Monday, October 17, 2005

California Could Be Hit Hardest

According to this article, when the housing bubble pops, busts, deflates, hisses, slows, decelerates, whatever, choose your favorite adjective, it will almost certainly bring down California's economy and will likely not leave the US economy as a whole unscathed if for no other reason than the "RE broker bubble" will pop along with it.

Some choice quotes:
"In 2004, the gross domestic product of the United States was nearly $12 trillion. But one state contributes far more than the 49 others."

"At 13.3 percent of the national GDP, California's share is nearly double that of New York, the nation's second-largest economy."

"That's why Alan Greenspan cannot relent in his quest to quash the speculative fervor in "frothy" housing markets."

"The whole darn state of California could qualify as the frothiest bubble in the land and, by the way, harm the U.S. economy as a whole when it blows."

""As home prices decelerate, consumption that has been financed through mortgage-equity withdrawal is likely to decline," Mr. Hatzius wrote. "As spending slows, the labor market is likely to weaken as well.""

"Northern Trust Co.'s Asha Bangalore estimated recently that 43 percent of the jobs created since 2001 have stemmed from housing. It stands to reason that a slowdown in housing will just as easily take away what it has so generously given to the workforce."

"Mr. Hatzius figures that the nation as a whole could lose upward of 1.3 million jobs, or 1 percent of the pie, in a housing-bubble recession. And California would get hit twice as hard, losing some 2 percent of its jobs."

"These estimates assume that employment in housing-related industries falls back to 1990 levels, when housing employed 4.4 percent of the U.S. population and 5.3 percent of California's. Today, it employs a record 5.2 percent of the nation as a whole and 6.3 percent of California's population."

""These estimates probably still understate the total impact of a housing downturn. First, our employment numbers do not include related areas such as banking, furniture or building materials manufacturing. Second, there likely will be an indirect hit from weaker consumer spending.""

6 comments:

marine_explorer said...

Sometimes it takes an outside observer to pointedly comment on our local economy. The bay area (especially silicon valley) fuels its own boosterism, while rationalizing away whatever could go wrong (and often does). Because we believe we live in an entrepreneurial hub, our ideas are somehow better and less prone to failure, giving us false confidence. The dot-bomb is one, the RE boom another.

Specifically to Marin, I've observed a systemic belief towards real estate as an unbustable hedge, which I'm guessing predates the boom. Perhaps this is due to earlier RE entrepeneurs in Marin--and many wannabes now following their tracks, hence the time-worn mantra "real estate never drops in Marin".

This attitude towards RE bears a striking similarity to the smug optimism towards "The New Economy" in dot-com circles I once frequented. Similar to silicon valley's reliance on tech, Marin's narrow focus on real estate could prove to be disastrous during a downturn, due to affected jobs, business development, tax revenues, and consumer spending.

Marinite said...

You are quite correct IMO as far as your characterization of Marin.

I would add one extra layer: Marin is extremely inward looking. For people here, Marin is the center of the world. That, and the political balkanization of the Bay Area at large. Marin repeatedly does things with at most lip-service to how it might affect other communities or those folks who might travel through Marin.

Anonymous said...

Many people in Marin will be in deep trouble if house prices decline while ARM payments increase with rising interest rates. There are lots of families in Marin that are already streched to the limit.

marine_explorer said...

I think you might be trying to use something completely different to push another point.

Seems my observation was the correlation between the tech hysteria/bust and the current RE boom. I was in the middle of the dot-bomb, and investor psychology smells familiar this time. That was the parallel I was drawing, and I suspect Marin is involved as well.

I think a lot of the posters here cannot fathom the amount of money some people have...smart people do not buy houses to make money...a lot of people that live in Marin that do not have to work.

So this means....? People do not invest in real estate in Marin to make money? Judging by discussions I've heard, sure seems like a popular hobby. Any other takes?

Regarding those "too wealthy to fathom": I'm not sure these people matter in the larger scheme of RE market activity, since they comprise a small percentage of the population. On the other hand, to the extent any local economy depends on real estate, to that degree they can be hit during a downturn.

I feel so unmoved to booster real estate, in Marin or elsewhere because it sounds all too familiar.

marine_explorer said...

Here's something interesting about CA I just ran across @ Reuters:

In the United States, income from mortgage equity extraction has accounted for some 7 percent of total disposable income this year, Zandi (economist @ Economy.com) said. But in some areas of California, for example, it accounts for up to 22 percent of such income.

Marinite said...

That totally makes sense.