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The ‘Catch-22’ of our economy

Local Commentary . Housing market

Posted: November 23, 2008 7:18 p.m.
Updated: November 24, 2008 4:30 a.m.

"The ‘Catch-22' is the housing market will not stabilize until the credit market stabilizes, and the credit market will not stabilize until the housing market stabilizes."

Those were the sobering words of Dr. Mark Schniepp, director of the California Economic Forecast, as he addressed a gathering of some 250 rapt listeners at the 13th annual First American Title Real Estate and Economic Outlook Conference at the Hyatt Hotel last Thursday morning.

Schniepp's words were of more-than-casual interest to the gathering because housing-related construction and financials are two of the three economic sectors that weigh most heavily on our declining economy in California, according to Jerry Nickelsburg, senior economist of the UCLA Anderson Forecast, another speaker at the conference.

Schniepp's chicken-egg conundrum aside, stability in these two sectors is not apt to happen soon. According to Mark Boud, founder of Real Estate Economics, who rounded out the slate of speakers, the housing foreclosure rate in California is now double the rate it was at the previous record high in the early 1990s.

What's more, the long term jobs/housing ratio, a key indicator of price supports for housing, is below equilibrium, indicating we can expect further softening in housing prices.

The economic instability we are facing is rooted in uncertainty. The crux of the problem in the financial sector is that bank assets - mortgages, commercial paper, corporate bonds and other holdings - have morphed into such complicated instruments that nobody knows how much they are really worth anymore.

That has led to a major devaluation of financial and other stocks on Wall Street, reducing the value of retirement and investment accounts for everyone.

The absence of a well-defined value of financial assets also leaves banks in a shaky position when calculating the value of the reserves against which they are able to lend, causing most to tighten credit.

This, in turn, has put the brakes on retail sales, the third detractor identified by Nickelsburg. The loss of retail dollars results in job losses, putting further downward pressure on home prices.

The effect of these circumstances is that our nation is in a decaying economic spiral, and people are feeling the economic downturn in ways that have not been experienced since the Great Depression.

Gratefully, Santa Clarita has been spared the worst of the recession, due no doubt in part to the fact we are the most business-friendly city in L.A. County and we are cultivating a diverse base of businesses here.

However, the economic analysts at Thursday's conference predicted continued softness in key economic sectors is likely to continue into early 2010.

What, then, are Santa Claritans to do when faced with such a set of circumstances?

We could rely upon the federal government. But, with Democrats in control with their inclination to succumb to populist pressures to engage in a trade war with Asian export countries, kill NAFTA, sharply raise taxes for high-income families and implement other anti-growth economic policies, that could be a risky bet.

After all, it was a combination of similar bad government policies such as tax hikes and increasing trade protectionism that helped create the Great Depression.

Similarly, we are unlikely to get much help from Sacramento. Since this year's record-setting delay in approving the state budget, which fell short of solving the fiscal crisis, things have only gotten worse.

Last week California Legislative Analyst Mac Taylor warned that California faces a fiscal crisis of historic proportions - possibly growing to $28 billion by June 2010!

Unfortunately, to create the appearance of a balanced budget, California legislators have shown themselves more prone to using accounting gimmicks - like over-estimating expected revenues, collecting taxes earlier than normal, and hiking the penalties for tax scofflaws - than they are in solving the systemic flaws in our economy.

As the UCLA Anderson Forecast report points out, a "strong undercurrent of housing- and finance-generated weakness" is dragging down growth in our state and will keep the jobless rate above 7 percent through next year, portending lost revenues from personal income taxes.

Given the improbability of a solution from Washington or Sacramento, it is becoming increasingly important for Santa Claritans to turn to the one source of help that has not let us down in the past - ourselves.

Our most critical need is to create additional permanent jobs here across a group of diverse, robust industries.

Additionally, we need to continue to encourage shopping in the Santa Clarita Valley when possible to keep money circulating in the local economy.

Finally, we need more good citizens to step forward, band together and help craft a winning economic development plan for the city.

As Benjamin Franklin said, "We must all hang together or assuredly, we shall all hang separately!"
Working together, we can do it, right here, right now!

Bill Kennedy lives in Valencia and is a principal in Wingspan Business Consulting. His column reflects his own views, not necessarily those of The Signal.


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