Recession looming in US housing-boom states
By Krishna Guha in Washington and Matthew Garrahan in Los Angeles

Published: January 16 2008 22:08 | Last updated: January 16 2008 23:39

California and Florida – the biggest and fourth biggest state economies in the US – are either in recession or on the brink, many economists now believe.

While state-level data are patchy, the available figures suggest that economic activity is probably contracting in Florida and may be declining in California as well.

The four former boom states account for about one-fifth of US gross domestic product. California’s economy alone would rank among the 10 biggest in the world, while Florida’s would rank in the top 20.

Their plight is likely to feature prominently in the presidential primary campaign.

Technically, states do not have recessions - only national economies do. But the US has a long history of so-called regional recessions.

Existing home sales fell 36 per cent in California and 30 per cent in Florida in the year to November 2007, against a national decline of 20 per cent. Median sale prices fell 12 per cent in California and 10 per cent in Florida, against only 3 per cent nationwide.

Both states have large inventories of unsold houses. Florida has a huge excess of condominiums and rising insurance premiums, while California is uniquely vulnerable to the dysfunction in the jumbo, or large denomination, mortgage market.

Government-sponsored Fannie Mae and Freddie Mac can only purchase mortgages up to a certain size. The price of the average home California exceeds this limit. The state is also the national capital of the subprime finance industry, which is in meltdown.

Jobs growth stalled in both states from August onwards. Unemployment is up by about a percentage point in each over the past year.

Ross DeVol, director of regional economics at the Milken Institute, told the FT that he believed California was now in recession. He said the Hollywood screenwriters’ strike – in its third month – was the “straw that broke the camel’s backâ€