“bubble clock‘ addresses trends that may indicate upcoming troubles in the economic and/or real estate markets.
To hum: California’s economy has a low risk, relative to other states, of its business growth being dampened by severe real estate weakness.
Source: My trusty spreadsheet analyzed state-by-state gross domestic product data for 2021 from the US Bureau of Economic Analysis. An accidental damage estimate was defined by looking at the growth of three real estate-related niches – construction, financial, and real estate – within a state’s GDP and comparing it to the broad chart of economic output.
The tendency
California has long been known for its dynamic and volatile real estate industry. But the housing frenzy of the pandemic-era was a national phenomenon.
California, for example, had 21% of its 2021 GDP growth tied to these three real estate categories. But that’s only a mid-25th largest proportion among states and below the statewide level of 23%.
History teaches us that the more dependent an economy is on real estate success, the more concerned one should be about the future. And these are turbulent times for the real estate business as the cost of financing is experiencing a staggering surge – interest rate hikes on par with the notorious spikes of the 1980s.
Wyoming’s growth was most dependent on real estate last year, as 82% of its business expansion in 2021 was tied to real estate niches. Next was Delaware with 52%, Oklahoma with 41%, New York with 39% and Louisiana with 38%.
Alaska had the smallest share with 3%, followed by Nebraska with 7%, North Dakota with 9%, Maryland with 10% and Indiana with 12%.
And California’s economic arch-rivals? Texas was 13th with 26%; Florida was #11 with 28%.
The section
Let’s look at the risks.
By my calculations, California real estate growth in 2021 was the eighth fastest at 1.6% versus a 1.3% nationwide expansion.
Remember, GDP is the sum of all spending on goods and services, so it’s a huge number. And it’s usually a slow-moving economic benchmark compared to, say, fluctuations in property sales or values.
The largest real estate GDP increase in 2021 was seen in New York at 2%, which was recovering from a pandemic population drain. Next came Delaware, Florida, Maine and Utah with 1.9%. Incidentally, Texas was in 13th place with 1.5%.
smallest? Alaska rose a tiny sliver, then North Dakota at 0.2%, Maryland at 0.3%, followed by Nebraska and New Mexico at 0.4%.
But the economic boom of real estate is by no means guaranteed.
So we compared real estate expansion to a nation’s overall economic growth. Let’s look at the state GDP extremes.
California’s business growth ranked third at 7.8% versus the country’s 5.7%.
tops? Tennessee (8.6%) and New Hampshire (8.5%) led the Golden State. Then came Nevada with 7.1% and Florida and Indiana with 6.9%. Texas? No. 19 with 5.6%.
worst? Alaska at 0.3%, then Ohio at 2.1%, Oregon at 2.2%, Maine at 2.4% and New York at 2.5%.
How bubbly?
On a scale of zero bubbles (no bubble here) to five bubbles (five alert warning)… TWO BUBBLE!
Keep in mind that we’re estimating how much a bubble burst might hurt, not the likelihood of a bubble existing.
The low-risk formula of a state economy would be strong overall growth, with a modest share of that expansion tied to bubbly real estate. So if the real estate game cools down, other business drivers could keep the local economy thriving.
So look at my calculations like this: California’s combined ranking for 2021 growth and its real estate dependency resulted in the eighth lowest risk score among the states. Indiana was the safest, followed by New Hampshire, Tennessee, Iowa, Nebraska, and Nevada.
The most stupid? Wyoming then Oklahoma, Louisiana, Delaware and Vermont.
And California’s economic archrival? Texas had the 16th highest risk and Florida No. 21.
Postscript
Because GDP can miss the human impact of business change, consider government employment through concentrations in construction, finance, and real estate jobs.
California ranks 30th with 10% of its jobs tied to real estate and banking.
tops? Delaware at 15.8%, then Arizona at 14%, Utah at 13.4%, Florida at 13.3%, Colorado at 12.7% and Texas at 12.3%.
lowest? DC at 5.5%, then Mississippi at 7.9%, Alaska at 8.3%, Vermont at 8.4%, and West Virginia at 8.6%.
Jonathan Lansner is a business columnist for the Southern California News Group. He can be reached at jlansner@scng.com
