Hot Housing Market Still ‘Cruising’
UCLA Anderson Forecast, among the first economic prognosticators to proclaim that California’s housing boom was peaking, is now singing a slightly different tune.
The housing boom isn’t quite over yet, it says.
Although signs of slowing are starting to crop up in certain regions, “there is lack of convincing evidence of a slowdown in the big picture,” according to UCLA’s quarterly forecast on California’s economy to be released today.
Southern California “is one part of the state that’s got some zip in it,” said Ryan Ratcliff, an economist and author of the latest forecast. “We’re not accelerating but we are still cruising along at 80 to 90 miles an hour.”
However, the state’s housing market will probably begin to slow over the next two years. That would lead to a loss of 2% of the jobs in construction and other real estate occupations and force Californians who have tapped into their homes’ equity to rein in spending, Ratcliff said.
Such a scenario points to “anemic” growth for the state’s economy in 2006-07, but not a full-blown recession, he said.
Ratcliff’s view contrasts with previous UCLA forecasts that pointed to a possible real estate-led recession. With so much of the state’s economy dependent on the housing sector, they argued, signs of deceleration were cause for concern.
The Anderson Forecast, best known nationally for having accurately predicted the 2001 recession, has long argued that real estate prices in California and the U.S. are unsustainable, partly because property values have climbed far faster than personal incomes.
As recently as September, UCLA Anderson Forecast economist Christopher Thornberg said California’s housing boom appeared to be peaking, and the resulting slowdown was expected to produce weak economic growth over the next two years and a possible recession by the end of 2007.
In researching the latest report, Ratcliff said he wanted to take “a deeper look at the data before proclaiming the end of the real estate boom.” His conclusion: It depends on whether you see the glass as half empty or half full. Ratcliff falls into the half-full camp.
He found that the year-over-year rate of home-price appreciation was no longer growing in the Bay Area and was growing slower in Southern California. But price changes are still running about 18% above year-ago levels. That suggested to him that although the pace of price growth may be slowing, “we’re still a long way from prices flattening out.”
That analysis also applies to home sales, he said. Looking at seasonally adjusted sales for both regions, “you might see a plateau starting about March of 2004, or even the beginnings of a decline if you like your glasses half empty,” Ratcliff said.
“But looking back over the entire graph, there have been several instances since 2001 where sales have flattened out for a few months, only to pick up again.”
Despite his optimism, several counties show more definitive signs of cooling off. Sales in San Francisco County are off 20% from their June 2004 peak, and prices are down 5% from their May high. San Diego County’s market has lost steam as well, but price increases have leveled off to a flat rate of growth.
The two counties’ housing markets differ because of jobs, Ratcliff found. Areas with severe job losses also experienced bigger home-price declines. San Francisco saw 4% of its information jobs disappear since January, whereas San Diego has not had any significant job losses.
The strength of the job market will determine whether California’s real estate market takes a hard fall or finds a soft landing, Ratcliff said. He predicts a soft landing, with Southern California and other regions eventually following San Diego’s path -- home prices leveling off and sales ticking down moderately.
In past recessions, jobs in both the construction and durable manufacturing sectors had to contract before the economy tanked, the forecast said. Construction remains the fastest growing sector year to date at 5.8%, and now accounts for 6.2% of employment in California. That’s almost the same proportion as durable manufacturing jobs in the state.
“The key reason why there will be more of an economic slowdown than a recession is that you usually need two sectors” to show significant job loss, Ratcliff said. This time, if only construction jobs contract at the 2% rate he is predicting, that wouldn’t trigger a severe downturn, he said.
The housing downturn of the early 1990s was set off by massive job losses. Between 1990 and 1993, California lost 510,000 jobs. Of those, 52% were in manufacturing and 36% were in construction.
California’s job picture has been lackluster in recent months. The rate of employment growth has slowed after a significant number of jobs were added in July and August, Ratcliff said.
But other economic signposts help support Ratcliff’s view of the glass half full for the state’s economy. Personal income and taxable sales were up 8% and 6.4% year-over-year, respectively, in the second quarter.
As for the national economy, Edward Leamer, director of the UCLA Anderson Forecast, expects the U.S. housing market to start to slow next year and construction and real estate-related jobs to contract. But the outlook for manufacturing jobs is positive.
“Without significant job loss in manufacturing, we are not likely to have a recession-level elevation in joblessness,” Leamer said in his report on the U.S. economy.
