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Tuesday, June 21, 2005

UCLA Anderson Preview: Bubble Burst could lead to Recession

by Calculated Risk on 6/21/2005 02:41:00 AM

The UCLA Anderson Forecast will be released today. According to a preview in the LA Times:

... the UCLA forecasters once again predict that a housing slowdown could push California into recession, while causing a noticeable slowing in U.S. economic growth.

UPDATE: Another preview article: Home bubble could weaken
the residential real estate market could soften in the latter half of this year, slowing the state and national economies.

Still, Edward Leamer, an author of the quarterly outlook from the university's Anderson School of Business, stopped well short of forecasting a recession this year. "The probability remains essentially zero ... before April 2006."

Leamer said the first indication of a turn for the economy will be fewer home sales with properties sitting longer on the market. Then builders will retreat and pull fewer permits, and jobs that depend on home sales will be lost. While a price softening and not a collapse is expected, this series of events will trickle down through the overall economy.

He noted a drop in spending on homes played a major role in nine of the past 10 economic downturns since World War II.

While the outlook for the economy over the next 12 months is positive, predicting after that gets dicey, but real estate will play a large role in what happens.

"The bad news is that we have real problems in the housing sector that will cause the economy a good deal of stress soon enough," Leamer said in his report, referring to home prices that have reached unsustainable levels in some markets.
ORIGINAL POST:

Others are expressing similar concerns:
On Monday, Merrill Lynch added to the bubble concerns, releasing a report that said U.S. economic growth could slow by a full percentage point next year if home prices were to stagnate in the biggest cities.

Merrill Lynch senior economists found that six California markets — San Diego, Inland Empire, Los Angeles, San Francisco, San Jose and Sacramento — were "well in bubble territory" with above-normal ratios of home prices to household incomes.

Federal Deposit Insurance Corp. data, provided to The Times on Monday, further underscored such concerns that declines in the nation's biggest housing markets could throttle the entire U.S. economy.
And on California:
... to the UCLA economists, the sizzling housing market has masked a number of weaknesses in California's economy, including job growth that is not as good as it looks. Employment and personal incomes in California have gained only modestly in the last year, UCLA's Thornberg said. Yet, many Californians "feel" wealthier because they perceive their homes to be worth a lot more.
They could say the same thing about much of the US: the housing boom has masked otherwise weak job growth. Look for more comments later today.