Via population. I remember cursing a politician between jobs (he was a commentator on KCET in Los Angeles). He was saying that California was going to grow by 15-20 million people so we had to divert water resources to allow development. . .A la Pete Wilson and his crew. We cannot allow California to grow the population by that much, unless we want to explode, in oh so many, different ways.

Via population. I remember cursing a politician between jobs (he was a commentator on KCET in Los Angeles). He was saying that California was going to grow by 15-20 million people so we had to divert water resources to allow development. . .A la Pete Wilson and his crew. We cannot allow California to grow the population by that much, unless we want to explode, in oh so many, different ways.

Many would consider allowing market forces to define the parameters of powerdown as unnecessarily dogmatic or even cruel. Dimitry Orlov posits that at this point, it's out of our hands. I really don't know.

-DV

Item 1: its' important to remember that most of the problems (as I see them) are related not to the California economy, but rather to the State of California (ie. the government).
The biggest issue is that it's almost impossible to gorvern the state with the current rules:
* 66% majority for a budget
* 66% mojorty to raise taxes
* Huge and growing committments to State workers (especially Police, Prison and teachers unions)
* Revenue sources are very cyclical, i.e. income taxes and sales taxes are very dependent on the boom-bust exconomy, while property taxes (which are fairly stable) comprise a shrinking source of revenu.

These are all TRUE, but we shouldn't forget that they are essentially consequences of rules we've made – and they could be unmade – they are not intracible like: Lack of water, bad climate or traffic jams. The electorate has choosen to enact term limits, guaranteeing that polititians have no interest in getting along across the isle. We, the people have also enacted all the laws that underlie the issues I outlined above (2/3 majority….)

This brings us to the other issue you raised: Real Estate.
There I do see a fundamental issue that you mentioned: There is limited possibility to build new housing. This, coupled with your (and mine) assertion that ultimately the High tech, agribusiness and Music/film industries are sound and will grow, in spite of government funding issues – will yield a situation where more and more folks will bid for a static supply of housing – thus putting a floor under housing prices.

I *do* share your view that in the short run the Silicon Valley upscale properties, too, are in for a loss in value. It is, however important to remember that there are 2 or more different real estate markets in California.
1. The Los Altos Hills/Beverly Hills market (very upscale and expensive)
2. The Upper Middle class proffessional market (let's call that the Cupertino market), populated by e.g. successful engineers.
and lastly
3. The rest of the market. This will be represented here by Soledad, but it could be any city in Riverside or Central Valley

This “Soledad” market was real estate speculation at its best. They were bult up, not because lots of folks was moving there for the well paying jobs, but because it was cheap to build there. Soledad's main industry is the Prison and some vineyards, emplying farmworkers. The commute to Silicon Valley takes 90 minutes or so.

The “Soledad” market has been whiped out. It was almost pure bubble.
The “Cupertino” market has barely been touched – yet – but as you imply it will be. But you shouldn't expect the 40% – 60% drop that you've seen already in the Soledad market. I think that we'll bottom out at around 20% from peak, which will put us well above 1989 (and above 1999) levels.
The Beverley Hills market, I don't know about, but I think the rich will do well, it's sort of the definition of being rich – If you need to, you can just sell the yacht to keep your house, or take one less vacation per year.

Does that mesh vith your views too?

Peter

If you take the view that I do that California got leveraged up both financially and infrastructurally, way past what the State could support, then it's easier to see the good things–and the good traditions–but also see that California's physical growth has peaked.

Let me give some examples: no more net additions to the state's highway system. No more net additions to the state's housing stock. No more net additions to the state's commercial real estate square footage.

I do forecast some buildout of rail, and possibly more agricultural expansion. However, the latter too has reached certain limits via water. Of course, if the state wanted to spend the billions and billions needs to make current water infra more efficient in the central valley, then, yes one could raise yields I would think.

The size of the government grew beyond the state's economy. The state's economy, like the US as a whole, grew out past sustainable levels because of debt creation as well. Infrastructure in CA–especially the system of freeways–now looks like a drag rather than an enhancement for either productivity or the economy.

One has to remember a basic theme: the bulk of California, Southern CA, was built to a cheap liquid fuels standard. Southern CA no longer “works”. And it will just get worse from here. Oil is at 72 with unemployment in CA at very high levels.

There is no return to the normal for CA. Something new, yes I hope so.

CA housing looks to me like it wants to trace out some of the most terrible declines we have seen elsewhere. Many areas have now given up everything back to 1989 levels. Of course, it is a huge State with lots of different housing markets. So I am reluctant to make a blanket statement. That said, I see the disease coming into SF Bay and LA proper. I don't think this ends until the upper middle class get hurt badly in prime LA and prime SF. (BTW that is a demographic statement, not a political statement. Just trying to locate the focus).

Here is what I see next in CA: Higher taxes, lower economic activity, a massive hole in State Govt spending and payroll (normally would be a good thing from a free market perspective), decaying infrastructure, ongoing pension losses or reduced payout from CALPERS, city and town bankruptices (more Vallejos), more layoffs in City and Town govt payrolls. And so on.

Meanwhile, innovators in Silicon Valley and Filmakers in LA will continue doing great stuff, along with many other globally oriented businesses in CA. But it won't be enough to support what the state had become.

G

This is not unusual, we've seen the relative cost of electronics drop for decades now (and we've previously seen the relative cost of oil and food steadily drop for decades, before that.

The most likely reason for this rebalancing is that 3rd world countries are becoming integrated into the world economy, and their needs are for food and gas, not housing in California.

I don't actually share your bad feeling about housing in California (as I understand your comment). Housing prices are fundamentally driven by 3 things:
1. cost of fund (=interest)
2. The ability of buyers to pay (i.e. are there lots of well-paying jobs)
3. Population growth
I am comfortable with the long term job market in California, as well as with its desirability as a immigration destination (both within the US and internationally). I also think that the current mortgage interest rates (about 6%) are reasonable, and I don't see any huge changes in the near future.
The big unknown here is: Will we keep on exporting jobs to China/India?

Peter

You realize that the pattern you drew is a continuation pattern.

Your recent comments on societal reaction to discussion of big problems have been interesting as well.

My take is that it's crucial to keep the band playing until first class has boarded the life boats.