Economic Outlook January 2018 Peter F. Orazem Iowa State University For the first time in many years, we see some signs that the labor market is slowing or stagnating. This could be a temporary lull, or it could be that the combination of weak state support for the university, a slowdown in private investment, the weak agricultural economy and the resurgent market to the south are ushering in a more difficult economic environment for over the next few years. I present the time trends in Figures 1-3. Overall December employment is almost flat over the past two years while has continued along its 8-year trend. Both and far outpace the rest of the state and are also outpacing other metro areas as we will show later. The stronger employment growth is fine to the extent that residents can patch into the much larger Des Moines labor market, but the stronger employment prospects in the larger market are also a reason to live in Polk County rather than. As shown in Figure 2, driving the relative growth in and has been the strength of the private sector, so the setback in the private sector in 2016 is why failed to keep pace with. The government sector is atypically important in, and through December 2017, we were still adding jobs. However, the midyear reversion and projected further cuts to the Iowa State budget suggest that 2018 will be difficult. Combined with the stabilization of enrollment, it is unlikely that the government sector will be a source of employment growth for over the next few years. In comparison to the other Iowa metropolitan areas. central Iowa is clearly outclassing the field. If having an adjacent growing faster is a threat, being completely removed from the market is worse. While the focus of economic growth will be south of, at least we do not have to move away to tap into that growth. Why are there so many students in? For as long as I have been on the city council, I had people tell me that Iowa State was going to reverse its enrollment growth so we did not need all these apartment buildings. The enrollment growth at Iowa State is not an unexpected event. It was the result of a conscious strategy to make up for lost state support for the university. As shown in Figure 5, even though Iowa state government revenues have not fallen, Iowa State s share of the state budget has declined 41%. State support of Iowa State University has fallen 35% after correcting for inflation. The university turned to increasing tuition as the only mechanism to prevent massive reductions in the workforce. The strategy is easily illustrated in
Figure 6. The share attributable to state support has decreased 24 percentage points since 2000 and the tuition revenue share has increased 24 percentage points. The students are exactly replacing the lost state revenue. Without the tuition from 10,000 additional students at Iowa State, we would have 1,911 fewer people employed at Iowa State, meaning 20% fewer ISU employees. Iowa State will do everything it can to prevent a decrease in the student body that would cause a massive reduction in force. One could ask why the University of Iowa did not have to increase its enrollment. You can blame our legislators for that one. One would think that the state would allocate its university support in relation to the number of Iowa residents at the university. That is why our resident students pay a lower tuition. However, since 1981, the state of Iowa has allocated Regents revenue based on a fixed allocation that gives the University of Iowa 46%, Iowa State 36%, and UNI 18% regardless of how many resident undergraduates each university enrolls! Knowing that, the University of Iowa began reducing its resident student enrollment and replacing them with nonresident students. And why not? They received the same support from the legislature regardless of whether or not they enrolled Iowa residents, and their nonresidents paid 2-3 times more in tuition. Between 1981 and 2013, the University of Iowa reduced its resident enrollment by 2,246. Iowa State increased its resident enrollment over that period by 2,387. As a result, the University of Iowa receives state support equal to $14,839 per Iowa resident student. Iowa State receives only $9,420 per Iowa resident student. In 1981, the per student subsidy at ISU was 93% of the UI subsidy, and it is now 63% of the UI subsidy. So why are there so many students in? Because the legislature has been steadily shorting ISU for performing its mission of educating the children of Iowa. The Housing Market 1: Rentals With an increase of 10,000 in the student body, there is upward pressure on the price of rental housing unless we add supply at the same rate that we add demand. That did not happen in, and so rents were bid up more than in other markets. Interestingly, rents in tracked rents in Story County until 2016 when rents rose above the surroundings (Figure 7). However, it is clear that rents in and Story County were rising relative to Polk County. Whereas in 2012, Polk County rents were higher than in, the gap was eliminated by 2016. Additional information is shown in Figure 8. This focuses on the rate of growth of the rents. Boone rents lag substantially, but the rest are comparable. However, rents did rise more rapidly than other area markets as enrollments rose at Iowa State, and rents had not fallen appreciably as of January 2018. We are constantly told that does not need all the new apartment complexes. In fact, has too few, which is why there has been a conversion of detached houses into rentals and why
there has been an atypical increase in rental prices. In Table 1, we show that in 2007 early in the enrollment expansion, about 80% of rental units in were in apartment complexes. However, as enrollment continued to grow, detached houses took up a larger share of all rental units. The reason is that we did not grow apartment complexes sufficiently rapidly, and so there was a market for converting houses from owner-occupied to rental. Table 1: Share of rentals in detached single units, duplexes, and complexes 2007 2010 2012 2015 2017 single share of total units 7.8% 8.6% 9.3% 7.9% 8.3% duplex share of total units 12.2% 11.8% 11.7% 10.4% 10.0% apartment complex share 80.0% 79.6% 79.0% 81.6% 81.7% Source: Data provided by Inspections Department Table 2 presents the total number of units added in multi-family apartment complexes. We added 7,040 beds since 2013 which is smaller than the increase in enrollment. That presumes that students are the only people who want rentals, but we are adding jobs in at a rapid rate at this time as well. We did not add enough units in multi-family complexes to meet the rising demand, and that is why there was upward pressure on rentals. Table 2: Added beds in apartment complexes in, 2013-2017 Source: Data provided by Inspections Department It is possible that the housing complexes that are being completed coupled with the slowdown in demand growth due to stabilization in the university enrollment and the slowdown in employment growth will finally let supply catch up with demand. But that is by no means guaranteed. In fact, rents can fall considerably before they revert to the mean of the surrounding areas. The Housing Market 2: Are Housing Values Really that Unaffordable? Average housing prices in are lower than Ankeny but higher than the city of. But are housing prices unaffordable? That is an internally contradictory question in that
Index, 2000=1 prices are all based on market transactions where someone paid for the house. By definition, then, the house was affordable. Nevertheless, I asked the City Assessor to provide information on all the houses in and in Story County. The resulting distributions are presented in Figure 9. The median price of houses in is $207 thousand. The median price of houses outside is $50 thousand less at $157 thousand. In, about 2400 houses are at or below the first-quartile price of $161 thousand. Outside, there are almost 2600 houses at or below the first -quartile price of $113 thousand. If the city wishes to have more houses in this price range, it can do no better than to make it less expensive to build. The recently established Story County Housing Trust Fund is $240,000 or the value of one house. The city effort at the old middle school site would add about 40 units. These efforts, though well meaning, will have negligible effect on housing values relative to supporting policies that make it easier or cheaper to build more units. Figure 1: Nonfarm Employment Growth in the and Metropolitan Areas Compared to Iowa, 1990-2017 1.3 1.2 Growth in December Nonfarm Employment,, Des Moines and Iowa Labor Markets, 1990-2017 1.1 1.0 Iowa 0.9 0.8 0.7 1990 1995 2000 2005 2010 2015 2020
Index: 1=2000 Figure 2: Private Sector Employment Growth in the and Metropolitan Areas Compared to Iowa, 1990-2017 1.4 Growth in December Private Employment,, and Iowa Labor Markets, 1990-2017 Index, 2000=1 1.3 1.2 1.1 1.0 0.9 Iowa 0.8 0.7 1990 1995 2000 2005 2010 2015 Figure 3: Government Employment Growth in the and Metropolitan Areas Compared to Iowa, 1990-2017 1.2 Growth in December Government Employment,, Des Moines and Iowa Labor Markets, 1990-2017 1.1 1.0 Iowa 0.9 0.8 1990 1995 2000 2005 2010 2015 2020
Index: 2000=1.0 Figure 2: Private Employment Growth by Iowa Metropolitan Area, 2000-2017 1.200 1.150 1.100 Private Employment Growth in Iowa Metropolitan Areas, 2000-2017 Iowa City Index: 2010 = 1 1.050 1.000 0.950 Sioux Falls Cedar Rapids Cedar Falls-Waterloo 0.900 Dubuque 0.850 1995 2000 2005 2010 2015 2020 Figure 5: State Tax Revenue and Iowa State Appropriations, 1992-2016 Indexes of Current Dollar Iowa State Tax revenue and Iowa State University State Appropriations, 1992-2016 1.05 Iowa State Tax revenues 0.95 0.85 0.75 0.65 Real State tax revenue is flat since 2008 ISU state appropriation is down 16% since 2008 down 35% since 2000 ISU State Appropriations 0.55 1990 1995 2000 2005 2010 2015 2020
Figure 6: Iowa State University Revenue Share by Source, 1990-2016 Budget Share Median market rent 0.6 0.5 0.4 0.3 0.2 0.1 Revenue Shares for Iowa State University for Academic Operations, AY1990 - AY2016 State Appropriations 48% Contracts and Grants 19% Tuition Federal Appropriations including Labs 0 1990 1995 2000 2005 2010 2015 Academic Figure 7: Average rents across all units, Polk County, Story County and, 2012-2018 43% 24% 1500 Index of Rental Prices,, Story County and Polk County April 2012 - January 2018 1400 1300 1200 Polk County Story County 1100 1000 900 Source: Zillow https://www.zillow.com/research/data/ 800 2012 2013 2014 2015 2016 2017 2018 2019 Month
Rental Price Index, Jan 2013 = 1 Figure 8: Index of Rents relative the level in 2013, Central Iowa municipal markets, 2012-2018 1.5 1.4 1.3 1.2 1.1 1 Index of Rental Prices, and Vicinity April 2012 - January 2018 Ankeny Nevada West Johnston Boone 0.9 0.8 Source: Zillow https://www.zillow.com/research/data/ 2012.2 2013.2 2014.2 2015.2 2016.2 2017.2 2018.2 2019.2 Figure 9: Distribution of Housing prices in and in Story County outside, 2017 Source: City Assessor s Office