UCLA Economists Expect Housing Downturn to Pack Wallop

LA Business Journal ^ | 6/21/05 | MATT MYERHOFF

[BurbankKarl]

The end of an inflated housing market will likely lead to a recession after April 2006 that hits hard in Southern California, where so many jobs and so much economic activity are dependent on the real estate market, according to the quarterly UCLA Anderson Forecast.

Economists at UCLA's Anderson School of Management said in the report released Tuesday that the housing market is artificially propping up the economy, particularly in Southern California. They predicted that falling consumer spending on housing would precipitate a recession as it has in nine of the last 10 recessions.

Ed Leamer, director of the Anderson Forecast, said that despite many signs that California's economy is recovering, a recession can't be headed off unless the predicted decline in spending on housing is offset by much higher exports or military spending.

"Southern California has been producing jobs, but they all have to do with the real estate market, which is due for a turnaround," Leamer said. "We're going to lose $100 billion to $150 billion in reduced spending on homes by consumers, and you have to make that up, so it either has to be in exports or in defense spending."

The quarterly study predicts how the economy will perform for the next two years. UCLA economists found that since World War II, spending on housing declined sharply 10 times, and recessions followed eight of those times. The two exceptions were at the beginning of the Korean and Vietnam wars, when higher military spending offset the housing declines.

The Anderson Forecast first declared a bubble in California's real estate market two years ago. Housing prices have so far defied the UCLA economists, but the market is now showing signs of weakening, with lower sales volumes, slower appreciation and growing difficulty in selling expensive homes, Leamer said.

"When that trouble really starts, you'll see declines in building permits, and finally spending on construction," he said. "Southern California home sales data is already flattening out."

The report concludes that the real estate market, driven by low interest rates, has made current housing construction levels unsustainably high, outpacing by far the growth of the adult population. Current housing start permits are set to exceed 2 million in 2005.

Anderson economists predict that housing starts will begin to fall by the end of 2004 and will hit 1.6 million by mid-2006, a level consistent with population growth.

[ken5050]

Predicting when a bubble will burst is akin to predictin earthquakes. You know they're both gonna happen......just not when...oops...shouldn't mention quakes and California...

[SittinYonder]

UCLA economists are with ya on the housing bubble burst.

[DoughtyOne]

I would suspect the UCLA folks are upset that poor immigrants can't buy a home for $25k. Perhaps that's whey they are pleased to produce predictions that might influence housing downward. "Heck, a crash might great."

[Dark Skies]

Predicting when a bubble will burst is akin to predicting earthquakes.

Yup. The sky is falling.

An economy moves forward in fits and starts and it give the bean counters (read linear types) fits and starts.

Also, bubbles in real estate seem to be city specific except in nationwide depressions.

It would break my heart if Beverly Hills and Malibu had a bubble burst.

[ambrose]

Repeat after me, there is no bubble. This time it is different.

---

3326 MALABAR ST Los Angeles, CA, 90063 offered at $225,000

photo 1 of 6

Bedrooms: 3 Bathrooms: 1 Full / 1 Partial Year Built: 1920

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View Home Details $330,000 1029 W 151st Street, Compton, Ca 90220 Map it! Listing provided courtesy of C-21 Action Bedrooms: 3 | Bathrooms: 2 | Sq Ft: 1,200 Comments: No comments provided.

3326 MALABAR ST Los Angeles, CA, 90063 offered at $225,000

[eyespysomething]

The report concludes that the real estate market, driven by low interest rates, has made current housing construction levels unsustainably high

is what I say. But what I don't get is:
Anderson economists predict that housing starts will begin to fall by the end of 2004

Shouldn't that be predicted, followed by some type of qualifier as to if they were right or not?

[Bogeygolfer]

typo....2005. It's a no brainer the market will fall sooner or later. These guys have been wrong for two years. If folks had listened to them then and stopped buying it would have crashed two years ago. Sooner or later they'll be right and they'll conveniently overlook those 20% growth years when it was supposed to be dropping like a rock. I'd like to see a nice flat line for awhile and I'll be at peace.

[eyespysomething]

Well sure its a no brainer, just look at it. It's unsustainable.

We bought our house 6 years ago this summer, and at no time since could we have gotten a better interest rate (we are at 5.75%). So with as much tinkering as the Fed has done, the rate really hasn't changed. A lot of people have been buying and selling property because of the low rates, and a lot of people have been doing refi's. But there are only so many people who will refi, and so many people who can get a mortgage. It reminds me of the stock market internet bubble.

I don't study economics, but I do read Walter Williams when I can. 8-)

[FreeRep]

If all economists were laid end to end, they would not reach a conclusion on the housing bubble.

[Bogeygolfer]

Was it absolutely necessary to mention the internet bubble? I'm still recovering. Not so much from investments which were bad enough but it also impacted my business. I'm convinced the market will come down and am hoping for a soft landing or even a flat market. My objection isn't even that they will be right it just annoyes me that they don't acknowledge they've been wrong and I assure you they will tout their success when that time comes. The last few weeks I've been more hopeful that we may get lucky or at least avoid a big fall.

[Vigilanteman]

Those photos and prices are typical why deflation of the southern California bubble in housing is long overdue. Shoddy workmanship and 1200 sq ft selling for a third of a million????? And, as I understand it, Compton is not a particularly nice neighborhood either.

[buwaya]

Compton is pretty awful.

[crz]

You gotta be shitting me right? Gimme 300 grand and you can take possession of ten acres, a two full bath, three bed 2000 sq ft 1920 remodeled home (although it needs some finish work) A class a spawning trout stream running through. With highway frontage in a quiet rural area. New 24 X 42 steel garage..14 X 12 foot door so a guy can get his camper in or semi tractor, New well, Septic upgrade, new kitchen, Hardwood floors with lots of Birds Eye maple in it, new LP gas furnace, new wood supplement furnace, wood cozy stove upstairs, New Bathroom floor with jaquzzi tub, new loft-needs finishing. Decks and porches all round. Several out buildings. Driveway redone correctly with good crushed cement and gravel mix. About 20 apple trees and plum trees all about. Planted red pine trees. Enough room to run a couple horses or whatever you fancy.

For 300 grand you'll get lots thrown in the deal-a front end loader, the garden equipment enough wood to last you two years..hell three years, it'll rot before you can burn it all. About 500 yards of unscreened top soil that actually goes things, not like that junk they sell you and find out it wont grow weeds. And anything else I can think of.

Trying to sell this place as we are moving to AZ as the Mrs has a dam fine job down there-she's down there now.

[Carry_Okie]

Arnold is borrowing and spending beyond the State's means while things look good, with the prospect of higher unemployment costs and lower revenues staring him in the face, never mind bank insolvencies.

Beyond stupid.

[Carry_Okie]

$330 G's for a fixer in... Compton?

What a horror.

[calcowgirl]

The state is continuing to spend more than it brings in, despite Enron-like accounting to accelerate revenues. When they have to start paying on the Economic Recovery Bonds, we will be in a world of hurt. On top of that, he wants to issue more bonds, masked in his "spending reform" measure.

Beyond stupid. Yep.

[buwaya]

Have you seen the pressure the guy is under ? Even what he has managed to cut, or move over to seasonal expenditure like highways, has been against intense opposition.

The unions, the press, and better than half the public hate what he has cut, or kept from growing so much. He has no legislative support. To get them to move he has to resort to initiative blackmail, a very uncertain threat.

This is California, a nearly ungovernable place. One man can only do so much.

Consider what it would be like to be in his shoes.

[calcowgirl]

Have you seen the pressure the guy is under ? Even what he has managed to cut....

Yeah, I've seen it. And he isn't getting nearly enough pressure from the Republicans, IMO.

He has promoted a leftist environmental agenda (global warming, solar roofs, Sierra Nevada Conservancy, etc). He has appointed leftists as his highest advisors and to positions that will succeed his administration. He promoted putting the state heavily in debt and plans to add even more debt through his spending reform. His proposed budget continues to reflect deficit spending, and the past year also produced an increase in the deficit. He abandoned his blow-up-the-boxes program, abandoned his much touted "Audit" to identify and eliminate waste and abuse, and has yet to wield the veto pen to cut spending, a major campaign promise. He signed AB-50 to ban .50 caliber "assault" weapons. He stood motionless during the S.F. Gay marriage fiasco. He endorsed an unaffordable $6 Billion stem-cell research program.

His tactics have ticked off the unions, and accomplished nothing. His campaign to help his donors involved in the hospital industry turned the nurses against him. I should applaud this? Now, teacher tenure, a do-nothing measure, is bringing out more union voices. Neither of these moves improves the state's fiscal position. He has chosen the wrong fights, and, in the meantime, his other actions are taking the state further toward bankruptcy.

Forgive me if I can't get excited about him ticking off the unions. This is not a two-dimensional fight. Because the unions oppose him on certain measures does not mean he is doing a good job.

[Carry_Okie]

Even what he has managed to cut, or move over to seasonal expenditure like highways, has been against intense opposition.

Sob! Poor Arnold, we just can't expect him to use his line item veto! Those mean old Democrats would call him bad names!

Just what the hell did you or he think that job would require?

Arnold says, "Cut, cut, cut!" "Cut up the credit cards!" "The state has a spending problem!" and the voters cheered. So what does he do but propose a budget with 9% real growth in spending which is a THIRD HIGHER real rate of growth than we saw under Bray Davis. Now the people boo. Did it ever occur to you that it was his borrow and spend behavior that was causing a large part of his drop in popularity?