California's Recovery Is Split Down the Middle -- of the State

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California state flagIn the 1978 film Superman, the hero's nemesis, Lex Luthor, hatches a plan to destroy western California and create hundreds of miles of new beachfront property by diverting a nuclear missile into the San Andreas Fault, which runs down the middle of the state.

When it comes to the Golden State's economic recovery, though, it's the inland regions that are in for some trouble, according to a report by University of California, Los Angeles's Anderson School of Management.

Inland Housing Overhang

While commercial and residential real estate prices in the San Francisco Bay Area and Los Angeles region have likely bottomed out, those in the state's Inland Empire and Central Valley will likely continue to drop. The regions are working through the effects of the inland construction boom leading up to the recession and the resulting loss of about 250,000 construction jobs, UCLA Anderson Forecast Senior Economist Jerry Nickelsburg said in a Los Angeles presentation of the report earlier this week.

Further weighing on inland property values is the prospect of cash-strapped state and local governments cutting more jobs. The public sector employs a larger percentage of the population in Sacramento and the Inland Empire east of Los Angeles than along the coast. There have been about 70,000 state-sector jobs eliminated over the past couple of years, with 50,000 more likely to be cut.

Nickelsburg underscores the grim outlook for real estate: "We have a huge overhang of housing in inland California.... We aren't overbuilt. We just built in the wrong place."

Lagging Jobs Growth

With little construction planned for much of California, the most populous U.S. state's economic recovery will lag that of the rest of the country. State unemployment rates will remain about two percentage points more than the nation's through 2012, according to the report. Overall, the state shed about 1.3 million jobs during the two years leading up to the end of 2009, with only about 40,000 Californians rehired since then.

Inland homeowners have already felt the pain. They're more than twice as likely as their coastal counterparts to get default notices from falling behind in their mortgage payments.

Median prices in areas such as Sacramento, Riverside and San Bernardino have plunged more than 50% from their peaks as of the end of 2009, compared to a smaller though still-substantial drop of about 40% for both Los Angeles and the Bay Area, according to the California Association of Realtors.

L.A. Economy Warms Up

Meanwhile, the study's authors say L.A.-area retailers and entertainment companies have started hiring workers this year, while the hospitality and manufacturing industries in the Bay Area also experienced first-quarter job growth.

In addition, L.A. property will benefit from the region's relatively low percentage of construction jobs and the effects of an improving Asian economy, which will buoy the local shipping and warehousing industries dependent on activity at the Ports of Los Angeles and Long Beach.

"We do think the worst is behind us," said Julia Thornton Snider, economist with the UCLA Anderson Forecast, who cautioned at this week's presentation that both the region's and state's recovery will take at least a couple of years. "L.A. is not really a microcosm of California."
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