Death Spiral Doesn’t Mean Declining Real Estate Values

by Bill Watkins on January 18th, 2013
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Forbes recently ran an article by William Baldwin titled “Do You Live in a Death Spiral State?” In the article, Baldwin calls states with declining economies Death Spiral States. (Confession: I really wish I’d come up that term) He correctly included California among his Death Spiral States.

Then, he gives investment advice based only on the fact that a state may be one of his Death Spiral States. That’s where he gets it wrong. Here are a couple of quotes:

If your career takes you to Los Angeles or Chicago, don’t buy a house. Rent.

To lend money to California, Illinois or the other nine states perched on the precipice requires a leap of faith. So does buying a house in those locales. Don’t count on a property tax limit to protect your home’s value. If other taxes are high enough, there won’t be any buyers.

I can’t quibble with his comments on lending money to states that seem hell bent on achieving financial insolvency. It is the real estate advice that I have trouble with.

In most places, housing prices are tied to economic activity, or the lack of it. That’s why Rust-Belt cities are always among the most affordable housing markets in America. Think of it this way: Why would anyone voluntarily move to, say, Detroit if they didn’t have a job there?

California is not most places, though, and there are lots of reasons to move to California if you don’t have a job. There are even more reasons if you don’t need a job. Real estate will do just fine in large regions of California, even without a vibrant economy.

Santa Barbara is an excellent example. Santa Barbara County’s economy is anemic in good times. Its economy grew slowly even when California was booming. Here’s a list of its top ten employers as identified by Mark Schniepp at the California Forecast Project:

University of California SB

Vandenberg Air Force Base

County of Santa Barbara

Santa Barbara Cottage Hospital

Santa Barbara Unified School District

Santa Barbara City College

City of Santa Barbara

Chumash Casino

Marian Medical Center

Santa Maria Bonita School District

There is only one for-profit business on the list, and that’s a casino. Together, these ten large employers are the source of 35,659 jobs out of the top 55 employers’ 55,496 total jobs. That’s a weak economy.

Still, even with its lackluster economy, Santa Barbara house prices are high by anyone’s standard. The strength in home prices is because of the amenities, natural and manmade. Santa Barbara is a great place to be and to live. Because of that, unlike Detroit, Santa Barbara’s residential markets are independent of the economy. Santa Barbara’s residential markets are national or international.

Santa Barbara is not alone. California’s entire coastline is similar. They aren’t building many new houses in Coastal California, and if you can afford it and opportunity isn’t important to you, there aren’t many better places to live.
Suppopse, for example, you are retiring and cashing out, California looks pretty attractive. You may not be able to afford Santa Barbara or Marin County, but you might be able to afford Ventura or San Luis Obispo. Each is almost surely better than wherever you came from

It’s like this from Mexico through the wine country, from the ocean to at least the first mountain ridge. People want to live here, and some can afford it. Why not? It’s as good as it gets. As long as that’s true, real estate prices will not reflect the economy. I’m not selling.

This was previously published at the Orange County Register

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