“Things are destined to get worse before they get better.”

From James W. Hughes and Joseph J. Seneca at the NJ Voices blog:

Housing slump promises more budget woes

The current housing slump is destined to worsen, according to the National Association of Realtors’ index of pending sales of existing homes that was released this week for the month of July. The NAR index for the nation, which is based on signed contracts to purchase existing homes, was 16.1 percent below that of one year ago.
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Things are destined to get worse before they get better.

In New Jersey, residential building permits are down approximately 30 percent so far this year compared to the equivalent period in 2006. Thus, it should be obvious that New Jersey and its economy are full participants in the national housing slump.

What may not be obvious is the direct impact of declining home sales on the state budget. New Jersey’s total Realty Transfer Fees, collected when a home is sold, have become a growing revenue source for the state. They increased more than eight-fold between 2000 ($77.7 million) and 2006 ($655.5 million). The large jump in revenue since 2000 was attributable to both higher realty tax rates and sharply rising home sales during the boom.

In 2006, Realty Transfer Fees generated 2.5 percent of all state tax revenues, up from 1.4 percent in 2004. Total Realty Transfer revenues were expected to decline this year, but the housing market has tumbled far deeper and faster than most analysts predicted just several months ago. Thus, the decline in Realty Transfer Fees is destined to continue to grow until the housing market bottoms out. Sales of existing homes in the state surged from 132,300 units in 2001 to 184,400 units in 2005. But, by the second quarter of this year, sales dropped sharply to a seasonally-adjusted annual rate of 145,100 units.

This is not good news for the state’s current budget or for that of next year. Moreover, there are other state revenue sources – such as sales taxes (on building supplies and home-related items), corporate business taxes (on homebuilder profits), and personal income taxes (on real estate- and residential construction-related employment) – that are highly vulnerable because of their link to the state’s housing market.

With the national economy slowing, and the housing market still facing further declines, fiscal prudence for New Jersey is certainly in order.