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 Business News | April 2005 
Biggest U.S. Housing Market to Slow
 Christine Chin
| | Report warns of rise and fall of red-hot real estate. |
Real estate, the Atlas that carried California to economic well-being in 2004, may no longer be able to support economic recovery, a report warned today, predicting an end to the state's red-hot housing market.
The study, written by the UCLA Anderson Forecast, said the housing sector has been maintaining the California economy, but its current growth path both in building and in prices is "clearly unsustainable." UCLA Anderson issued two reports, one on the U.S., one for California.
Rough times are likely ahead for both the California and U.S. economies, according to the Anderson Forecast. California's real estate market is cooling, the report said, and that could spell the end to California's recovery.
The forecast noted that half of the private-sector jobs created in California in the last two years are connected in some way to real estate.
Property values in the last years shot up a jaw-dropping $1.7 trillion, equivalent to about 35 percent of the total personal income in California since 2001.
Consumer spending based on this phenomenal increase in home equity, the report said, propelled economic growth in California.
Rising interest rates will hurt the residential market this year, according to Christopher Thornberg, the Anderson senior economist who authored the California report.
The best that can be expected for California, Thornberg opined, is a "tepid" economy this year. And that's only if other economic sectors recover enough to offset expected weaknesses in housing. If those other sectors don't come through, California can expect another downturn, Thornberg said.
The Anderson Forecast made headlines when it accurately predicted the 2001 recession.
Not everyone agrees with the latest forecast that California's housing boom has seen its last days.
"I think it's a little too early to say the current upswing in the housing market has ended and if you look at the economic fundamentals at this time we've got an economy that's improving at the state level in terms of job growth," said Robert Kleinhenz, deputy chief economist for the California Association of Realtors.
Rather than a bursting bubble, C.A.R.'s economist foresees only a slight decline in home sales from the previous year.
The association predicts that home sales will fall by two and a half percent in 2005, Kleinhenz said. "If we meet our expectations in terms of home sales for 2005, this will be the second-best year on record."
"The Anderson Group has been talking about a housing price bubble for at least the last two, if not three, years," Kleinhenz said. "It's true that a tremendous amount of wealth is being accumulated specifically in the housing market at this time and it's true that homeowners are tapping into that wealth."
Bubble situations, Kleinhenz said, are speculative in nature, with people buying homes strictly for investment purposes. Based on C.A.R.'s research, he said, people in California are buying homes to live in, not for investment.
Kleinhenz said the increase in long-term interest rates don't worry him because interest rates are still historically low.
California will respond more quickly to hikes in the interest rate than the rest of the nation because affordability in the state is already low, he said.
"The median home nationally cost $189,000 in January. In California, it cost $485,700," Kleinhenz said.
The economy is also improving at the national level in terms of job growth, GDP growth and other measures, Kleinhenz said.
In contrast to Kleinhenz' assessment, "Sailors take warning," was part of the title of the Anderson Forecast report for the U.S. overall. Though this report said there would be no recession in 2005, it is "quite likely to occur by the end of the decade," according to Edward Leamer, author of the report.
Charting the history of 10 economic expansions since World War I, Leamer described the current economic expansion as beginning in the first quarter of 2002.
"The expansion is now 13 quarters old," Leamer said. "That's mature by historical standards. Five of the last nine expansions have terminated at 14 quarters or less." Based on his measurements, Leamer said, the current expansion "is reaching the probable time of death, by historical standards."
The one ray of hope, Leamer opined, is exports, a major factor in the length of the Reagan expansion. "The declining value of the dollar relative to the Euro is sure to stimulate exports in the year ahead." However, the report said rising interest rates are the biggest threat to expansion in the U.S. |
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