California Connundrum

Today we presented the Chapman University Economic Forecast. For the past five years we have asked Jim Doti (the president of Chapman) and Essi Abidi (the director of the Anderson Center) to present their estimates for the nation and California to policy makers in Sacramento. Last year was a pretty robust year - one estimate suggests that the single effect of growth in Google produced more than $400 million in revenues for the state - based on options and capital gains. The forecast suggests that the dandy growth that we experienced for the last couple of years is likely to slow down a bit in the coming year. The forecast also presented a longer term problem facing the state that I believe is under-rated. Housing affordability in many regions of the state is dropping below 15% (that means that fewer than 15% of the families in a region can afford to buy a house in the area.)

The challenge for the state is twofold. First, we need to attract industries that will produce workers who can afford our housing. But as you look at the housing numbers in key areas of the state - a lot of the demand for housing is speculative. The net growth in the Bay Area counties is actually negative - they are building more houses as people (and jobs) are leaving the region. That is not a sustainable situation.

If the growth in jobs (either through self employed individuals or salaried employees) is not sufficient to meet demands - the value of housing will decline. The Bay Area is fundamentally unsound economically. Other key areas of the state are also fundamentally slow in their growth prospects.

One other notion that was presented by the forecast. The ratio of self-employed to salaried employment in California has been shifting to self-employed. The forecast suggests that comes from a couple of sources - especially real estate and mortgage brokers. But there is plenty of evidence that a good portion of the self employed are people who are entrepreneurial in nature. To the extent that these people are liimted to the real estate industry - as rates rise - employment (and thus tax revenues) will decline. One could argue that many of these new self employed are outside of the real estate industry - but we need to think about that issue.

Clearly in the last couple of years the California advantage (the wage differential that was present in much of the last 40 year between the state and the rest of the nation) seems to have been narrowed considerably. The long term prospects for the state budget are not very good - if our reliance on the growth in real property prices has been the engine for growth. I will have more on this problem in a later post.