Spillover

Before we get really micro with our new MB Market Update, let's look at the big picture again, which fairly blares from this morning's LA Times. (Yes, there they go again.)

The giant headline is that California's budget deficit is getting worse by the minute, and that's attributed to the housing market.

If you're familiar with state government, you know the state's budget is built on shifting sands (or a flood-prone delta, or a quake-prone fault; pick your regional analogy). That is to say that the slightest fluctuations in economic activity can make irrelevant all recent projections for the state government's income.

In recent years those fluctuations have often meant over-performance – extra revenue above even the rosiest projections. Now a new fluctuation is under way, with the housing market slowdown as the leading edge. Cue the expert:

"We are among a handful of states that has a lot of exposure to the housing crash," said Ted Gibson, a former state economist.

The state's deficit for the next fiscal year is already looking to be $10 billion, about 10% of this year's overall budget of $103 billion. So that means across-the-board cuts this year, and really, that's feeling like just the beginning.

In this key passage, the Times makes sure to cite the paper's favorite gloom-and-doomer:

When the economy improved nationwide several years ago, most states erased chronic deficits and began building rainy day funds. California did not. It continued to spend more money than it brought in.

"We never fixed the problem," said Chris Thornberg, a principal with Beacon Economics. "It's been Scotch tape and glue and staples and just praying we will never have to face the reality that state government is on a path that is not sustainable."

Thornberg said the trouble in the housing sector is reverberating through the entire state economy, causing income and consumer spending to decline. He noted that unemployment is up a full percent since the beginning of the year, a jump that typically foreshadows recession.

"What's happening right now is big in terms of the revenue hit," he said. "The numbers are coming in way below where they should be."

Meanwhile, all the way across the country in places like Virginia and Florida, the Times finds evidence that a slowing housing market and rising foreclosures are causing voters once tightly aligned with the Republican party to drop away.

You might find it a stretch – there are, after all, some other issues out there that may be souring voters on the GOP – but the Times backs it up with anecdotes. A woman from Loudoun County, Va., offers:

As [Karla] Schroeder assays today's vote for members of the county board, she says that for the first time in her life, she is considering voting for a Democrat.

And one of the things she's unhappy about is those foreclosure signs and the threat she sees in them to her family's financial security.

"I don't like seeing that," Schroeder said recently. "We think about moving, and I worry about whether we could sell our house."

It hardly seems fair to spank local Republicans over problems in the housing market, but voting isn't always rational.

Ask Tom Slade, who the Times says "helped build the Florida Republican Party," and whose Jacksonville house has been stuck on the market for 18 months.

"How deep, bad and big this monster will turn out to be is not clear yet, but it has the potential to turn wickedly mean," Slade said. "Who gets the biggest thumping is anyone's guess, but I would guess it would be the Republicans since we've had control of the executive branch."

The issues hardly seem partisan, but if the folks inside see it that way, who are we to question them?


UPDATE: The original version of this story incorrectly identified the party affiliation of the governor of Florida.