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Bubble watch: Could California’s economy handle a real estate crash?

Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.

Buzz: California’s economy has modest risks of seeing its business growth chilled by serious real estate weakness compared with other states.

Source: My trusty spreadsheet analyzed state-by-state gross domestic product data for 2021 from the U.S. Bureau of Economic Analysis. A crash-damage estimate was defined by looking at the growth of three property-related niches — construction, finance and real estate — within a state’s GDP and comparing it with the broad tabulation of business output.

The trend

California has long been known for its dynamic and volatile property-related industries. But the pandemic era’s real estate fever has been a national phenomenon.

For example, California had 21% of its 2021 GDP growth tied up in these three real estate categories. But that’s just a mid-range 25th largest share among the states and below the 23% nationwide level.

History tells us that the more any economy is dependent on real estate success, the more one should be worried about the future. And these are skittish times for the property business as financing costs are undergoing a stunning surge — interest rate hikes on par with what was seen during the infamous 1980s interest rates spikes.

Wyoming’s growth was most dependent on real estate last year with 82% of its 2021 business expansion tied to property niches. Next was Delaware at 52%, Oklahoma at 41%, New York at 39% and Louisiana at 38%.

The smallest share was found in Alaska at 3%, followed by Nebraska at 7%, North Dakota at 9%, Maryland at 10% and Indiana at 12%.

And California’s economic arch-rivals? Texas was 13th-highest at 26%; Florida was No. 11 at 28%.

The dissection

Let’s look at the risks.

By my math, California’s 2021 real estate growth was eighth highest at 1.6% vs. a nationwide expansion of 1.3%.

Remember, GDP is the tally of all spending on goods and services, so it’s a giant number. And it’s typically a slow-moving economic benchmark compared with, say, fluctuations in real estate sales counts or values.

The biggest real estate GDP jump in 2021 was found in New York at 2%, which was rebounding from a pandemic population outflow. Next was Delaware, Florida, Maine, and Utah at 1.9%. By the way, Texas was No. 13 at 1.5%.

Smallest? Alaska was up by a tiny sliver, then North Dakota at 0.2%, Maryland at 0.3%, followed by Nebraska and New Mexico at 0.4%.

But real estate’s economic boost os by no means guaranteed.

So, we compared real estate expansion with a state’s overall economic growth. Let’s look at the state GDP extremes.

California’s business growth ranked No. 3 at 7.8% vs. the nation’s 5.7%.

Tops? Tennessee (8.6%) and New Hampshire (8.5%) topped the Golden State. Then came Nevada at 7.1%, and Florida and Indiana at 6.9%. Texas? No. 19 at 5.6%.

Worst? Alaska at 0.3%, then Ohio at 2.1%, Oregon at 2.2%, Maine at 2.4% and New York at 2.5%.

How bubbly?

On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … TWO BUBBLES!

Don’t forget, we’re gauging how much a bubble’s bursting might hurt, not the chance a bubble exists.

A state economy’s low-danger formula would be strong overall growth with a modest share of that expansion tied to bubbling real estate. So if the property game does cool, other business drivers might keep the local economy in forward gear.

So, look at my math this way: California’s combined rankings for 2021 growth and its real estate dependence added up to the eighth-lowest risk score among the states. Indiana was safest, followed by New Hampshire, Tennessee, Iowa, Nebraska, and Nevada.

Diciest? Wyoming then Oklahoma, Louisiana, Delaware and Vermont.

And California’s economic arch rivals? Texas had the 16th highest risk, and Florida No. 21.

Post script

Since GDP can miss the human impact of business change, ponder state employment by concentrations in construction, financial and real estate jobs.

California ranked No. 30 at 10% of its jobs tied to property and banking industries.

Tops? Delaware at 15.8%, then Arizona at 14%, Utah at 13.4%, Florida at 13.3%, Colorado at 12.7%, and Texas at 12.3%.

Lowest? DC at 5.5%, then Mississippi at 7.9%, Alaska at 8.3%, Vermont at 8.4%, and West Virginia at 8.6%.

Jonathan Lansner is business columnist for the Southern California News Group. He can be reached at jlansner@scng.com


Source: Orange County Register

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