REET

Assumptions and Methodology

Background

On July 20th, 2011, the Chief Economist of King County presented forecasts of Real Estate Excise Tax (REET) revenues 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 document 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. 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 as of this date are assumed to stay fixed throughout the forecast horizon.

Chief Economist's Assumptions for REET Revenues

King County levies the Real Estate Excise Tax in unincorporated King County. There are two levies: REET 1 is 0.25% of the dollar value of a real estate transaction, and REET 2 is another 0.25%, for a total of 0.5%. The only difference between REET 1 and REET 2 is which programs the revenues feed. Our approach is to use an econometric model to forecast REET 1 separately and to double that figure to get the total REET 1 plus REET2 forecast.

King County does not receive any REET revenues for transactions within an incorporated city. Consequently, the planned annexations of urban unincorporated areas into incorporated cities will have a negative impact on this source of revenue for the County.

Forecasts of REET Revenues

REET revenues are a byproduct of real estate transactions - mostly residential transactions - and so will be driven by developments in that market. The strongest leading indicators for real estate transactions, and therefore REET revenues, are trends in house prices, mortgage rates and new permits. There has been a blip up in REET revenues lately, driven by government incentive programs that are quickly winding down. We expect that revenues will drop off significantly, as the recession in real estate continues for another two years at least. For the County, this will be exacerbated by planned annexations. Here are the variables used for projecting REET revenues:

New Single-Family House Prices - US - baseline forecasts from Global Insight

New Single-Family House Prices - US - pessimistic forecasts from Global Insight

New Single-Family House Prices - US - optimistic forecasts from Global Insight

Median House Prices - US - baseline forecasts from Global Insight

Median House Prices - US - pessimistic forecasts from Global Insight

Median House Prices - US - optimistic forecasts from Global Insight

Housing Permits - King County - forecasts from Puget Sound Economic Forecaster (PSEF)

Mortgage Rates - King County - forecasts from PSEF

Single-Family Housing Permits - Washington - forecasts from ERFC

Mortgage Rates - Washington - forecasts from ERFC

House prices and permits are positively correlated with REET, and mortgage rates are negatively correlated. Table 1 shows the combined REET 1 and REET 2 history and forecasts for 2001-2015. The year 2011 is a partial forecast: as of July 20, 2011, January through June REET receipts have been reported showing a decrease of 13.5% compared to the first six months of 2011. The reductions due to annexations assume that the full impact of an annexation on REET revenues will be felt in the same year as annexation.

Tables

_______________________

Table 1