UCLA Anderson Forecast: Home Prices May Fall 10 Percent

In its first quarterly report of 2007, the UCLA Anderson Forecast remains steadfast in its belief that the national economy does not face recession, though the group’s economists concede that length of the current, below trend growth period leaves them “increasingly nervous.â€? The Forecast in particular notes that, “ … the credit crunch in the subprime mortgage market will likely trigger a second leg down in the housing market in terms of output and prices.â€? The Forecast asserts that the slowed economy may well endure longer than previously expected, but that better-than-expected consumption, a “less-negativeâ€? trade sector and at least two and possibly three rate cuts will keep Gross Domestic Product (GDP) positive throughout 2007. The National Forecast In his National report, UCLA Anderson Forecast Senior Economist David Shulman remains consistent with the story the Forecast has been telling for some time, that a recession is not imminent for the U.S. economy. However, Shulman concedes that the period of below average growth will last longer than previously believed before the economy returns to normal. “For a housing market that has already witnessed starts decline by 36% [sic], this is not good news,” Shulman said in the report.

“We previously had thought that housing starts would bottom in the 1.4-1.5 million range; we now think the bottom could be around 1.2-1.3 million units with the risks still on the down side. Moreover, the recent weakness we have experienced in home prices will likely tend to accelerate with the nationwide peak to trough declines ranging from 5-10%.â€? He also discusses widening corporate credit spreads, asking “If corporate investment has been sub par with a very low cost of capital, how much weaker would it be should capital costs rise?â€? The National forecast calls for real GDP to be 2.1 percent, 1.7 percent and 2.5 percent in the first, second and third quarters of 2007 (marking six quarters of below trend growth), then expects the economy to return to trend in the fourth quarter and in 2008, averaging 3.5% growth during that span. The unemployment rate is expected to rise from February’s 4.5 percent to 5.0 percent by the third quarter, then gradually decline. The California Forecast In the California report, UCLA Anderson Forecast Economist Ryan Ratcliff pays particular attention to revised employment figures, noting that in the group’s last report they were concerned with a construction sector that was bleeding jobs at the same time the service sector was losing momentum. New estimates released in March 2007 reveal a much brighter 2006, with job growth up 52,000 and job creation rates up to 1.8 percent from 1.1 percent. The revised numbers also reveal that California has weathered the beginning of the real estate slowdown better than originally believed. However, the positive revisions are nothing more than a postponement of the inevitable. Ratcliff states, “We still expect to see the pattern of deepening real estate (job) losses combined with a slowdown in the rest of the economy – now it’s just the first half of 2007 instead of the second half of 2006.â€? Ratcliff also acknowledges the impact of the subprime meltdown on California. He says that the collapse of the subprime mortgage market has implications ranging from the soundness of international financial institutions, to job creation in the Southern California. He addresses several key questions on this topic, including whether the tightening of lending standards will further depress home sales, and whether or not a wave of foreclosures will bring down home prices as bank sellers generate substantial pressure on prices. Looking back, he writes, “ … the historical record suggests that a spike in defaults does not automatically imply a surge in foreclosure sales.â€? The report recalls two such incidents of high foreclosure rates, one in the 1980s and another in the 1990s. Ratcliff suggests that while it’s too early to tell, today’s combination financial excess in an otherwise relatively healthy economy may more closely resemble the 80s, when many households experienced delinquencies but avoided foreclosure. For more information, visit http://www.uclaforecast.com.

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