NEWS ANALYSIS : Interest Rate Cut Likely to Boost Southland Housing : Growth: Move gives home builders confidence to start new projects. Real estate has lagged in economic recovery.

This week’s quarter-point interest rate cut by the Federal Reserve is likely to give an added spur to Southern California’s nascent economic recovery exactly where it is most needed: in housing and construction.

“Real estate is the last sector to feel the recovery,” said John O. Wilson, chief economist at Bank of America.

Wilson and other economists believe that Tuesday’s rate cut--and further reductions that may be in the offing in 1996--may finally give Southern California the boost it needs to turn around its housing sector and restore full prosperity to its economy.

Indeed, the regional economy appears to be at a critical juncture after several years of aerospace industry layoffs and plunging housing prices. The year is ending amid pessimism about lackluster holiday retail sales and the slowing national economy, but optimism about falling interest rates and growth in key sectors.

What’s different now, however, is that even new-home builders--whose sector has long been a bellwether for genuine expansion in the Southern California economy--are daring to show some optimism.

“I’m looking to start three or four new projects,” said Ira C. Norris, chief executive of Upland-based Inco Homes, an Inland Empire builder. “What I’m hearing from my sales people is that they’re seeing better-qualified buyers, and the buyers are showing a little more urgency in attitude.”

That is significant for two reasons. One is that new home construction has long been the most troubled part of the dismal real estate picture, especially in Southern California. Another is that many analysts believe that sales won’t pick up in earnest until potential buyers sense that home prices have finally hit bottom.

“First, prices will firm,” said Stephen Levy, director of the Center for Continuing Study of the California Economy, a Palo Alto think tank. “Then people will start to be afraid of missing the bottom.”

Others believe that a housing recovery is all that is still needed to kick the state’s economic growth into high gear. “That’s how the recovery moves up a notch,” said David Hensley, a regional analyst for Salomon Bros. in New York.

A raft of surveys this year has indicated that California’s economy is once again expanding after a recession that struck later and deeper than in any other region of the country.

Although Southern California has suffered a disproportionate share of job losses since 1990--largely because the hard-hit aerospace and defense industries were concentrated in the San Fernando Valley and the South Bay--the region now appears to be catching up to Northern California in the pace of its recovery.

“The north-south split occurred because the south had the key industries in decline and the north had the key growth industry, high-tech manufacturing,” said Levy. “But there’s no north-south split now in terms of growth rates.”

For all that, analysts agree that the ever-rosier forecasts of the state’s economic growth mask some soft spots and potholes.

One threat to the recovery is the emerging softness in the national economy--the very condition that prompted the Fed on Tuesday to cut the federal funds rate to 5.5%.

“I don’t think we’re secure enough to have an exemption from the rest of the economy,” said Larry Kimbell, director of the UCLA Economic Forecasting Project. “If there was a U.S. recession, I think we’d probably follow.”

Still, most forecasters believe that California’s recovery is now so strong that it would suffer less than the rest of the nation from any economic downturn.

“No matter what happens to the rest of the country,” Levy said, “California will do a little better.”

Part of the reason for that, he argued, is that the new engines of the state’s economic growth--foreign trade, high technology and entertainment--are among those least affected by domestic economic cycles.

High tech and entertainment, for instance, are heavily export-oriented and are expected to benefit from any economic recoveries that take place in Europe, Japan and Mexico.

Another question about the recovery derives from the nature of the tens of thousands of jobs created over the last three years that have largely replaced more than 500,000 aerospace and defense jobs lost since 1990.

Analysts say the aerospace losses will have been made up at least numerically by newly created jobs by sometime next year. They debate, however, whether the new jobs are as high-paying and secure.

What is clear is that the workers displaced by the aerospace and defense cutbacks are not the ones moving into the new industrial sectors.

“In aerospace we lost some of the highest-paying blue-collar jobs, and they’re not getting replaced in any industry,” noted Brad Williams, an economist at the state legislative analyst’s office in Sacramento who produced a recent study of California’s job losses and gains.

To the extent that new jobs are arising in entertainment and high technology, moreover, “they’re very entrepreneurial,” said UCLA’s Kimbell. “They don’t offer the stability of aerospace.”

Whether they offer the earning potential of aerospace jobs is also subject to argument.

Williams’ study, analyzing job growth between mid-1993 and mid-1995, showed that the average wage of the 300,000 non-farm jobs created during that period was $29,000, or slightly below the economy-wide average of $30,000. The average wage for all industries losing jobs was $42,000.

The two industries with the highest job losses were aerospace, which lost 38,500 jobs with an average wage of $46,200, and banks, which lost 29,500 jobs averaging $32,400 in pay.

By contrast the greatest growth came in business services, including temporary clerical workers, which gained 113,600 jobs averaging $26,100 each. (The category, Williams cautions, also included more than 20,000 computer engineers for hire whose average wage was an exceptionally high $58,000.)

One riddle about the recovery is the impact of tremendously strong growth in the entertainment sector.

Production jobs in motion pictures, for instance, are highly unionized and well-paid, earning an average of more than $55,000 and competitive fringe benefits. Overlaying that employment, however, is a large population of freelance and entrepreneurial workers whose incomes are intermittent and uncertain and whose fringe benefits may be substandard.

The questioning of whether such jobs are stable enough to contribute to economic stability was one reason that signs of the state’s recovery went so long without getting much respect.

“I’m only recently a subscriber to the belief that entertainment is replacing aerospace as a real long-term growth industry,” said Salomon’s Hensley. “It’s always been a very difficult industry to measure. But the more I look at it, the more I think it’s a huge growth sector.”

In fact, economists say, with interest rates continuing to fall, employment stability and consumer confidence are the last elements needed before Southern California experiences a housing resurgence.

“How long can you have solid job growth, stable home prices, record low mortgage rates and strong household growth without having growth in housing starts?” asked Hensley.

Norris argued that it is only a matter of time before Southern California workers get over being gun-shy about the region’s housing market.

“The severe real estate recession gave us a credibility crisis in housing,” he said. “People lost their equity and that added to concern about whether housing is a decent investment.”

But predictions by leading economic forecasters of a 2.5% increase in average home prices next year and 4% in 1997 may unleash a tremendous pent-up demand, he contended.

“It’s still a buyers’ market,” Norris said, “but we’re along a track heading to a sellers’ market.”