As cities and states deal with declining real estate values and rising rates of foreclosure, at least we have the future to look forward to and its promise of prosperity and a better tomorrow. Or can we?

Some of the projections I have been reading do not anticipate the housing market staging a turnaround until late 2009 or well into 2010. Once the market does begin to turn, it will be very gradual and probably be a non event. The reason is that the likely rate of appreciation could easily be only 2 to 4%. If people are thinking once the bottom is achieved, we will experience a return to the days of wine and roses along with double digit appreciation in home values, are in for a real shock. According to Karl Case (S&P Case-Shiller home price index), “home prices tend to increase on average at an inflation adjusted rate of 2.5% to 3% per year”.

Gone are the days of easy access to money and the resulting high demand that sent home prices through the roof. Home price affordability will now begin to fall in line with incomes, which by most accounts indicate there is still room to fall; home prices not incomes.

Housing Prices

Today’s Wall Street Journal devotes a section to The Future For Home Prices. The author indicates that home prices are driven by hard to predict fundamentals including: immigration, birth rates, size of households and incomes. He goes on to predict that young people will settle in Florida, the Carolinas, Tennessee, Virginia, Nevada, Arizona and the affordable interior parts of California. Dallas and Houston are also mentioned, so lets add Texas to the mix. These areas are cited as having generally lower housing costs.

I believe other factors will serve to reinforce people’s decision on where to locate. With the financial markets being pounded every day, many consumers are witnessing the evaporation of their retirement. As a consequence, housing decisions will be dictated by pocketbook issues that affect disposable income.

State & Corporate Taxes

If you look at the states where housing is expected to grow you must look in areas that have an availability of underdeveloped land along with a pro growth, low tax policy. Neither of which describe California. Of all the states mentioned above, which state imposes the heaviest income tax on its citizens? California’s rate of 9.3% earns top honors.

Let’s face it. If the business climate is unfriendly and imposes a high tax burden, what incentives are there for business to locate here, create jobs and employ people? I can’t think of any. Again, the blue ribbon goes to California.

California Sidestep

Over the last several years, California has avoided financial disaster by two unforeseen events. The tech stock boom pulled us out of budget shortfalls in the year 2000, only to be beset by a bubble. After that, real estate was able to come to the rescue and create another temporary budget stimulus, until that bubble popped as well. It now appears the champagne has sat too long without the cork and we are all out of bubbles.

I have asked this before but it bears repeating, “Why do states with the highest tax rates run the highest budget deficits”? Californian’s and more specifically Sacramento need to adopt a strategic economic plan that goes past Wednesday and looks out into the future. The environment is a perfect example as the air quality has improved over time. Someone had the wherewithal to understand change was needed.

California residents have had enough of the ups and down of the real estate and stock markets along with a “seat of the pants” approach to the state budget. Pro growth, low tax policies will be required in the next 20 to 30 years to enable Californian’s to invest in houses and enable job creation, which drives the economic engine and creates the circular flow.