Wednesday, March 16, 2005

The impact of a housing bubble

This LA Times article is an interesting followup on my last post about housing affordability. It discusses the short-term boost but long-term drag of a housing bubble, using California as a case study. Of particular note is how it drives critical external/exporting jobs out of the state (as businesses flee high costs) while replacing them temporarily with local jobs to service the newfound wealth of the property owners. When the market cools and that one-time wealth boost has been used up, those jobs will disappear, likely throwing the state economy into recession or long-term stagnation. Some excerpts:

Real Estate Reliance May Hurt California

Half of the private-sector jobs created in California in the last two years are connected in some way to real estate. Meanwhile, property values in the last four years have swelled $1.7 trillion, the equivalent of about 35% of the total personal income in the state since 2001.

This sharp increase in home equity has spurred consumer spending that, in turn, has fueled more economic growth.

"We have an economy that's rolling along on the basis of a false sense of wealth," said Christopher Thornberg, a senior economist with the Anderson Forecast team.
...
"We need some other sectors to carry the ball," said Ross DeVol, director of regional economics at the Milken Institute in Santa Monica. "Real estate simply cannot push the economy forward any longer."

UCLA's Thornberg said it would take strong growth in other sectors of the economy to take the place of a flagging real estate market. Since 2000, California has lost so-called external jobs that cater to the national or international economy - making computer chips or T-shirts, for example - as it gained jobs that cater to other Californians, in retail, nursing or real estate. Only if external jobs catch on fire, Thornberg said, can the state maintain the status quo, which is lackluster job growth far behind historical averages.

"The best-case scenario is mediocre," he said. "That's what this boils down to."

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