Golden State’s Luster Not Worn Off Yet : Outlook: Although California’s economy and real estate market bear some disturbing similarities to New England’s, some experts say, this state is better off.
Local unemployment rates are soaring and housing prices are sliding, but many Californians steadfastly maintain that “this is no New England.”
But are they overly optimistic? Is California primed for a Texas- or New England-style real estate disaster, where housing prices fell fast enough to endanger a large segment of the financial system and led to a collapse of a major bank like Bank of New England?
Not likely, many economists say. Although California’s economy and real estate market bear disturbing similarities to New England’s, these experts say this state is better off. The Golden State’s real estate market and economy are not likely to slide as far or as fast as on “the other coast,” they contend.
“California and New England are enormously different,” said Paul Boltz, economist with T. Rowe Price Associates Inc., a Baltimore-based investment firm.
Added Michael Sumichrast, a private housing economist: “There is really no comparison between the two areas.”
What makes California so different? It is a wide array of factors, including strong population growth and a large and highly diversified economy, many experts said.
Specifically:
* The speculative fever in the real estate market was worse in New England than it was in California, said Robert Skinkle, regional economist with Wells Fargo Bank in San Francisco. Between 1985 and 1989, there was one housing unit--single-family residence, apartment or condominium--built for every new resident of the state, he said. During the same period, there was only one new residence built for every two new occupants of California, Skinkle added.
* New England’s population was growing more slowly than the national average during the 1980s, and is projected to continue growing at an average or below-average pace through the year 2000, according to the federal Bureau of Economic Analysis. California’s population, on the other hand, is growing faster than average, giving the state a certain economic dynamism, according to Boltz.
* The local economy is also far more diversified than economies in either New England or Texas, where severe recessions have already hit. Texas was largely dependent on oil; New England relied largely on high technology, finance and defense to keep its economy running.
However, California has all those industries as well as a tremendous base in agriculture, entertainment, international trade and tourism, economists noted. Moreover, there is a great deal of diversity even within industries.
For example, where New England’s technology industry was largely centered on minicomputers, California boasts significant companies specializing in nearly every segment of the high-technology arena.
* Largely as a result of this diversified industrial base, employment is expected to grow here by about 1.6% annually, versus growth of less than 1% in New England, Skinkle said.
Nevertheless, there are some disturbing similarities.
“It is like comparing Danny DeVito and Kareem Abdul-Jabbar,” said Michael Aronstein, president of Comstock Partners, a New York-based investment management and advisory firm. “On the surface, you would say the two are nothing alike. But anyone who understands the nature of human beings would say they are virtually identical--they have the same arterial systems, digestive tracts--the same basic makeup. They are just packaged differently.”
Aronstein contends that the entire nation is suffering from a malaise caused by overspending and high debt. But California may be hit harder than other parts of the nation because it was so prone to excess, he said.
How bad the problems may get here, though, is a subject of debate.
The biggest concern is that both California and New England supported speculative real estate booms that caused housing prices to soar out of the reach of most residents. Now, with the nation’s economy slowing, real estate prices are falling precipitously. And that can cause problems for a wide array of related industries, from construction to finance.
Also, some of both regions’ biggest employers are now troubled. Many large defense contractors are laying off workers as government spending ebbs.
Moreover, the California financial services industry is among the nation’s largest and most troubled. Few states other than Texas have had as many large bank and thrift failures as the Golden State. And now with real estate prices falling--the median value of a single-family residence in Los Angeles has dropped 10% in the past six months--more problems are sure to surface.
In December, the state’s unemployment rate soared to 7.1%, which is well above the national average and only slightly shy of Massachusetts’ troubling 7.4% rate.
Staff writer Tom Furlong contributed to this story.
CALIFORNIA AND NEW ENGLAND: SIMILAR OR DIFFERENT?SIMILARITIES
Both supported speculative real estate booms, which pushed housing prices up at double-digit rates.
Both economies have large high-technology, defense and financial services sectors that are now depressed.
Both economies have unemployment rates higher than the national average.
Per-capita income in both regions is higher than the national average.
California residents believe that “nothing bad could happen here,” which is exactly what New England residents were saying not long ago.
CONTRASTS
The speculative real estate fever was significantly worse in New England than in California, economists say. Between 1985 and 1989, one housing unit--single-family residence, apartment unit or condominium--was built for every new resident of New England, versus one for every two new residents in California.
Population growth is significantly slower in New England than it is in California.
Employment is expected to grow twice as fast here as in New England, according to Bureau of Economic Analysis projections.
The California economy is more diversified than that of the six New England states. The Golden State, for example, supports strong industries in agriculture, entertainment and international trade, which are all virtually absent in New England.
There is more diversity within industries in California. For example, New England has a strong high-technology sector, but it is largely centered on minicomputers. On the other hand, no one segment of the high-technology market dominates in California.
California’s economy is roughly twice the size of New England’s.
