California Economy Whacked by Housing Slump

California, the most populous state in the U.S., is being hit the hardest as the housing meltdown continues.

Part of the state’s woes were caused by the fact that California was the headquarters of the subprime mortgage industry, which has seen massive layoffs. Now bearing the brunt of the housing collapse, the state is expected to see its gross domestic product drop 1.5 percent in the first half of 2008, the largest decline in the U.S., according to Global Insight.

Sacramento, the state’s capital, may be firing about 600 people after first offering buyouts, while its fire and police departments have already slashed their budgets by 20 percent. Last year California led the U.S. in foreclosure filings and saw the largest fourth-quarter decline in prices, reported RealtyTrac, a California-based seller of data on defaults, and the Office of Federal Housing Enterprise Oversight in Washington, D.C. "The depth and magnitude of what's happening in the real estate market is really, really grim,” Russell Fehr, Sacramento's finance director, told Bloomberg.

California, which produces one-seventh of the U.S. gross domestic product, will lose $25 billion in personal income by the end of 2008, and the state’s property values will dip by $630.7 billion, according to forecasts from economist Jerry Nickelsburg at the University of California, Los Angeles, and from the U.S. Conference of Mayors.

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"The housing slump is the real drag on the economy,” Nickelsburg told Bloomberg.

Inside Mortgage Finance, an industry newsletter, said about 50 percent of the 25 largest subprime lenders were based in California. Nearly a quarter of the country’s outstanding subprime loans are in California.

Since housing prices more than doubled from 2000 to 2005, the need for nontraditional mortgages skyrocketed, said Peter Navarro, a professor at the University of California, Irvine.

"The high home prices here made it very difficult to get into houses unless you started doing really funky things,” Navarro said.

The number of house sales in the state declined by 30 percent in January compared to the previous year, to 313,580. California also saw the median price for an existing home dip by 22 percent to $430,370, according to the California Association of Realtors. Californians do have the option to have the values of their homes reassessed, which helps homeowners by lowering their taxes but places a great burden on the local governing cities and counties.

In San Diego County, 11,456 applications seeking reassessments were received in 2007, triple the 2006 number and the most in 10 years.

Since California was home to many subprime mortgage companies, the meltdown trickled down quickly. The slump resulted in 31,000 jobs eliminated last year in the subprime mortgage industry.

The financial services industry was also affected and saw employment fall 6.7 percent in January while construction workers saw its employment rate decline by 6.9 percent.

"That's literally money not available for spending,'” said Jack Kyser, chief economist at the Los Angeles County Economic Development Corp., an organization that works to attract businesses and jobs to the Los Angeles region.

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