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2013 Assessed Value and New Construction Forecasts _____________________________________________________________________________________________________     _____________________________________________________________________________________________________ Assumptions and Methodology
Background On July 20th, 2011 the Chief Economist of King County presented forecasts of assessed valuation and new construction to the Forecast Council. They were adopted by the Forecast Council and will be used to construct a balanced budget for 2012. The purpose of this page is to provide transparency to users of the forecasts, both inside and outside of County government. Assumptions Mandated by the Forecast Council All forecasts have been constructed under the following assumptions mandated by the Forecast Council. Taken together, these assumptions make the forecasts on the conservative (low) side. - The forecasts are constructed with a 65% level of confidence. This means that there is a 65% chance that actual revenues will exceed forecasted, and only a 35% chance that actual will fall below forecasted. This is more conservative than an "expected value" forecast, which would be at the 50% confidence level.
- All proposed annexations from King County to incorporated cities are assumed to occur as scheduled through 2015 (property tax year 2016). Some of the annexations may not occur or may occur later than assumed as they are still subject to voter approval.
- No changes to the tax code are assumed. Rates that are on the books now are assumed to stay fixed throughout the forecast horizon.
Chief Economist's Assumptions for Assessed Valuation Assessments for the 2012 tax year are still being conducted by the Tax Assessor as of this writing. When completed, they will be backdated to January 1, 2011 and will apply to the 2012 tax rolls. Our forecast dates match the year in which assessments will be applied to the tax rolls ("tax year"), which is one year forward from when they are given assessed valuations ("accrual year"). The residential, commercial, and condominium sectors of King County are forecasted separately. This allows us to tailor our assumptions more precisely as the different sectors are likely impacted by different factors or impacted by the same factors differently.
Assumptions for Residential Assessed Valuation Residential properties include all owner-occupied residences with three units or less per building. It is mostly single-family residences. We employ a diverse range of national, state and local historical data, with forecasts from three professional services: [2] - GDP - US - forecasts from Global Insight.
- Price index of single-family housing - US - forecasts from Global Insight
- Personal income - Washington - forecasts from the State Economic & Revenue Forecast Council (ERFC)
- Single-family housing construction permits - Washington - forecasts from ERFC
- Personal income - King County - forecasts from Puget Sound Economic Forecaster (PSEF)
- Housing construction permits - King County - forecasts from PSEF
Assumptions for Condominium Assessed Valuation The condominium property sector includes all owner-occupied residences with more than three units per building. It is affected by the same variables as single-family residences with the exception of permits: - GDP - US - forecasts from Global Insight.
- Price index of single-family homes - US - forecasts from Global Insight
- Personal income - Washington - forecasts from ERFC
- Personal income - King County - forecasts from PSEF
Assumptions for Commercial Assessed Valuation The commercial property sector includes all commercially zoned properties, apartment buildings, right-of-way, vacant lots and personal property in King County. The efficient set of variables that are predictive of commercial valuations are: - GDP - US - forecasts from Global Insight
- Non-residential construction cost index - US - forecasts from Global Insight
- 10 Year Treasury Yield - US - forecasts from ERFC
- Employment in software - Washington - forecasts from ERFC
- Employment in aerospace - Washington - forecasts from ERFC
- Personal income - King County - forecasts from PSEF
Forecasts GDP, personal income, permits, non-residential construction costs, employment in software and aerospace, are forecasted to grow steadily from the reduced levels of the last two years. These are positives for assessed valuations. The negatives are interest rates, which are forecasted to grow, and house prices, which are forecasted to continue falling through 2012 (impacting tax rolls through 2013). Table 1 lists actual total assessed valuations for all of King County through to the current tax year. Values for 2012 forward are forecasts. Table 2 contains history and forecasts for the unincorporated portions of King County. Downward adjustments have been made for anticipated annexations by incorporated cities. Note that the dates of the occurance of the annexation will not impact the tax rolls until the following year, as the table shows. Assessments for tax years 2011, 2012, 2014 and 2016 will be reduced by annexations occuring a year earlier. Annexations aside, assessments for unincorporated King County are forecasted to growth at a faster pace than all of King County because of differences in sector mix: unincorporated King County is about 85% residential while all of King County is less than 60% residential. Residential values are forecasted to growth faster than the commercial and condominium sectors. Assumptions for New Construction New construction is affected more directly by the business and real estate cycles than assessed valuations. Consequently, there is higher year-to-year volatility in the forecasts. The predictive variables employed are: - Price index of single-family housing - US - forecasts from Global Insight
- Construction employment - US - forecasts from Global Insight
- Housing construction permits - Puget Sound - forecasts from PSEF
- Construction employment - Puget Sound - forecasts from PSEF
- Median price of new homes - Washington - forecasts from ERFC
- Multi-family construction permits - Washington - forecasts from ERFC
All of the predictive variables are positively correlated with new construction activity. Forecasts of the predictive variables by the forecasting services tend to exhibit a continuing decline over the next two years with a recovery beginning in 2012. This turn-around won't affect tax rolls until 2013. This is reflected in the new construction forecasts in Tables 3 and 4. For the unincorporated areas in Table 4, the cyclical downturn is compounded by planned annexations. Econometric MethodologyFor the more technically inclined user, this appendix explains in some detail how the above assessed valuation and new construction forecasts were generated.
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