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Finance Bulletin: July 2006

Economic Update

More signs have come to light that the long-anticipated slowdown in California's housing sector is taking hold.  Existing home sales softened statewide in May, and although existing home prices held up, the pace of price gains continued to trend lower.  In addition, residential construction permits, while up slighty in May, remained well below year-ago levels.  These developments were anticipated in the May Revision forecast.  On the plus side, commercial construction took up some of the slack with robust growth, particularly office building.

• Home construction permitting picked up in May as the heavy spring rain let up, but was still much slower than the pace set a year earlier.  Permit issuances for home building reached a seasonally adjusted annual rate of 173,000 units in May.  While this is a 2-percent improvement from April, it was a 21-percent drop from May 2005.  Both single and multi-family sectors improved in May, but both slowed significantly from a year earlier.
• For the first five months of 2006, home construction permitting was off 12.6 percent from the same months of 2005.  The slowdown in single-family home construction overwhelmed a modest increase in multi-family permitting.  Single-family permitting fell almost 19 percent compared to the first five months of 2005, while multi-family increased 6.4 percent.
• Nonresidential construction permitting recovered in May after slowing in April.  Business construction rose over 34 percent from May 2005, lead by a jump in parking garage construction and gains in industrial building activity. For the first five months of 2006, commercial building activity was up nearly 25 percent from the same months of 2005.
• During the first five months of the year, nonresidential construction growth was fairly widespread throughout the state.  Among major metropolitan areas, the fastest annual growth in percentage terms was in the Santa Ana-Anaheim-Irvine MSA where a major acceleration of office construction more than doubled the pace of overall commercial construction.  Very strong growth was also recorded in the Riverside-San Bernardino and San Francisco-San Mateo-Redwood City MSAs.  Only the Ventura and Sacramento regions experienced slowdowns.
• The pace of existing home sales slid for the second consecutive month in May, falling to a seasonally adjusted annual rate of 488,260 units—21 percent below the year-ago pace.  Home sales during the first four months of 2006 were down over 19 percent from the same months of 2005.   Home sales in May were off 25 percent from the latest peak in September 2005.
• The slowdown in existing home sales occurred throughout California.  According to the California Association of Realtors, sales in all major regions of the state were down significantly from year-ago levels.  The pace of home sales slowed the most dramatically along the central coast and in the Sacramento area with Santa Barbara County sales down over 34 percent from a year ago; San Luis Obispo, 30 percent; Monterey County, 32 percent; and the Sacramento region, 33 percent.  Southern California experienced a less dramatic slowdown.  Sales in the Los Angeles region were down 11.6 percent in May.
• Despite weakening sales, California home prices held up during the first five months of 2006.   The median price of existing single-family homes sold in May was $564,430—up 2.9 percent from the end of 2005.  This price is still within the $540,000-to-$570,000 range that it has been in since June 2005.  The May median price was 8.0 percent higher than a year ago—the first below-double-digit annual gain since May 2001.
• Home price stability varied throughout California in May.  Price were up over the year in the Los Angeles and Riverside/San Bernardino regions, by 13.5 percent and 8.8 percent respectively.  The San Francisco Bay area, including the Silicon Valley, enjoyed more modest appreciation.   In contrast, home prices fell in Santa Barbara County (-9.3 percent), Palm Springs
  (-3.5 percent), and Santa Cruz County (-0.3 percent).

Monthly Cash Report

Preliminary General Fund agency cash for June was $59 million below the 2006-07 Budget Act forecast of $10.325 billion.  Year-to-date revenues are $56 million above the $93.572 billion that was expected.  The variance between June and year-to-date cash is due to differences between preliminary and actual revenues for prior months.

• Personal income tax revenues to the General Fund were $81 million above the month’s forecast of $5 billion.  Withholding receipts were $52 million higher than the projected level of $2.433 billion and other receipts, which include estimated payments, final payments, and miscellaneous such as audit collections and withholding on real estate, were $79 million over the month’s estimate of $2.857 billion.  Refunds were $49 million above the anticipated $200 million.  In November 2004, the voters passed Proposition 63, which imposed a 1 percent surcharge on taxpayers' taxable income above $1 million to fund mental health service programs.  Pursuant to the Proposition, the cash amount transferred to the Mental Health Services Fund (MHSF) during fiscal year 2005-06 is 1.76 percent (0.0176) of total monthly personal income tax collections.  The special fund amount transferred to the MHSF in June was $1 million above the forecast of $90 million.  Year-to-date General Fund tax revenues are $83 million above estimate.
• Sales and use tax receipts were $16 million below the month’s forecast of $2.823 billion.  June represents the second prepayment for second quarter sales.  A more complete picture of second quarter sales will be available in mid-August, when all of the second quarter receipts have been processed.  Year-to-date, the sales tax cash is $151 million more than anticipated.  Continued higher gas prices may mean a portion of this revenue will be transferred to accounts for transportation purposes.  This will become clearer when more detailed sales data are available in mid-2006-07.
• Corporation tax revenues were $40 million above the month’s estimate of $1.638 billion.  Prepayments were $81 million higher than the forecast of $1.521 billion and other payments were $22 million below the $173 million that was expected.  Refunds were $19 million above the projected level of $56 million.  Year-to-date revenues are $41 million above estimate.
• Revenues from the insurance, estate, alcoholic beverage, and tobacco taxes came in $23 million below the $525 million that was expected.  The remaining revenues—pooled money interest income and “other” revenues—were $141 million below the month’s estimate of $339 million, due in part to delays in expected Medi-Cal fee revenues.  

For more information, please contact the California Department of Finance, Room 1145, State Capitol, Sacramento, CA or call (916) 323–0648.

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