There may be a silver lining to California's monetary maladies, after all: Golden State residents are paying off their debt, if only because they have no other choice.
The average resident’s credit card, mortgage and auto debt dropped 4 percent since last year, according to a credit watch report released in July 2011 by Credit Karma.
Large mortgages account for the majority of California residents' loans, an average of $314,375 in June 2011, far above the national average of $174,000, said Kenneth Lin, CEO of Credit Karma.
Since its peak, the California housing market has shrunk about 35 to 40 percent.
“We’re at the bottom, and it’s going to last a while until there’s job growth,” said Paul Habibi, UCLA real estate professor.
Home sales were not solely affected, the housing market dragged down consumer spending, as well, Habibi said.
Americans in general, subdued by a 9.2 national unemployment rate, are more hesitant to take out credit cards and are paying off the ones they have as quickly as possible, said Lin.
California has among the highest costs of living in the nation and indebted residents need to follow the most obvious advice to alleviate their financial burdens: spend less and pay down their debt.
“The only cure is time,” Habibi said.
Declining property values are not generally seen as a positive asset, but some economic terrors are making other areas healthier.
When a property's value drops, the next buyer needs to take out a smaller loan, Lin said.
One-third of home sales are foreclosures, diminishing the worth of surrounding homes and that in turn puts pressure on other economic sectors, Habibi said.
This change in behavior, Lin said, is one of the few desirable outcomes of the Great Recession.
But they are contrary to Americans’ deeply ingrained habits to spend their income, Habibi said.
“A year ago, there was a big uptick in consumer spending,” he said. “Because homeowners were in foreclosure.”
Spending money previously allocated to mortgage payments on consumer goods created an artificial increase in the market that, Habibi said, we’re paying for it now.
“Debt can be used wisely if used as an investment but it can also be a double edged sword, it can cut your throat if you’re not careful,” he said.