idaho's largest state-headquartered bank. "We're going to have to slowly, methodically work our way back to where we were in 2006."

from Western Investor, August, 2010