Will Subprime Woes Put California Economy in Trouble?

The largest increase in California mortgage defaults was seen in the East Bay and Sacramento areas and Bakersfield, Ventura and Riverside counties.

According to the forecast, Easy Bay and other counties where new houses are a big part of the market are most likely to have the biggest increase in defaults.

Economists attribute that trend to the fact that first-time home buyers are moving into more affordable areas, and builders in those areas have placed an emphasis on moving inventory quickly, thus stretching lending standards to close a deal.

Recent mortgage company problems have been well documented in the Golden State, and it doesn’t stop there. In 2006, the construction market lost 2,700 jobs. Those losses are expected to continue this year.

“We expect to see job growth in California slow to below 1 percent through the middle of 2008, with growth in real personal income and real taxable sales slowing to the low 2 percent through this period,” according to one expert.

In many ways, the national economy is a “mirror image” to 2000, according to the forecast.

Seven years ago, the corporate sector was overextended in the aftermath of the dot-com boom, while consumer and home equity levels were thought to be in good shape.

Now, the housing credit is in trouble as California home loan costs have soared through the roof, while the corporate sector has retained a healthy cash flow.

“We are becoming increasingly nervous about the economic outlook as the period of below trend growth grinds on,” economist David Shulman wrote in his recent forecast.

“Put bluntly, the credit crunch in the subprime mortgage market will likely trigger a second leg down in the housing market in terms of output and prices.”

Economists are forecasting real GDP growth to be 2.1 percent, 1.7 percent and 2.5 percent in the first, second and third quarters, respectively, in the coming year.

SOURCE: NBC-TV 4