Bubble Trouble: Weak housing market now Schwarzenegger’s problem

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Many of you remind me on a regular basis that the housing problem goes far beyond housing. Fresh evidence today that you are correct: The budget gap in Sacramento is growing, and housing is a big part of the reason.

Breaking news from the Sacramento Bee: ‘The state budget deficit has increased to about $16 billion, primarily due to continuing problems in the housing market and high energy prices, according to an independent budget analysis released Wednesday.

From LATimes.com: ‘Legislative Analyst Elizabeth G. Hill, whom lawmakers of both parties look to for advice on fiscal matters, says the depressed housing market and high energy prices will cause revenues to sag even more than the administration of Gov. Arnold Schwarzenegger projected last month.’

Bloviation: I think it’s fair to liken the state’s recent management of its finances to the behavior of families who have tapped housing equity to spend beyond their income. The state’s spending in the past couple of years was supported by an unsustainable burst of economic activity fueled in large part by the housing bubble. The state has been spending beyond its means.

There’s some political karma at work here: The governor benefited quite a bit from the housing bubble -- because of the bubble and the associated burst of economic activity, and some pay-later borrowing, the financial crisis that swept him into office magically disappeared. No tax increases! No spending cuts! No money down! No payments until next spring! Now the trouble is coming back. (You can insert a ‘Terminator’ ‘I’ll be back’ joke if you like.)

Tangentially related: the northern California city of Vallejo is facing a pretty serious financial crisis. From The Mercury News: ‘Labor negotiators met Monday in an urgent effort to hammer out a budget crisis resolution before the Vallejo City Council votes for drastic cuts or to pursue bankruptcy.’

Comments? Thoughts? E-mail story tips to peter.viles@latimes.com.
Photo Credit: Gov. Arnold Schwarzenegger, by the AP