California Real Estate Market Waning As Wealth Evaporates

In California, real estate is (or was) king.  We’ve noticed something interesting on morning walks around the Hollywood Hills… 

About a year ago, around every turn was a construction truck… people were gutting their homes (or their investment properties), installing granite countertops perhaps, or new hardwood flooring, and prepping their homes to be put on the market. So, slowly, the construction trucks were replaced by For Sale signs… and granted, more than a few have come down, so we can assume that they’ve sold.

However, there are some houses that have been sitting on the market, unsold, price reduced, for months now… and senior economist at the Center for Continuing Study of the California Economy, Stephen Levy is worried that the California housing cycle isn’t going to end well.

“There’s a limit to what people can afford,” he wrote in a recent Weekend Edition of the Wall Street Journal. And Americans are learning to live within their means – or at least are beginning to realize what their means are.

But in California, living within your means was basically unheard of, as home prices were inflated to 80% more than the national average.

Unlike most of the mainstream press, Levy isn’t as worried about foreclosures in this market, although that is a definite problem. What concerns him most is “the spending behavior of those who aren’t going to lose their homes, but have seen their wealth evaporate.”

Think about the Baby Boomers who hope to sell their home – but run into a couple of problems. First, their house is worth less than they had been quoted when they refinanced, and now they are upside down in their mortgages, i.e., they owe more to the bank than their house is worth.

Or, secondly, buyers in California are becoming few and far between, because even though house prices may be declining slightly, they are still over-inflated – and there is no added ‘benefit’ of EZ credit.

This isn’t just happening in California… take a look at Vegas, Boston, Colorado and Florida – you’ll see a similar picture.

The California economy is an important one to keep your eye on, writes MarketWatch, “because accounts for 13% of the country’s gross domestic product or the total value of all goods and services produced nearly double the No. 2 contributor, New York. That means that what happens in California, home to such growth industries as high-tech, biotech, venture capital and film, doesn’t necessarily stay in California. The impact of slow economic growth, or even recession, in the state will ripple through the rest of the country.”

Kate Incontrera
for Markets and Money

Kate Incontrera
Kate Incontrera is the managing editor of Markets and Money. She is also the author of Markets and Money's Weekend Edition, a weekly wrap-up of contrarian investment analysis.

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