UCLA forecasters have seen the future of California's housing market, and it looks like this: more apartments near the coast, fewer McMansions in the desert.
That prediction is based on several factors, including expectations that rising fuel prices will encourage people to live closer to jobs along the Southland coast and in the San Francisco Bay Area.
The state's population is also skewing younger, meaning there will be more demand for urban rental units and less demand for suburban cul-de-sacs, according to the quarterly economic forecast released Wednesday by UCLA's Anderson School of Business.
"The incremental demand for housing is moving more into multifamily housing," said Jerry Nickelsburg, senior economist with the forecast. "Many of the younger generation have been buffeted by the boom and bust in the housing market, and see value in living closer to work."
That's bad news for the state economy, however, for two reasons. One is that construction of multifamily homes requires less labor than construction of single-family homes. Second, areas such as the Inland Empire and Central Valley that were hit hardest by the housing bust won't get a construction boom to help pull them out of the economic doldrums.
This means "there is an even larger structural unemployment problem in California than we originally thought," Nickelsburg wrote in the forecast. "Not only do we have excess construction, real estate and support skills, but some of those that will be demanded will be in the wrong geography."
California won't start adding a significant number of building permits until 2013, forecasters say, which is one of the reasons the state's unemployment rate will stay above 10% until the middle of that year. Nonfarm employment in the state won't return to pre-recession levels until 2014, and construction employment won't reach those levels until at least 2021.
"In a typical recovery, you get a bounce-back in housing and hiring of a lot of construction workers," Nickelsburg said in an interview. "We're not seeing that this time, which definitely slows the recovery, and slows economic growth."
Changes in the state's demographics are driving some of these shifts, forecasters say. Household formation has slowed in California as the unemployed have moved in with their family members to save money, leading to less demand for new homes.
In addition, California is one of the youngest states in the nation, according to census data, with a median age of 35.2, compared with 38.0 in New York. Although there are many Gen Xers of home-buying age in the state, many "bore the brunt of sub-prime mortgage and housing bubble crash," Nickelsburg said, and now do not think a home is a safe investment.
The market is already responding to this trend, according to UCLA. Building permits for single-family homes have continued to decline while permits for multifamily complexes are starting to regain strength. Permits for multifamily homes are now at 40% of the peak number, comparatively stronger than permits for single-family homes, which are at 20% of their previous peak.
These housing issues, coupled with the financial pain experienced by state and local governments, will keep California's unemployment rate at an average of 11.7% this year and 10.9% next year.
The picture is slightly rosier on the national level. Gross domestic product will grow at an annual rate of 3% through 2013, and the unemployment rate will decline slowly, reaching 7.8% by the end of that year. This year, the U.S. unemployment rate will average 8.9%.
The recovery will remain tepid because many jobs are gone for good, said Ed Leamer, director of the UCLA Anderson Forecast. Outsourcing and robots have replaced about 2.5 million manufacturing workers. About 2 million construction jobs are gone permanently because they had been created by artificial demand. Retail technology and Internet shopping, coupled with consumers' spending fatigue, have led to the displacement of 1 million retail jobs.
Those 5.5 million workers are one reason the economy won't grow as robustly as it has in past recoveries, Leamer said.
"We have been vigilant for signs of a real recovery," Leamer wrote. "These have been hard to find."