UCLA Group Predicts Flat Home Prices

The Anderson Forecast backs away from its dire projections last year but says things could worsen based on recent data.
By: Lisa Girion: Los Angeles Times Online
With home sales slumping faster than predicted by even the most pessimistic prognosticators, the question is: How low will prices go?

The UCLA economic group that was among the first to declare the housing market a bubble now is saying that prices, at least in California, probably won't decline significantly anytime soon.

In its widely watched quarterly outlook to be released today, the UCLA Anderson Forecast reiterates earlier projections that the deteriorating housing sector will slow state and national economic output and job growth through 2008. Although it doesn't rule out a recession, it doesn't expect one.

Absent a recession, it reasons, homeowners would rather hold than sell into a deteriorating market. Unless a job loss forces a sale, many homeowners would rather stay put than sell for less than the high they recall some neighbor getting last year.

"Expect home prices five years from now to be about the same as they are today, though lower in real [inflation-adjusted] terms by 15%-20%," the forecast said.

Although the statewide average price might not decline, a few areas where about 40% of the housing stock is new construction — such as in Yolo and Placer counties — are expected to see drops as builders cut prices to move inventory, UCLA economist Ryan Ratcliff said. In contrast, during the last housing market decline, which was accompanied by recessionary job losses, prices fell more than 10% statewide from their 1989 highs.

"We're not going to see anything like the '90s again," Ratcliff said.

Although that might sound like good news to homeowners, the lack of a significant price correction is bad for the economy overall because it will lead to further job and productivity losses in the housing sector, said Edward Leamer, director of the UCLA Anderson Forecast.

"So while your happy homeowner is pleased by the fact that home prices are not going down," Leamer said, "the unhappy home builder is not going to have anything to do."

Leamer cautioned that the outlook was based on data trumped by recent reports showing that housing sales and starts were sliding more rapidly than the group had projected.

If the trend accelerates, he said, "then our forecast is too optimistic."

The latest UCLA housing forecast, at least for California, is less bearish than its outlooks issued last year. Christopher Thornberg, the UCLA economist whose California forecasts last year called for the housing bubble to burst with dire consequences, recently left the school's forecast group to form his own consulting firm. He said last month that his expectations were growing more gloomy.

UCLA's national outlook forecasts turbulence through 2008, including mild stagflation — that dreaded 1970s phenomenon marked by rising prices and, at best, slowing growth.

It expects inflation-adjusted economic growth to slow to an average annualized rate of 1.8% through the first half of 2007 and unemployment, now at 4.7%, to rise to 5.1% by the end of next year. At the same time, core inflation, which excludes energy and food prices, is expected to increase to an average rate of 3.2%.

"While not a recession, it is hardly a pretty picture," the UCLA report said. "The combination of sluggish growth and rising prices will have the look and feel of a low-level stagflation."

But it won't be anywhere near as bad as the stagflation of the 1970s, when output declined and broad price increases pushed inflation to 8%, said David Shulman, a UCLA senior economist and author of the national forecast.

"What we had in the 1970s you could call pneumonia," Shulman said. "You could call this a low-grade cold. It's some of the symptoms, but you are still walking around."

The group's outlook for California's economy is much the same as the national picture and past projections: a continued slowdown in growth caused by the slumping housing sector.

In a separate report, the University of the Pacific's Business Forecasting Center projected that payroll employment in California would grow at a rate of 1.2% to 1.4% through 2008, slightly higher than the UCLA group's projection of about 1% over the same period.