Slowdown forecast for U.S. real estate market

'Soft landing' expected in California
Inman News
A quarterly housing and economic forecast released today by the University of California, Los Angeles, calls for a slowdown in the U.S. economy through 2006, with declines in housing construction on the horizon.

The latest Anderson Forecast revises an earlier prediction of a rapid slowdown in the overall economy and housing construction. "The slowdown is now considered to be more gradual than predicted in June as the projected reduction in housing construction is still in the future," according to an announcement about the forecast. "In California, there are hopes for a 'soft landing' as the economy weakens over the next two years. The Los Angeles forecast mirrors that of California, as a number or risk factors including payroll employment and residential real estate pose a threat to the moderate growth currently being experienced."

Michael Bazdarich, a senior economist for the UCLA Anderson Forecast, in June had said that "substantial declines" were expected in U.S. housing construction starting in late 2005, and these declines were expected to "drive a noticeable deceleration in U.S. economic growth in the last half of 2005 and after," though the data have shown a flattening in housing construction rather than a deceleration.

"Bazdarich...expects these declines are still on the horizon, and while the drop-off in housing construction has yet to occur, declines in consumer and business spending is happening at a faster rate than was expected three months ago. On the plus side, U.S. foreign trade trends are showing signs of turning for the better," according to the forecast announcement.

The overall forecast has been slightly upgraded from June. Bazdarich notes, "the bottom line is that an improving trade deficit will work to mitigate the economic drag coming from slowing spending growth and, next year, declining housing activity. Our June forecast looked for U.S. growth to fall into the 1 percent to 2 percent range next year.

"With slowing consumer and business spending growth hitting import sectors hardest, even a 20 percent decline in housing starts over the next two years will work to push economic growth only to the mid-2 percent range." He does caution that an abrupt plunge in housing starts and housing prices – a bursting of the housing bubble – could still drive a slump.

In his California forecast, UCLA Anderson senior economist Christopher Thornberg notes that the California economy "seems healthy on the surface," but below the surface there is no encouraging news.

The California economy, like the national economy, is being driven in part by the housing sector and consumer spending (which is being fueled by the wealth home owners are feeling). But while these sectors continue to fuel growth, core California sectors like information, manufacturing and professional services continue to languish, according to Thornberg's analysis.

Dr. Thornberg states, "The forecast for California is mediocre at best, at worst we are liable to dip into another recession." He also stated that the research group has not been able to time the end of the real estate bubble, and his latest forecast calls for a "soft landing," one in which the economy sees weak growth for the next two years but no recession.

Los Angeles, like the rest of the state, will also avoid a crash and experience a "soft landing," according to the local forecast.

UCLA Anderson senior economist Ryan Ratcliff states, "Any trouble in real estate markets is more than six months out, so our forecast is for a slowdown in housing in early 2006, leading to a broader economic slowdown in 2006-2007. At this time, there is not enough evidence from our leading indicators to suggest that this slowdown will become a full-blown recession."