The Other Orange County

What you won't see on fantasy TV shows: a cratered real estate industry, few jobs, foreclosed homes, and empty office space

by Christopher Palmeri

Mission Viejo, Calif., 92691

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The sun still sets magnificently on the cliffs of Laguna Beach. The Angels are slugging away on another could-be-the-champs baseball season. Over in Disneyland (DIS)—the self-proclaimed Happiest Place on Earth—a new attraction debuts in June. The Innovations Dream House will show off high-tech gadgetry from Microsoft (MSFT) and Hewlett-Packard (HPQ) while allowing guests to interact with the fictional Elias family as it prepares to attend a soccer tournament in China.

If they weren't make-believe, the Eliases would probably be postponing that trip and worrying about their jobs. They might even be fighting foreclosure on their Dream House. That's life in Orange County these days as the subprime disaster comes home to roost.

A 1,000-square-mile swath of well-heeled suburbia just south of Los Angeles, the "O.C." was the main headquarters for dozens of mortgage companies that have now gone bust, among them Ameriquest, once the nation's largest subprime lender, and New Century, once among the top 10. As a result the region is one of the hardest hit by the collapse of the housing market. Big builders such as Lennar (LEN) are putting new construction on hold. The Orange County Register calculates that 43 local mortgage outfits laid off some 7,200 workers last year.

Orange County still looks like a sunny, can-do place, with an $8 billion-a-year tourism industry and shopping malls the size of small cities. It is home to 3 million people, whose $58,000 median annual household income is $10,000 higher than that of the U.S. as a whole. There are shiny new office towers and subdivisions filled with Spanish-style homes. But like native son Richard Nixon (born in Yorba Linda, wintered in San Clemente), the O.C. has a dark persona that seems to rear its head every so often. In 1994 the county became the largest municipality in the country to declare bankruptcy, done in by bad investments in dicey securities. Now it's the subprime mortgage fiasco.

Boom Town Gone Bust

"The culture here is very real estate- and finance-focused," says Michael Capaldi, a principal at Newport Beach-based developer Renaissance Pacific Properties. "When real estate is good, it feels like a boom town."

Even now, big cities such as Irvine and Anaheim are a far cry from more beleaguered locales such Cleveland and Detroit. While the county's rate of 3,300 foreclosure filings in March is three times what it was a year ago, on a percentage basis Orange County is doing better than neighboring regions. In nearby Riverside and San Bernardino counties, 8% and 6% of homes are in the foreclosure process, vs. just 2.4% in Orange County, according to research by market tracker Default Research. Moreover, the median sales price of a home, while down 14% to just under $600,000, is holding up better than the statewide fall of 26%.

But there are other signs that the county's economy is worsening. Retail sales and vehicle-registration fees are running 10% below what they were in the prior fiscal year. Frank Kim, Orange County's budget director, says he's anticipating much lower revenue next year from property taxes as homeowners ask to get their dwellings reassessed at lower market values. As a result he's keeping the county's projected budget flat at $6 billion, after years of 5% to 6% increases.

The county is also doing better jobs-wise than the rest of the state and the nation. Its unemployment rate, 4.3%, is nearly two percentage points under California's average and one point below the U.S.'s. But Orange County is heavily dependent on homebuilding industries, and about 6,200 jobs in construction and finance were lost through the third quarter of 2007, wiping out employment gains in government and business services, says Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University in Orange, Calif. Job creation in the county is expected to lag behind the rest of the U.S. for the rest of this year.

"Orange County is in recession," says Adibi. "It began with the mortgage industry, spilled over into construction, and now it's more broad-based."