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California’s Long Term Real Estate Outlook

Even though we can’t be sure of what our income tax rate will be for 2011, we do have a kinda sorta idea of the high side, right? Lookin’ for more to be thankful for this Thursday? If you don’t live in California, trust me, be thankful as you anticipate tax day.

Those who’ve worked hard to produce, often employing breadwinners in the process, will be payin’ almost half of each dollar earned at the margin, if the current federal rates aren’t renewed. In my town you can add the constant irritation of a 9.5% sales tax. Is it really a mystery why so many people and businesses are puttin’ the Golden State in their rear view mirror?

The seeming paradox is that the population continues its upward trend. That trend has been more or less a net economic positive since the end of WWII. However, in my opinion, that is rapidly changing, and has been for quite awhile.

The producers are hittin’ the exits. New producers aren’t arriving in nearly large enough numbers to make up the shortfall. Smart folk don’t run into a tax chainsaw on purpose.

When whatever ya wanna call normal finally returns to the economic scene, CA will still be a tax tax tax state. And, lest we forget, history shows that those who love taxes also love spending — taxpayer’s money.

The price of a home will still be, relatively speaking, far more expensive, and much of the time older than their counterparts in other states. Lifestyle? Weather? The last few years has shown that those who have the financial option to leave, and many who simply can’t afford to remain, are hittin’ the road, Gettin’ Outa Dodge.

At some point, even great weather and lifestyle become overpriced.
 
I speak as a CA native. The trends of the last 20 years or so have saddened me. To each their own, but my view of CA’s real estate future, especially investments, is not positive. I think many have allowed their micro view to override the macro realities. When a state transitions from producer friendly to a taker state, the economy predictably forces those who create wealth and employment to go elsewhere, if only to avoid being bled to death. We have higher than average unemployment now, and the future, in my opinion, will continue to be one of producers fleeing. 

This irritates the takers. Go figure.

There are those who’re bullish on California real estate in the long term. To each their own. But to those whose rosy outlooks have them planting their investment capital here, I ask the following questions.

1. As more and more of the producers and biz owners leave the state, how are the weather, beaches, mountains, and general CA lifestyle gonna keep attracting doers, those who produce, when they’re outnumbered by those who covet their fish?

2. In your opinion, does the election of Jerry Brown, along with a legislature ruled by a large liberal majority, now armed with the need for a mere simple majority vote for budget approval, bode well for producers? If so, please explain it to those of us who can’t connect the dots.

3. As California’s population grows in number as it simultaneously loses IQ points through out-migration, how will that make real estate investors see the state as a solid home for their investment capital?

4. Given California’s economic ‘leadership’ the last 20 years or so, including the most recently elected bunch, what points would you make to convince your favorite uncle to invest his hard earned money into its real estate?

To those bullish on California real estate I ask you to make your case.

Meanwhile, lest we forget our obligation this Thursday, I remind you to eat WAY too much, followed by mountains of various desserts. It’s the law.

I wish you and your family a very happy and loving Thanksgiving.

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  • 13 comments

    13 Comments so far

    1. [...] This post was mentioned on Twitter by Jeff Brown, Real Estate Feeds, Sean Broderick, CCIM, Mark Risley, My REALTY and others. My REALTY said: California’s Long Term Real Estate Outlook: Even though we can’t be sure of what our income tax rate will be for… http://bit.ly/fyXsS6 [...]

    2. Jim Klein November 23rd, 2010 11:01 pm

      Great post Jeff; you smashed this nail squarely. I’m from Michigan so I wanna say, “Rookie!” California is New Idiocy, you see. Destroying production is old hat here, and we had plenty to destroy. You can bet you’re right on the RE price guesses. That’s why you can buy whole towns here for the cost of a beachfront there.

      The funny thing is that the New Idiocy is the same as the Old Idiocy, is the same as the Ancient Idiocy. Some wants to make, and some wants to take. How’s that for simple?

      Have a great holiday, you and everyone else who’s earned one.

    3. Jeff Brown November 24th, 2010 10:22 am

      Back atcha, Jim. We’ve created a third group — Some wants to keep…some.

    4. Al Lorenz November 24th, 2010 10:44 am

      Jeff,
      You’ve done the research and looked into your crystal ball. I’m hoping to hear next about the places that look pretty good to a “producer” from California, and why. You’re breaking the state’s grip on you, bit by bit. Now, it is getting to be time to start working on making sure I don’t break Thursday’s laws! Have a great one.

    5. Jeff Brown November 24th, 2010 11:13 am

      Hey Al — The grip is strong, as it’s rooted in both family, culture, and decades of deeply set roots. Here’s where I think those projecting a rosier future for CA are missing a puzzle piece.

      When producers leave the state, their mindset isn’t one of a vagabond. They’ve thought long and hard, as it’s often an emotional decision. We all know folks in places like MI who can’t move due to family obligations/ties. It’s one thing to move yourself, quite another to make your 70+ year old mom or dad go with you, or worse, be left behind. In other words, when producers move, they pretty much stay moved. They set down new roots. They’re not comin’ back.

      What that means to CA is crucial — one less successful fisherman whose fish you can take. While more and more of these proven fishermen are leaving, more and more takers are arriving. CA is the land of ‘free fish’. Add to that the irritating little factoid that thousands and thousands of those takers aren’t even in the state (country) legally, and you can easily see where the right side of this equation is heading.

      A big fat ZERO.

      Eat WAY too much, Al.

    6. Patti Mullen November 24th, 2010 1:11 pm

      It’s amazing how the real estate markets in states like California and Florida have turned around. I have friends involved in real estate in the Northwest (Idaho, Washington State) and they’ve told me there are a lot of people relocating from California.

    7. Thomas A B Johnson November 24th, 2010 6:41 pm

      Here is Joel Kotkin in Forbes on this very topic. Al, might I suggest the Republic of Texas?

      http://blogs.forbes.com/joelkotkin/2010/11/15/california-suggests-suicide-texas-asks-can-i-lend-you-a-knife/

    8. Don Reedy November 25th, 2010 8:45 am

      Hi all.

      Just a quick note to let you know that I’m a white meat fan on Turkey day. Never had much use for the dark meat, unless it’s on a wing dripping with hot sauce, served by a Hooter’s gal.

      And as a fellow intelligent California you’d think I’d be echoing Jeff’s prognosis. But I won’t.

      Because, Jeff, while it’s true that producers will leave, and the barnacles continue to build up on the hull of this once great ship, you’ve neglected to account for the future entrepreneur who will find these climes still ripe for the harvest. Your specialty is investment real estate, and as such aligned with more traditional hunts for wealth. When the oil runs dry, you move to a different well. When the gold rush is over, you build factories in the Midwest. When manufacturing is killed off by the unions, you school yourself in the kiln of Goldman Sachs and move to NY.

      But for most of us, the real estate we oversee is one not tied to the building of wealth. It is tied to neighbors, schools, communities, stability, friends and family. For most of us here at BHB the path to home ownership was never built on investing in real estate, it was built on investing in homes.

      Your home, Jeff, is here. There’s more oil somewhere, perhaps with our friends in Texas, perhaps elsewhere. But ultimately, California won’t sink. The barnacles that are the current and upcoming legislature will scourge the hull, but there will be divers to scrape, and painters to paint, captains of the changeling California to drive new business, and most importantly, to provide a safe harbor for the families and communities we serve.

      Happy Thanksgiving to all. May you be blessed to find that your home is filled with friends and family whose love and joy saturate your own life beyond expression.

      And Jeff…..As long as there are two “Browns” in California, I will not be fearful.

    9. Jeff Brown November 25th, 2010 8:55 am

      Patti — I’ve witnessed first hand with my own boots on the ground, how much of the population increase in Idaho is coming from the not so Golden State. Many of them started with the purchase of ‘second homes’, then threw their hands up at some point, packed up and headed east.

      I haven’t seen what you note was CA’s real estate market ‘turning around’. I’m thinkin’ their median price will be lower next November, possibly by more than 10%. I hope not.

    10. Jeff Brown November 25th, 2010 11:14 am

      Hey Don — I’ll take the dark meat.

      I understand where you’re coming from, Don. Those sentiments were repeated myriad times in Michigan, but not so much any more. The new generation of entrepreneurs have fled. Why? Because their entrepreneurial spirit is hard pressed to soar when most of the brains, producers/employers, can-do folk, have left the building. Then there are those kids who will someday be our new role models for entrepreneurship who had no choice but to leave, because they’re attached to Mom and Dad. They’ll still set the world on fire, just not in Michigan.

      Why will California be much different, except perhaps in degree?

      Who’s moving to California? Why? Is it for the low income taxes? The excellent public schools? The positive way government looks at business in general?

      “…you’ve neglected to account for the future entrepreneur who will find these climes still ripe for the harvest.”

      Harvest what and from whom? Continuing with the farming metaphor, when drought destroys what the farmer planted, there is little if anything to harvest. Though I’d agree to your likely response, that droughts are part of the cycle, and the farmer survives till the next season. However, when the drought stretches to multiple consecutive seasons, the farmer chooses survival for his family over his emotional ties to home. In the 1930′s it was called the Dust Bowl in Oklahoma. Ironically, most of those folks chose California at ‘the better place’.

      The same dynamic, soaring entrepreneurial attitude and spirit that powered California’s gigantic growth from 1945-today will do just as well in another state — one not treating them as KFC treats their chickens. Picture entrepreneurs as Golden Geese being imprisoned in little boxes, little light, just enough food ‘n water to enable them to keep laying the golden eggs on which the takers feast year round.

      The problem California’s government faces is that the producers aren’t poultry. They can (at least so far) choose to live in a state that treats them as if they, you know, lay golden eggs ‘n stuff. Economically speaking, producers like you and I are the state’s version of the Colonel’s chickens. Historically, we’re beginning to look like the middle stages of the Dust Bowl.

      California appears to be on the verge of official bankruptcy — everyone knows they’re practically bankrupt. Instead of opting for free market leadership in government, the takers installed the most failed former governor in the last half century, ensured the legislature was made up of takers, then made passing budgets only a simple majority away. If there’s a light at the entrepreneurial tunnel given those facts, I’m all ears. Remember, when times get tough, the takers in power panic, and tend to wanna grab more.

      Michigan? They just elected a conservative governor. When takers rule without challenge, they and their citizens are destined to die in the dark, freezing. Their last coherent thoughts? That it was the producers who made the light and the warmth possible. That all those golden eggs weren’t the product of magic wands. That government never created wealth, they only confiscated and wasted it. California is about to learn what Michigan has already learned. You’d think having watched Michigan’s foolish state government destroy their own flock of golden egg-laying geese, that those in California would’ve chosen to avoid that ugly fate, learning the lesson the easy way.

      Apparently not.

      The irony is — they hate business — yet must have it to survive. If they could force producers to stay, we both know they would.

      “But ultimately, California won’t sink. The barnacles that are the current and upcoming legislature will scourge the hull, but there will be divers to scrape, and painters to paint, captains of the changeling California to drive new business, and most importantly, to provide a safe harbor for the families and communities we serve.”

      Don, the water’s already above the red line. Dry dock is no longer an option. Man the lifeboats. Will the ship of state actually sink with no survivors? Of course not. They’ll make the ship barely seaworthy, but without discernible motive power. CA will be a powerless, rudderless ship, alone in the ocean, with her remaining passengers virtual captives. Picture the Titanic not sinking, just helpless.

      The passengers have yet to mutiny, Don — and they don’t seem inclined to any time soon. Our kids may see a ‘changeling California’, but you and I will be pretty long in the tooth when it even becomes possible.

      Meanwhile, later today I’ll be together with about a dozen family, and several desserts. As I write this, pumpkin pie and apple cobbler is being made from scratch. Regardless of outside forces, we have much for which to be thankful. Happy Thanksgiving, Don.

    11. Jim Klein November 25th, 2010 12:32 pm

      “…but without discernible motive power.”

      That’s the whole thing in a nutshell IMO. Happy Thanksgiving y’all.

    12. Don Reedy November 25th, 2010 2:22 pm

      Jeff.

      I’m thankful for you, and just for today the careful and crafted time you took to respond to my boating analogy. Enjoy your dark meat, and I too shall enjoy mine. Let’s meet up again soon to share more of what we both have, and have to be thankful for.

      By the way, my prognosis for the long-term real estate outlook in California remains positive….as long as the likes of you continue to put a boat in the water and row.

    13. Jeff Brown November 25th, 2010 3:24 pm

      Let’s meet soon. Gotta jet, apple cobbler just came outa da oven. :)