Posted: January 29, 2010

By Michael Schwartz

michael.schwartz@insidebiz.com

"We knew last year it was going to rain," Vinod Agarwal said last week in presenting the annual economic forecast for Hampton Roads as calculated by Old Dominion University's Economic Forecasting Project.

The region's gross regional product declined 1.3 percent in 2009, faring better than the nation as a whole, which saw gross domestic product decline 2.5 percent.

The year, however, turned out to be worse than Agarwal and his team predicted.

This time last year the ODU economic forecast team, also made up of ODU professors Gil Yochum and Mohammad Najand, predicted GRP to decline only 0.3 percent.

"We expected it to rain," Agarwal said. "But not this hard."

If 2009 was metaphorically rainier than expected, the 2010 forecast can be best described as partly cloudy with a chance of showers.

GRP for 2010 is expected to grow 2.4 percent, the project predicts, slightly less than the anticipated U.S. GDP growth of 2.8 percent.

"We don't go down as fast and we don't recover as fast," Agarwal said, referring to the buffer of Department of Defense spending that guards the region from economic extremes.

The local economy in 2009 benefited from $20 billion in defense spending in the region. That, combined with the steady income, regular pay raises and increases in housing allowances afforded military employees - all contribute to DOD's stabilizing effects locally.

More on the 2010 predictions in a moment.

The interesting factor built into ODU's project is they not only predict the future, a year later they show how their predictions panned out.

In addition to underestimating the rate of economic decline in 2009, the project was slightly off in predicting how far declines in the job market, local hotel revenue, taxable sales and cargo tonnage would fall.

The group predicted job growth would decline 0.4 percent in 2009, when in fact it turned out to fall 0.8 percent with the largest declines seen in the trade/transportation, construction and manufacturing sectors.

The region lost about 6,000 jobs during the year and Agarwal said they expect unemployment figures for 2009 to be revised downward, likely revealing that the region lost more than 8,000 jobs during the year.

Directly related to job loss and lack of income are the region's taxable sales. The project predicted 2009 taxable sales in the region to decline 3.9 percent. They actually dropped 4.7 percent to levels not seen since 2005.

Hotel revenue, a factor related to the health of the region's tourism industry, showed signs of weakness in 2009. The project had predicted a 2.2 percent decline in hotel revenue for last year. It dropped 5 percent, with the largest declines seen in the Williamsburg area, Norfolk and Portsmouth.

Williamsburg in particular appear appears increasingly weak as measured by hotel revenue.

Hotel revenue in that area has been in steady decline for much of the last decade, the project found; the only exception was 2007, which correlated with the 400th anniversary of Jamestown.

The Williamsburg hotel market "is somewhat in trouble," Agarwal said. "Something needs to be done there to increase demand."

Activity at the region's ports, not surprisingly, was down in 2009, 16.4 percent for the year, worse than the projected 14.4 percent.

Agarwal spent much time discussing the performance of the local housing market in 2009.

The value of single-family housing building permits declined 19.5 percent during the year, far less than the predicted 40.7 percent.

In correlation with the drop in employment in the region, local building permits also declined to below 3,000 for the year.

The median sales price of new- construction homes fell 5.4 percent in 2009, about half the rate of decline from 2008. That figure, coupled with factors such as the highly touted federal first-time homebuyer credit, historically low interest rates and homebuilders who Agarwal said have adjusted well to the declining market, allowed the local inventory of new homes to fall below 2,400, the lowest point since 2005.

New-construction home sales for the year were down, however, at their lowest rate since at least 1995, which is as far back as the data goes.

Existing-home sales were a slightly different story.

They actually increased by a few hundred in 2009 and inventory fell slightly.

The median price of existing homes fell 5.5 percent in 2009, about three times the rate of decline in 2008.

Existing homes for sale now sit on the market for an average of 88 days.

For both new and existing homes, Agarwal said inventories are still too high, indicating "the market is still pretty soft."

The region has about six months worth of inventory for homes priced between $175,000 and $300,000. It jumps to about 9 months for the $300,000 to $521,000 price range. And above that, the region has nearly two years' worth of inventory to burn through based on recent demand trends.

Distressed home sales, those sold as bank-owned properties or short sales, were up dramatically in 2009, making up more than 18 percent of all sales. That figure was nearly nonexistent in the region up until 2007.

Distressed sales also are no longer concentrated in a single-price category, Agarwal said.

Agarwal saved the best for last - the predictions for 2010.

The good news, he said: "2010 will be a better year than 2009."

The predicted GRP growth of 2.4 percent will come with an estimated real GRP of $72.31 billion, fueled by growth in defense spending, the port, the health care industry and tourism.

That's the good news.

The bad news is the lagging effect of unemployment.

Civilian employment is predicted to decline once again in 2010 by about 0.2 percent. That should leave the region's unemployment rate steady at 6.8 percent.

Agarwal said the model indicates a gain in net jobs in the second half of 2010, but that gain won't eclipse the number of jobs already lost.

For those who have jobs, incomes are expected to rise and therefore taxable sales are predicted to increase 1.9 percent in the region to $19.18 billion.

Hotel revenue and cargo tonnage are predicted to increase 1.2 percent and 6.3 percent respectively.

The value of new residential building permits should rise 7.4 percent for the year, though the median home price is expected to decline again in 2010.

All of the Economic Forecasting Project data can be found at www.odu.edu/forecasting. nib