I am starting a website which targets a specific geographic
location(California).  I need a lot of space and bandwidth due to
nature of my site.  I was wondering if it makes a lot of difference to
have it hosted in a datacenter in my state?  I know there are a bunch
of hosting company out there, but prices seem to jump if I HAVE to
have it in California.  SO I was wondering if its really faster. Also
if anyone can recommand some around northern california, bay area
region, I would apprecaite it.

All other things being equal, you will probably see a very marginal
increase in performance.  You can test this by running ping or tracert
to ip's within the datacenter from wherever your target location is. 
This kind of thing can be very important if you are running a video
game server, for instance.  But for a webpage? I doubt it will be
noticable unless there is a lot of real-time interaction (like a video
game) or large amounts of data being transfered.

Probably the most important of those previously mentioned "other things" are:
1.  Hop count, in itself, not a huge deal, but in reality if the hop
count gets too high then you are probably fighting a bad peering
arrangement and would be better off with a higher tier provider.
2.  Link latency, each link in the internet has a given capacity and
over time the utilization of this link will vary.  These both factor
into what your throughput will be.
3.  Peering relationships.  Or how the networks connect to one another.

What i'd do is, like the previous poster mentioned, do some pings and
traceroutes from the various large ISPs in the area that you are
targeting at various times during the day and night and to various
different hosting providers.  I'd also tend to look for hosting
providers that have "private peering" agreements with the major
internet providers so you can avoid public peering points (places
where the backbone providers connect to one another) as much as you
can.