Alaska — Housing Markets Recovering, Economy Just Simmering, At Least for Now

Each year when I speak in Alaska (Stewart has the number one market share for title insurance in the Northern-most State from our operations and independently owned agencies we underwrite), I am impressed by the resilient people that thrive in what most of us would consider a challenging adverse weather environment. Alaskans, like Australians and Texans, possess that “CAN DO” attitude. I then tell them, “Except y’all have funny accents.” Yes, they laugh.

That said, the Alaskan housing market is seeing some positive signs given essentially no recent job growth. Unlike most of the lower 48 states, the Alaskan economy feeds off the rest of the U.S. economic activity plus that from Pacific-rim countries. Then examine the large impact of a shrinking U.S. Military presence in the state. It has not been a pretty economic picture in recent years. But things are looking up.

Japan is a major contributor to the Alaskan economy, ranging from natural resources to the hospitality sector. Japan’s Gross Domestic Product (GDP) for the fourth quarter of 2013 increased a minimal 0.3 percent sequentially from the prior quarter. Throw in the decline in the price of gold dropping 30.8 percent from the high recorded in September of 2011, and it’s not surprising that job growth in Alaska is muted.

Another issue was the former taxation system on oil production in Alaska, in which taxes rose as oil prices increased. Alaska has received so much revenue from oil production on the North Slope in recent decades that the State has neither an income tax nor Statewide-sales tax. Residents receive annual checks from the Alaska Permanent Fund. Last year, each resident of the State garnered almost $900. So a family of four pocketed almost $3,600. In 2008 per person payments exceeded $2,000, but as oil production declined, likewise did payouts. To see a history of payouts click http://finance.yahoo.com/news/look-yearly-alaska-permanent-fund-202116654.html

Oil production declined not as a function of depleted known reserves, but due to an increasing tax environment that made oil production uneconomical in what is a very high-cost environment. Oil production peaked in 2011 at slightly more than two million barrels per day, but has since declined to just slightly more than 500,000 barrels per day. The oil producers argued that the progressive tax on production made new exploration and production unprofitable. The old tax started at 25 percent of net profit per barrel at $30 and increased by 0.4 percent for every dollar of net profits greater than $30 dollars at the well head. Tax rates on oil were capped at 75 percent of total net profits.

From 2011 to 2012, Alaska was the only oil producing state that saw a decline in oil production. The newly-passed tax now features a flat rate of 35 percent on producers net profits. With various deductions, in some instances, the effective tax rate may be as low as 14 percent according to some analysts. The three primary producers have stated that the new taxation system would result in increased oil production. From an oil and gas perspective, the future of employment in Alaska looks much more positive.

All-up, Alaska had 2,300 fewer jobs in December 2014 than in the same period in 2013. I believe this will change as oil exploration production ramps up in 2014 and beyond.

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Anchorage, the largest city in the State, accounts for 178,400 of the total 333,100 total civilian jobs (excluding military personnel). That’s more than one-half of all the jobs in the State (53 percent). Fairbanks tallies 40,000 jobs. See Anchorage and Fairbanks job numbers in the following two graphs.

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While job growth has essentially been on a hiatus, housing demand shows consumer confidence growing for the future in Alaska. The following graphs show the raw and 12-month moving average of the number of residential sales per month. Sales have grown nicely for the past two-and-a-half years in Anchorage. While not back to the level seen a decade ago, they continue on a positive trajectory.

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Anchorage prices are doing the same. The next graph shows the recovery in prices, which are almost back to the norm seen from 2005 through 2011. Note this graph depicts the 12-month moving average of median prices, so it emphasizes the trend. Sales data for Alaska are from Realtors® and MLSs and do not represent total closings.

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Fairbanks, unlike Anchorage, has seen a relatively constant number of average closings per month since 2010, as shown in the following graph.

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I would hypothesize that the more variable the climate, the greater the seasonality there will be in residential sales numbers. The next graph of just raw, non-averaged data shows this extreme sales seasonality in Fairbanks. Fairbanks has recorded a summer high temperature of 99 degrees and a winter low of -66 degrees.

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Prices have been relatively static in Fairbanks. The following chart represents Fairbanks average prices. What this says to me is that most people are buying a home based on a monthly payment, hence the consistency of the average price.

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My prognosis for Alaska is for a continued recovering housing market and resumed job growth. I do believe that the effective tax cuts for oil producers (claimed to be $750 million by some authorities), will result in expanding oil and gas production and significantly more jobs. Do note that there is a recall referendum on the ballot in Alaska this coming August to repeal the effective tax cut. The oil and gas industry, until now, has been funding 90 percent of the total cost of the State government, and the current tax cut may result in the first State revenue deficit in decades.

If you have never been to Alaska, I urge you to go. At least twice—once in the summer and once in the winter. Each time is like going to a different country. Alaska is a uniquely beautiful place on this earth that is populated with some amazing people living on post card views. I have had the opportunity to visit there for the past 15 years. Some of my best friends live there—friends for life.

Plus the economy is looking up.

Ted

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