September 28, 2006

UCLA Anderson Forecast Predicts Soft but Turbulent Landing for National Economy

California Real Estate Sector to Continue Decline Leading to Economic Slowdown

LOS ANGELES - In its third quarterly report of 2006, the UCLA Anderson Forecast says that while, “the U.S. economy appears to have seamlessly downshifted to a soft landing (and) we are not forecasting a recession … the economy is about to get bumpy as the housing market continues to deteriorate.”  The Forecast calls for a sustained period of 1.5-2.0% growth.  In California, the housing market continues to soften and real estate employment has gone from an “engine of growth” to “a drag on growth in 2006.”  In the absence of a recession, however, statewide home prices are unlikely to experience significant declines.

The National Forecast
UCLA Anderson Forecast Senior Economist David Shulman says that the national economy is about to enter a period of several quarters of sluggish growth with, “inflation above the comfort level.”  In response, the Federal Reserve will cut the funds rate to 4.5% and unemployment will rise, while economic sectors related to real estate will decline.  Strength in business investment and trade, coupled with a bottoming of the housing market will eventually strengthen the economy, which will bounce back to a 3-4% growth rate by 2008.  The Forecast calls for real GDP growth averaging 1.8% in the three quarters beginning with the third quarter of 2006.

The report titled, “Soft Landing with Turbulence Ahead,” notes that home sales are off 12% and housing starts off 26% from their respective peaks, making it clear that the housing market is in a major cyclical decline.  “It is only a matter of time,” Shulman writes, “before nominal home prices are down on a year-over-year basis.”

The California Forecast
The California Forecast, authored by Economist Ryan Ratcliff, says that the State’s real estate sectors will continue their 2006 decline – without major declines in other sectors.

This distinction is significant, since it implies a slowdown instead of a recession. Historically, recessions in California have had major job loss in at least two sectors, such as construction and manufacturing.  Without recession-sized job losses, a significant decline in statewide home prices is unlikely.  However, a few regions where new  construction is significant share of overall sales may see some price declines, since builders historically have been more willing to lower prices than owners

According to Ratcliff, building permits will continue to decline, bottoming out in 2008 as activity returns to levels seen in 2000. The drop in building activity will continue to weaken the construction sector, which will lose around 100,000 jobs through the life of the forecast (which runs until fourth quarter 2008). The Financial Activities sector will suffer a slowdown overall, due to real estate-related declines. Nominal home prices in the State will stay flat through 2008, though real prices will fall.

In a California companion piece titled, “2005: The Year the Tortoise Won the Race, Whither California Home Prices,” Forecast Director Edward Leamer again makes the case that the real estate sector is a volume cycle, and not a price cycle.  As a result, the real declines in this area will be in total volume and not real estate prices.  He argues that volume produces the activity which contributes to GDP (and GSP) and declines in volume often lead to layoffs of construction workers and lowered brokers commissions.

Leamer expects home prices five years from now to be about the same as they are today, though lower in real terms by 15-20%.  Meanwhile, housing’s contributions to GDP will be very weak, with building, finance and real estate commissions suffering significant declines.

About UCLA Anderson Forecast
UCLA Anderson Forecast is one of the most widely watched and often-cited economic outlooks for California and the nation, and was unique in predicting both the seriousness of the early-1990s downturn in California, and the strength of the state’s rebound since 1993. Most recently, the Forecast is credited as the first major U.S. economic forecasting group to declare the recession of 2001. Visit UCLA Anderson Forecast on the Web at http://uclaforecast.com.

About UCLA Anderson School of Management
UCLA Anderson School of Management is ranked among the top-tier business schools in the world.  Award-winning faculty renowned for their research and teaching, highly selective admissions, successful alumni and world-class facilities combine to provide an extraordinary learning environment.

The mission of UCLA Anderson School of Management is to be a global leader in management education, research and service. Established in 1935, UCLA Anderson provides management education to more than 1,400 students enrolled in MBA and doctoral programs, and some 2,000 executives and managers enrolled annually in executive education programs. UCLA Anderson alumni number more than 35,000 graduates around the world dedicated to continued networking, professional development and educational activities.

Contact Information

Hilary Rehder, (310) 486-5650, hilary.rehder@anderson.ucla.edu

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