A brave new economy – California budget implications for real estate

drhousingbubble's picture

Over the weekend it was announced that California’s large $9 billion budget deficit was no longer $9 billion but $16 billion.  Whoops.  Last week J.P. Morgan Chase, a darling of the Federal Reserve, reported a $2 billion trading loss on “synthetic derivatives” yet still had the audacity to state no further regulation was needed.  Whoops.  What we have here is a system of phony numbers and massive speculation.  This plays into the giant pool of shadow inventory sitting in bank balance sheets while trillions of dollars went to bailout these banks.  Even accounting standards were frozen for these speculators.  Instead of working to increase transparency and help the overall American taxpayer they instead are using the same leverage to gamble on global stock markets.  The system is interconnected and that is why the California budget figures this weekend came as no surprise.  What is surprising is the cheerleaders narrowly focused on real estate and pretending the economy around them is completely sound.  Do they have ear plugs and blinders on as to what is really transpiring?


California’s unemployment rate is officially back to 11 percent but the underemployment rate is above 20 percent.  If we look at “not seasonally adjusted” numbers the unemployment rate is 11.5 percent:

california employment data

Over 2,000,000+ Californians are out of work.  The participation rate continues to decline similar to trends across the country yet very few even address this.  This is absolutely crucial especially when it comes to housing.  Are all the retiring baby boomers going to be the next segment that will boost the housing market?  The unemployment and underemployment figures are very important because as long as the employment situation is weak, there is little reason to expect higher home prices.

Unemployment Insurance

A report this weekend discusses how over 200,000+ people on unemployment insurance will lose their coverage this weekend:

california unemployment insurance

Of those losing unemployment insurance coverage 40 percent will be here in California.  I’m sure this is a big plus for the housing market.  There is only so much fudging of numbers that can be done until people start realizing what a giant mess we are in.  Besides this, we now have the government trying to obscure even more numbers to keep their crony financial friends protected.

Cutting off Census

I saw this posted last week and found it astonishing.  Many in the non-mainstream financial press use the Census data to crunch numbers and bring a new perspective to what is happening in the market.  I certainly use this data as I’m sure many of you do as well.  Take a look at this:

“(Census) The Appropriations Bill eliminates the Economic Census, which measures the health of our economy. It terminates the American Community Survey, which produces the social and demographic information that monitors the impact of economic trends on communities throughout the country. It halts crucial development of ways to save money on the next decennial census.”

This is mind boggling but plays into the statistics deception that is being pushed on the public.  Similar to those trying to forewarn about the housing bubble bursting, the system is trying to hide data to keep the illusion moving forward.  This is madness.  Do people realize that good statistical measuring tools came about right after the Great Depression?  You know why?  So analysts, educators, and all citizens can dig in and keep the system honest.  The fact that we spend billions of dollars building streets in other nations and can’t spend a few million to actually audit our own books is nothing more than a purposeful hiding of the obvious.  Those that continue to act under the “business as usual” mindset are largely not open to seeing what is going on.

This is why I find it fascinating what is going down in Greece.  People have been living in austerity for well over two years and now, for lack of a better word, are revolting.  They realize the financial system has them by the scruff of their neck.  They have nothing left to lose with a 25 percent unemployment rate.  Here in the US, it seems like the folks in charge would rather keep the data obscure and feel that as long as you get your steady dose of iPhones, Dancing with the Stars, and double-lattes that things will just keep marching forward.  By the way, we’ve been in recovery since the summer of 2009 so all this data must be imaginary right?

Budget Gap

The budget gap announced this weekend was stunning but not surprising.  Just look at the April revenue data:

california budget estimates

Source:  State Controller, CA

“SACRAMENTO – State Controller John Chiang today released his monthly report covering California's cash balance, receipts and disbursements in April, showing monthly revenues came in $2.44 billion below (-20.2 percent) the latest projections contained in the Governor's proposed 2012-13 Budget.”

April is a big month for tax receipts and revenues came in $2.44 billion below expectations.  The California budget is a mess.  So we are now assured that we have two items that will hit in the next year:

-Tax increases

-Service cuts

Both of these are unlikely to boost real estate values.  I hear arguments of people saying they are buying homes near prime schools and colleges like UCLA or UC Berkeley.  These are public colleges with large support from the state!  What do you think this does if prices keep on increasing and put students into deeper debt?  These institutions were built with public funds and those funds are running dry.  So what do they do?  They raise fees.  We have a lot of hidden benefits in California paid for by taxpayers and many in the state suffer from the “I want it all but don’t want to pay for it” mentality.  Well the time is coming when choices will need to be made.  Real estate is no sacred cow like some would think.  Heck, even 30 percent of those that own their home in the state are underwater on their mortgages.  Just looking at all of this in context makes you realize that some of those diving into the housing market today are suffering from cognitive dissonance when it comes to real estate.  The low mortgage rates are a siren call to jump in but just look at the above metrics.  What are we going to do, live in homes and trade them to one another continuously as our major source of economic growth?  We tried that during the housing bubble and look how that turned out.  Beyond artificially low interest rates, why in the world would housing values go up in the state given broader economic conditions?

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Walt D.'s picture

49ers? Thats where California stands in scholastic achievement, despite astronomical increases in the amount of money spent on education.  Californians have been brainwashed into thinking that the measure of success of Education is not how many students graduate from high school or college, or what they know when they graduate, but rather the amount of money that is being spent on it. Using this metric, education has become a sacred pig. Nobody dares to cut the amount of money spent on education even though massive increases in the last 20 years have produced no tangible results. 

Jerry Brown can not tax his way out of this problem. France will give him a preview of what happens when you "tax the rich" - business and high earners relocate to London.

banksterhater's picture

Yea, I don't think housing comes back, Harry Dent is right, the demographics, no wage growth, it's basically going to be those with equity swapping with the same, keeping Prop 13 tax base, not move-upers. Dent is right about the Japan model playing out here. When rates do go up, even worse for buyers/sellers.

ebworthen's picture

Only Chinese buyers can save CA.

billsykes's picture

That's crazy, Russia and Canada had smaller GDP's than California ($1.9T) and now Calif is not going to report numbers- failed state. 


They are joining Syria because they don't report their numbers either.




Ripped Chunk's picture

Sounds like it was one of those plus a negative combined with a minus a positive word problems at work again...........

W10321303's picture


White-collar criminologist and former senior financial regulator William Black addresses the grassroots reaction to austerity measures in Europe — from the "Indignados" movement in Spain to the anti-bailout elections in France and Greece — as well as in the United States, where the Occupy movement is re-emerging as the presidential campaign gets into full gear. "Finance is supposed to simply be a middleman to help the real economy," Black says. "It in fact now completely dominates and is a parasite on the real economy. German austerity has pushed the entire eurozone into recession and the periphery into Great Depression-level unemployment. And the same arguments are being made in the United States and are used as a pretext to try to destroy Social Security, Medicare and Medicaid. It is economically illiterate, but politically attractive.http://www.democracynow.org/2012/5/15/ex_financial_regulator_william_bla...

William113's picture

Your not from here are you ?

insanelysane's picture

Population in CA is 37.5, with a total labor force of 18.5 and less than 16.5 employed.  I believe government workers are part of the 16.5 employed, so how many people are actually bailing out the Titanic?  Bring your own bucket.

Stuck on Zero's picture

The State of California like the U.S. Government refuses to face up the fact that we reached "Peak Government" just like "Peak Oil" some time ago.  They just need time to adjust. It can't grow.  It can't stay the same.  It must shrink.  Politicians will be kicking and screaming all the way but it will inexorably shrink.

"Peak Government" bitchez!





SRVDisciple's picture

Hello Fellow ZHers,

Can anyone point me to the chart from a few weeks back that showed, unemployment vs labor participation rate? How was/is that chart created? Is there a way to chart California alone in this manner?


Payne's picture

Housing is all about Jobs, California is doing absolutely nothing to create an environment for job creation.  The Pols are only preserving Union Benefits.  They hope to keep all union benefits at a set level so that when the economy magically provides them with money that all look great.

They refuse to cut benefits amounts instead they will reduce hours or lay off recently hired workers.  We will know soon if the voters are dumb enough to give Jerry more money to throw in the hole.

Seer's picture

"California is doing absolutely nothing to create an environment for job creation."

Have you taken a look at bazillion other locations around the globe?

The world's economic system is contracting!  And this is because of decreasing physical resources*: if you think it a scam then you have to reconcile why the ruling elite would want to destabilize their well-established positions to take up whatever cause it is that one finds for putting forward this notion that it's some sort of "plan."  *ALL WARS ARE ABOUT/OVER RESOURCES!

"The Pols are only preserving Union Benefits."

(NOTE: This is shit that's been legislated a LONG time ago- no one can violate these laws, they have to be REPEALED- are you working to do this?)

Oh, I see, that explains why the real estate and financial sectors have been so highly subsidized!

Things start to get tight and everyone all of a sudden starts running around pointing fingers.  Sorry, you're going to have to adjust and or FIGHT, you're NOT going to get your "way" by sitting there whining and pointing your finger (and refusing to look in the mirror).

odatruf's picture

We can bitch and moan about the lack of leadership all we want, but at the end of the day the politicians do what they need to do to get elected*.  And public employees vote, organize, donate and work for candidates who will reward them.

It is that simple; and that difficult.

* I am not saying that candidate X will adopt position Y in order to satisfy public employee group Z, but rather that if candidate X doesn't natively support position Y that another candidate will win. Or maybe candidate X will see the writing on the wall and not even bother to run.

ddtuttle's picture

The UC Berkeley idea might work.  The University is rapidly building an endowment and is weening itself from state support.  The university has an army of grateful alumni who are happy to contribute.  Its as good a school as Harvard (I'm being polite to the Crimson here), but is 100s of years behind in building a sustainable endowment.

piceridu's picture

Corporations like Monsanto have set up camp at universities especially Berkeley. They have barbed wire encampments within the university grounds that are off limits and open to only a chosen few. The money they promise goes to further their propaganda. They dictate curriculum not only for the students that attend the university but also for the grammar, middle and high schools. Watch this startling documentary: http://www.youtube.com/watch?v=vlhdgMe3Moc

the grateful unemployed's picture

makes you wonder what the flow of research grants will look like in the next ten years? Drone research, Yes! Climate change, no? Affordable and sustainable alternatives to the present consumer products cycle, where it concerns the global need for food shelter and clothing? Not so much.

rosiescenario's picture

Kalifornia is controlled by the voters in LA and SF....that's the first problem.


The state has manged to create over several decades a duplicate bureaucracy to that seen in the Federal government....so when you try and run a business here you get regulated 2X. For example, for air pollution one must not only meet the Fed regs, but then the states and they are both incredibly complicated requiring the services of a specialized attorney to translate.So, the second problem is that Kali drives companies out of state due to its bureaucratic regulations. Companies trying to business in the state are at a severe disadvantage to those in other states or in foreign countries. Even the ag businesses are relocating to states such as Texas that encourage instead of discourage business.


The state's tax rate also induces companies to do business elsewhere.


The public employee unions seek compensation for its members that cannot be economically supported. In the longer term this will bankrupt the state and leave these union members with no income or pension. The greedy get needy.


Taken all together the state has managed to create a perfect storm of taxes and bureacracy that drives up costs while driving out all those creating jobs and income.





Seer's picture

"Kalifornia is controlled by the voters in LA and SF....that's the first problem."

Yup, blame it on the sheep...

For more on REALITY:


Yes, lots of action on the part of employee unions etc, but most benefits can be traced to corporate entities (i.e. developers); AND, this within the state and not in DC (where entities from the financial and defense sectors work on a much higher plane).

Oh, and keep in mind that without these "voters" the "productive" elements would have less of a market to sell to (lots of iCrap running around in the cities).

blueskies123's picture

If anyone cares to find out the real reasons why tax receipts came in so low, please consider all the corporate tax breaks that took effect in 2012. Corporations demanded and received more tax breaks despite the bad economy.

If corporations were paying tax rates what they were paying even 10 years ago, CA wouldn't be in such a pickle.

It is not education, medi-cal, that is doing the state in, it is the corporate tax breaks, which is welfare for the corporations.

smb12321's picture

If that is the case why does Texas (which is VERY generous to corporations) and has NO INCOME TAX have double digit increases in tax revenue?  No, the problem is that CA keeps electing the very folks who promised the world, failed to deliver while going bankrupt and now promise to do so again if only they get "one more tax".  (I should have said two more in this case.)

FeralSerf's picture

". . . why does Texas . . ."

Oil and gas. 

Seer's picture

Ah, physical resources, the ONLY real "productive" (wealth creating) elements...

Texas will eventually suffer the affects of global contraction.

Freddie's picture

Yeah right.  The few businesses that are still there.  The big tech companies with lib major shareholders probably get welfare.  I think they need more MediCal for more illegals. The state is a third world hell hole from China, Mexico, Asia, you name it.

DonutBoy's picture

As a business owner in California - I have no idea what tax breaks you are talking about - my company didn't get any.  Leaving aside whether higher corporate taxes in California are "right" or "wrong" - as a practical matter, California is a less friendly place to do business than it was, and neighboring states know this and make it appealing to move.

Seer's picture

Race to the bottom.

I don't know what "neighboring" states have beneficial (exploitable) business environments.  Yeah, sure, lower tax rates might exist, but... shipping ports in Arizona*?  And, really, when it comes down to it, true "wealth creation" only really comes from a net gain in exports: US consumer debt is way too high to expect any growth here (and while it in itself will cause a reversal in growth, it has the added burden, as noted in this discussion, of further downward pressure from govt expenditures [much the result of externalized costs from big corporate business]).

* NOTE: Yeah, there's also Nevada, and Oregon, but, and I mean no offense to those living there, these are hardly attractive locations (OK, Oregon DOES have sea couple of ports [really only one?]).

DonutBoy's picture

The funny thing about that comment to me is how few businesses in California export.  Agriculture I suppose.  In the electronics industry the bulk of the products are designed here, manufactured overseas, and imported.  If you were to select the most favorable state to start a new manufacturing plant in, California, Arizona, Nevada, or Texas; California would be at the bottom of that list despite the availability of ports.

FeralSerf's picture

The intellectual property portion of the electronics industry is huge and is the cause of large profits to many American corporations, e.g. Apple Computer, Intel.  Many of those companies, of course, do not bring that money back to the U.S. for tax reasons.  Hollywood also is responsible for very large amounts of IP profits.

smb12321's picture

Heard on CNBC the other day that a new survey ranked CA dead last in business environment.   Increasingly it is dividing into Hollywood idiots, Silicom Valley execs, public unions and zombies.  Anyone who can is fleeing considering the taxes, unemployment and now a dropout race of 20%.  I read an amazing statistic.  Latinos are or soon will be the largest voting bloc in CA and over half did not reach the 11th grade.  What a debacle.

Seer's picture

Gee, I'm pretty sure you missed a stereotype, but I'm not able to figure which one...

Let actual facts speak out:


What the article gets wrong is that there isn't inexhaustible resources.  Always conveniently overlooked: anything based on a bad premise can be shown to look good if you ignore the premise itself.

TheCanimal's picture

What about the children of the poor, disenfranchised, undocumented workers?

FeralSerf's picture

Thanks to some thinking-out-of-the-box tax accountants, the illegal Latin American workers are now getting TINs and filing their income tax returns as they are legally required to.  Since most of them don't make very much and have very large extended families, they qualify for large earned income tax credits.  Their dependents don't need to be U.S. residents or citizens.  Americans can no longer credibly accuse the Mexicans of avoiding their U.S. tax burdens.

The Law of Unintended Consequences in action:


smb12321's picture

I presume you mean what will happen to those who rely on the state. They will suffer though not nearly as much as they would if CA went broke.  A state cannot function is the number of productive contributors continues shrinking while those on the dole advance endlessly.   Either the productive folks get tired and move or the place goes bankrupt.

Ask why such states as TX without an income tax have double digit increases in revenue while high tax states like CA and IL get further and further behind. 

Madcow's picture

Could California exit the union and devalue its own currency ?

FeralSerf's picture

California would be self supporting as a country if it had military spending comparable to most western European nations.  California sends a lot more money to Washington than it receives from the feds.

The California politicians would soon find a way to "fix" the problem of what to do with the new found wealth though.  And they would have a lot of fun with California's new currency.

Ar-Pharazôn's picture

mate really............ that was a joke?

Seer's picture

Here's data where you can looks up the Federal BOP per state:


Freddie need not apply his precious energy to doing research, he's to busy frothing emotionally... (which is very little different than what his perceived "clowns" are doing- just another clown in the circus he/she deplores)


smb12321's picture

The data appeared to be seven years ago, at the beginning of California's slide into the abyss.  Where's 2011 figures?

Freddie's picture

How is it a joke?  The state is a joke.  It is Greece on steroids.  

Seer's picture

A clown calling others clowns- you're precious!

At least Trav could provide some relevant discussion, rather than incessant carping about Oblama/Dems/Libs (while you state nothing about how perfect you are).

Fucking go away.

TruthHunter's picture

“(Census) The Appropriations Bill eliminates the Economic Census, which measures the health of our economy. It terminates the American Community Survey"


The government doesn't need this anymore, its redundent.  The NSA probably pulls it out cheaper and quicker. Also its like the news; no

need to report on bad things, don't worry, be happy.

goodrich4bk's picture

It is not difficult to balance California's budget.  Spend 5 or 10 minutes with this interactive calculator from the LA Times and it's easy to do without any significant tax increases:  http://www.latimes.com/news/local/budget/

I was able to do it by spreading the pain equally.  I cut all programs that could be cut by 10%.  I released the non-violent drug prisoners and did not spare the Cal State or UC systems from my 10% cuts.  The only programs I did not touch were Community Colleges and State Parks.  But even if you cut them 10%, too, you still need tax increases.

I restored the vehicle license fee to the 2% my parents paid for years without complaint.  Come on, people, stop your whining.  And I kept the "temporary" tax increases from last year, i.e., the .25 sales tax and the 1% income tax increase.

BINGO!  Budget balanced.  Now, what is so goddamed hard about that?

smb12321's picture

It's balanced!  But because productive people and businesses are fleeing the state while those on the dole are moving in, collections continue declining while outlays steadily increase.   So next year the Gov sadly admits a 10 billion deficit BUT a little trimming and, oh yeah, more taxes will fix the problem.  

In CA's case it's 5 years running (with no end in sight) and anyone with an atom of sense can see the process is a sinking hamster wheel that only accentuates the problem.

Joe The Plumber's picture

Next year and the year after that the government will find other worthy programs and want another "small reasonable tax increase"

This becomes cumulative and in another decade kalifornia is back in the same position but taxes are even higher and more businesses and ambitious people are gone, making the solution even more difficult

Hold the line now and forever. No new taxes. Taxes increase naturally as the economy grows. Governments should learn to live with that

No net additional taxes ever. No mas. Always vote against any tax increase

Seer's picture

'Next year and the year after that the government will find other worthy programs and want another "small reasonable tax increase"'

Like bailing out banks and defense contractors...

'Taxes increase naturally as the economy grows.'

Bad assumption, that the economy will grow.  Growth is dead.  People need to get this through their heads and come to grips with how we're going to operate in such an environment: yes, this does include govt (which I have no use for).

DeadFred's picture

In California it's constitutionally mandated that the budget be a balanced one. This has led to a decade of flim-flam numbers and pie-in-the-sky assumptions of economic conditions. There is no more room one time accounting tricks and reality is setting in. It has taken a couple years longer than I expected but this is a big issue likely coming to a head soon. When the state can't balance the budget it will pay with IOUs once again for months and finally it will default. Bigger than Greece, Spain or Italy this threat will likely hit around election time or the end-of-year cliff we hear about. It's not priced into the market that's for sure. Last summer's low were transitory.

Seer's picture

"In California it's constitutionally mandated that the budget be a balanced one."

Is this not true for ALL US States?

odatruf's picture

Almost all states.  A few don't have this mandate.

semperfi's picture

Deficits don't matter - BULLISH !!

D. Cheney

Seer's picture

The great neo-con Cheney voicing the ghost of Keynes!