California: Canary in the Economic Coal Mine

by: Paul Kedrosky October 08, 2008    
Paul Kedrosky

Paul Kedrosky

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A piece tonight in the WSJ is painful reading about what is happening in California, the state first and most severely struck by the subprime credit crisis. There is the odd glimmer of light -- like that San Diego real estate shows signs of bottoming -- but it is mostly bleak stuff.

With its export businesses, manufacturing sector, professional services and big retail employers, California looks like many other U.S. states, only more so. California's $1.8 trillion economy -- twice the size of India's and accounting for about 15% of the U.S. gross domestic product -- is powerful enough to have ripple effects nationally. It is home to Hollywood, five of 30 Major League Baseball franchises and the largest farming sector in the nation.

California was also at the leading edge of the nation's recent housing bubble, which is where its current problems started. Home prices in California rose higher and faster than in most of the U.S., and started weakening earlier, in 2005. Some mortgage-holders defaulted. Others struggle along under a mountain of debt. The problems spread to the state's financial sector, which was heavily exposed to local real estate. As Californians cut their spending, job losses spread from the housing sector to retail stores and auto dealers. Now the state's unemployment rate is 7.7%, among the highest in the nation.

More here.

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This article has 18 comments:

  •  
    Oct 09 01:53 AM
    I'd be curious to know what percentage of sales in California now are cheap foreclosures. With more than 300,000 every month nationwide and a lot of those in Cal, it has to be skewing sales data heavily....

    I have found that new sales generally lead existing homes and we certainly aren't seeing that yet.
    Reply | Link to Comment
  •  
    Oct 09 06:16 AM
    And according to the WSJ California has the highest corporate tax rate in the world (State + Federal).
    Reply | Link to Comment
  •  
    Oct 09 08:01 AM
    CA agribusiness also has benefit of cheap ( below market) irrigation water subsidized by the u.s taxpayer.
    > jack
    Reply | Link to Comment
  •  
    Oct 09 09:01 AM
    In Orange County, CA roughly half of all home sales are foreclosures (REO).

    Check calculatedrisk.blogspo... There are occasional posts on this topic.
    Reply | Link to Comment
  •  
    Oct 09 09:27 AM
    California Solutions:
    California has always been full of gamblers, social deadbeats and low morals.
    The governor should force the refund of all realtor and bank commissions on foreclosed homes. They knew they were sucking in the gamblers so why are they getting out of this scott free?
    Secondly walkaways share responsibility and should pay 5 years interest (collectable by the IRS) for the privalege of dumping out.
    These are not innocent children who 'didn't understand'. It's time to get real here and take your share of the burden-----whoever you are.
    Reply | Link to Comment
  •  
    Oct 09 09:32 AM
    Im sorry but I believe CA is getting what they deserve. A state that takes from the ambitious and gives to the lazy is headed down. Also true for Obama.
    Reply | Link to Comment
  •  
    Oct 09 10:45 AM
    I remember the old days in California where several bond measures would pass in every election to pay for this pet project or that shortfall. Now, the middle class is leaving California in droves and the fools in the state house are still raising taxes on the middle class. Of course, the huge tax loopholes for the wealthiest members of the entertainment industry will remain intact.
    Reply | Link to Comment
  •  
    Oct 09 10:50 AM
    Sig heil CLH... you continue to show your political and personal prejudices.
    Reply | Link to Comment
  •  
    Oct 09 11:39 AM
    I got it!!

    California can package their debt, slice and dice it, and then sell it to pension funds and insurers. Then they can borrow from the FED to make the payments.

    Can you say "Implosion"? Sure. I knew you could.
    Reply | Link to Comment
  •  
    Oct 09 12:31 PM
    I live in CA, and yes, we are the stupidest people on the planet. We are $15 billion in the hole from all the previous bond issues and other overspending, and yet the current ballot is full of more bond measures. These new bond measures will undoubtedly be voted in, again, by people who don't have to pay the bill. Democracy in action where 51% of the people can extort money from the remaining 49%
    Reply | Link to Comment
  •  
    Oct 09 12:38 PM
    Dr. Jackpot: you're spot on about CA too. You should apply for Sec of Treasury!
    Reply | Link to Comment
  •  
    Oct 09 12:48 PM
    I don't normally agree with your positions CHL but in that netted-out comment I firmly do.
    Reply | Link to Comment
  •  
    Oct 09 05:18 PM
    California is to the US what the rest of the US is to the world. It represents the purest ideals of what America should be about: economic opportunity, freedom, diversity and liberalism. Naturally, its prominence and superiority draws detractors. By making the comments above about moral bankruptcy and gamblers, you people sound like the radical Islamists that you undoubtedly detest -- jealous, insecure, backward-looking xenophobes. I don't hear you complaining about all the federal money earned in California that gets spent in the sorry states in which you live (www.taxfoundation.org/...); nor do I hear you complaining about California when you are using or benefiting from all of the technology developed in California (biotech, telecomm, networking, defense, etc.); nor do I hear you complain about California when you are eating all of the food grown here. California has its problems (Proposition 13 being one), but I'd rather sink with California when it falls into the sea then be holed up in the 'hollers of West Virgina with the likes of the posters above.
    Reply | Link to Comment
  •  
    Oct 09 05:52 PM
    CLH- if California gets what you claim they deserve, then you should note what a significant part this state plays in the entire economy's big picture.
    7th largest economy in the world and 15% of the US GDP!

    Like it or not chump, saving this state will be crucial to the turn around in our economy.

    Note also that the largest percent of the 7.7 % unemployment is directly related to the housing downturn- mortgage company lay offs, building companies going out of business and laying off, Nurseries that supply the landscaping of the building industry closing down and/or laying off, real estate agents out of business and the list goes on.

    Then you add in our huge 3rd world population that are mostly unskilled labor flooding the states social system costing tax payers millions of dollars. Just go into one of our inner city hospitals and you'll witness first hand.

    Then you have state labor jobs being cut, school systems shutting down due to cut backs and there you have it " a self fulfilling prophecy!"

    Of course, it all started with the greed of banks, predatory lending mechanisms and people being stupid enough to pay 100%-200% more than the house was worth and more than what they could afford.

    Bienvenidos a Caifornia!
    Reply | Link to Comment
  •  
    Oct 09 06:27 PM
    Smarty_Pants: I think you have indeed "got it" except they can just skip the pension funds and insurers and sell their crap directly to the fed. That way we can all help pay their bills. Viva Mexifornia! BTW: I was born and raised in CA back when it was a great place to live.
    Reply | Link to Comment
  •  
    Oct 10 06:34 AM
    Skeedaddy:
    If Californians can't save themselves, then they are not worth saving. The greedy practices you mention were in response to edicts from Congress to grant mortgages to people who could not afford them. The Federal Reserve helped by flooding America with money and credit. Don't blame your local banker, etc.; blame Congress.
    Reply | Link to Comment
  •  
    Oct 22 03:17 PM
    I lived in California till January, 200y. My wife and I are engineers and we worked in the bay area. We were paying over $1000/month in income taxes and $1800/month for a two bedroom apartment. We moved to Texas and we have no income taxes and we own a very nice home with our total payment (including taxes, insurance, etc) for $1432/month.

    California has become a one word IQ test and the correct answer is Leave.
    Reply | Link to Comment
  •  
    Dec 20 01:59 PM
    Many of us predicted exactly what has happened to California, years ago.

    Take Housing:

    Back in 1998 and even as late as 2002 when everyone was saying to buy homes in places like Los Angeles and San Diego many of us looked with bewilderment. Home prices in these areas were over valued back then and they still are today. The income to housing cost data shows that the median house should cost around 200k in San Diego. This is exactly where prices are headed. Prices will continue to fall with a few small bounces in certain areas, but you will not see a real bottom until 2012 or 2013. When this bottom is put it you will not see a ramp up of any sort. Adjusted for inflation homes in California, particularly in Los Angeles and San Diego will be lower 15 years from now. There is no catalyst for a California housing boom. California no longer gets the huge influx of migrants from other parts of the United States. These educated folk that California could count on since after WWII no longer chose California. In fact, the educated are leaving California in droves, destined for much better managed states such as Texas, Colorado, Oregon, Utah, Nevada, and Arizona. Georgia and the Carolina's as well. The demographic shift spells longer term, certain trouble for Southern California real estate. The uneducated hispanic population is not going to produce the wealth needed to support sky high home valuations. This will begin to be evident by 2025. Those who chose to call this comment racist, then be my guest. I don't care. The long term forecast for the entire state of California is dismal at best.
    Reply | Link to Comment
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