In many ways the dynamics of Ca’s fiscal decline are beginning to resemble the nation’s real estate decline. They both contain elements that feed on each other making the situation worse. These feedback loops fueling the state’s fiscal crisis include a declining economy which reduces revenue: a real estate price decline reducing 1) consumer confidence, 2) consumer spending (no more house ATM), (3)property tax revenues; state and local government spending soon to fall; the flight of besieged businesses to friendlier states and countries, etc.
Also, like Greece, CA faces much higher interest cost on our debt since our state is tied with Illinois for worst credit rating. Investors will increasingly look to how a state handles its finances.
The worst development from the recent weeks’ news is that the economy is not rebounding, which in past cycles always bailed us out. The question now is how much do collapsing state and local budgets affect real estate? We are about to find out.
