Arnold and the Housing Slump

Posted by: Chris Palmeri on November 16, 2007

One unlikely victim of the housing crunch is California Governor Arnold Schwarzenegger. It ain’t just because his $11 million home in LA’s ritzy Brentwood neighborhood is slipping in value. The Governor bought himself another term with promises of $68 billion in infrastructure spending. He wants to keep buildings schools and prisons, fixing highways and—a top priority—shoring up the state’s water supply.

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But a report released on Nov. 14 by the state Legislative Analyst’s Office http://www.lao.ca.gov/2007/fiscal_outlook/fiscal_outlook_07.aspx#chap3says his budgets will fall some $10 billion short over the next two years. One big part of the shortfall— property taxes, the second largest source of revenue in the state after the income tax. According to the report, property tax revenues rose an astonishing 60% since 2001, to $47 billion this year. From a peak of 12% per annum growth, growth will likely to fall to 3% in coming years.

Falling home prices spills over into construction-related jobs and retail sales. That means lower sales and payroll taxes. State employment in construction and finance grew by 25% this decade, according to the report, five times that of overall employment. By the analyst’s office estimates, state revenues will still rise by 4.6% this coming year. But expenditures will climb 7%, a big difference where you’re talking about an $111 billion budget.

So the Governator will face some tough choices, slashing spending and backtracking on his promises or raising taxes, and backtracking on another promise. Lucky for him he still has that 11,000 square foot house to come home to.

Reader Comments

John L

November 17, 2007 9:27 AM

As an outsider looking in, I always wondered what the state was doing with all that surplus property tax money. A few years ago, the word on the street was California was hurting. Evidently, things are turning around, and that's no small feat. I think Governor Schwarzenegger is doing a fantastic job, and hopefully the voters recognize it and continue to support him. My bet is he'll figure it out.

Paula

November 17, 2007 11:46 AM

This is such an "awkwardly" written piece. Does anyone edit these articles prior to them going to print?

Ain't? To make a point?

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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