O.C. Economic Recovery Predicted by Midyear : * Outlook: Area may lag nation, business leaders warn, because of red tape and lack of affordable housing.

Orange County business leaders on Thursday predicted a local economic recovery by mid-year but warned that the region could lag behind the rest of the nation, blaming government red tape and the county’s dearth of affordable housing.

Robert H. Smith, chairman and chief executive of Security Pacific Corp., predicted that there will be an “adjustment” period--perhaps as long as three years--before the national economy returns to substantial growth.

“I think we’re going to come out of this very good,” he told an audience at the Irvine Chamber of Commerce 1992 Business Outlook Conference. “It’s just going to be hard in the interim to labor through it.”

Smith, whose company is the parent of Security Pacific Bank, joined top executives from the home building, banking and pharmaceutical industries in calling for relief from government regulations--from environmental restrictions to banking laws. They said such regulations are driving up home prices and the cost of doing business in the region.

“At some point in time you must make a decision between what you want and what you want to pay for,” said William C. Shepherd, president and chief executive of Allergan Inc., an Irvine pharmaceutical company.

Julie B. Newcomb, president and chief executive of Costain Homes in Newport Beach, said that municipal building and development fees add $20,000 to $30,000 to the cost of new homes and that builders face a host of new environmental regulations.

“It’s no surprise when potential recruits from other states refuse to move here after realizing they’d be trading a luxurious 4,000-square-foot home in Atlanta on a one-acre lot for a 1,500-square-foot attached home in Irvine,” she said.

Home builders, she said, are being hit by stricter environmental regulations, such as the Clean Water Act of 1989, which requires builders to meet new requirements for runoff water.

“The standards are so high that even normal drinking water, with its chorine content, might not pass the test,” she said.