UCLA Economists Still See a Bubble in Housing Market

Times Staff Writer

California’s economy has long benefited from the surging housing market, while economists at UCLA Anderson Forecast have long warned that the wave will eventually break.

In their latest quarterly forecast, to be released today, 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.

The state’s economy has been boosted artificially by increased spending from Californians feeling wealthier thanks to home price rises of 40% in the last two years, the UCLA forecasters said. When those prices stop rising, consumers will rein in spending, possibly triggering a recession, they said.

And it won’t even take home prices to fall, just to flatten out, they said.


“This process will have a detrimental impact on the economy even if prices don’t fall,” UCLA senior economist Christopher Thornberg said.

UCLA economists, among the first to predict the 2001 recession, began to call the housing boom a “bubble” two years ago. That view wasn’t widely shared then.

But lately the bubble belief has gained traction. Federal Reserve Chairman Alan Greenspan earlier this month cited signs of “froth in some local housing markets.”

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.

The top 55 U.S. housing markets, where prices have appreciated 30% or more in the last three years, represented about 40% of the total value of all U.S. housing in 2004, FDIC spokesman David Barr said. The Los Angeles-Orange County market alone was valued at more than $1 trillion, as was the New York City metropolitan area.

Many in the housing industry take issue with the bubble scenario. They say prices are justified because they are being driven upward by insufficient housing supplies coupled with growing demand from immigrants and others. Although home price rises now are slowing, the consequences won’t be dire, they say.

But 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.

Indeed, the gross value of all residential real estate in California more than doubled, to $4 trillion, since 1997.

“Your average Californian adult found him or herself richer to the tune of $40,000 on the basis of housing appreciation over the past two years,” Thornberg said. The amount was about half of what the same adult earned in income in the same period.

This housing wealth effect has prompted consumers to spend more, Thornberg said. Taxable sales in California have grown faster than incomes for 10 quarters, he said.


But, “at some point, that will go away,” he said. And when people rein in spending, national and local economies will feel the pinch, he said.



Comparing two housing booms

Inflation-adjusted increases in housing prices for the states with the greatest gains in the current boom


1997-2005: 80.7%

1983-1989: 45.7%


Rhode Island

1997-2005: 67.4%

1983-1989: 60.6%


1997-2005: 66.6%

1983-1989: 57.0%

New Hampshire

1997-2005: 63.3%

1983-1989: 48.7%


1997-2005: 57.4%

1983-1989: 0.8%

Sources: UCLA Anderson Forecast, Office of Federal Housing Enterprise Oversight