UCLA Anderson Forecast Calls for Real Estate Slowdown in California; No Statewide or National Recession Seen
In its second quarterly report of 2006, the UCLA Anderson Forecast anticipates a slowdown in real estate across the United States and in California. But absent other factors that historically precede recessionary conditions nationally and in the state, no recession is foreseen. In the latest report, released to the public today, UCLA Anderson Forecast Director Edward Leamer frames his forecast in an essential question: "[Will] housing difficulties be amplified by problems elsewhere in the economy, producing a nasty recession, or will the pathology be mostly contained in the real estate sector (including construction, real estate brokers and mortgage brokers)?" He concludes that the problems will likely be confined to the real estate sector and will not produce a national recession.
Leamer, who does not expect real estate prices to fall significantly, notes that sales volume is what typically drops, and drops more precipitously than prices, as the price cycle lags behind the volume cycle. The number of homes sold will drop as owners decline to sell in a weak housing market. Prices, however, should hold. The real decline in the housing market, Leamer says, will come in "residential investment," which includes construction of new homes, repair and remodeling, and brokerage commissions on the sale of new and existing homes. But according to Leamer, the decline in residential investment and the associated decline in construction employment will not be matched by a decline in manufacturing employment, as the latter has not yet recovered from the recession of 2001. Unless there is a decline in manufacturing employment, the national economy will avoid recession in what Leamer calls "a close call." The California forecast, by economist Ryan Ratcliff, takes note of the state's slowing real estate markets. Ratcliff concludes that the real estate slowdown will lead to a flat housing market and a slower economy.
"We do not predict a recession, nor do we predict a substantial decline in average nominal home prices," Ratcliff says. "This forecast it based on two arguments. There is not enough vulnerability in the usual sources of employment loss to create a recession, and the historical record suggests that average home prices do not usually fall without this kind of job loss." As in the national forecast, Ratcliff is acknowledging declines in real estate and associated job losses in real estate-sensitive sectors. But absent job losses in manufacturing or other sectors, there will be no recession, he says. Ratcliff does note the possibility of some downside risk to the forecast, however, due to the potential impact of exotic real estate financing and uncertainties about the effects of home prices on consumption. |
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