Executive Summary of the UCLA Anderson Forecast’s June 2007 California Forecast
By Ryan Ratcliff
So far, 2007 has been a bit of a puzzle. Falling sales,
weak prices, and rising foreclosures have continued to be the rule in local
housing markets, and both national and state measures of construction activity
suggest that real estate has been a drag on economic growth for close to a year
now. But in spite of all this bad news from real estate, the wider California economy is mostly unfazed: job growth has slowed only slightly, and we’ve seen
only a minor uptick in unemployment.
Was the landing from our high-flying real estate markets so
soft that we didn’t notice touching down, or is the better metaphor that real
estate job losses are like that elusive Godot: always anticipated but never
arriving? Our analysis of 44 years of construction data suggests annual
average construction employment usually drops 2-3 years after annual permits
hit their peak. Given that annual permits peaked in 2004 and that the first
four months of employment data are already below the 2006 average, this
historical data suggests that this building cycle and its effects on the wider
economy may take longer to work through than we originally thought.
The pipeline of mortgage resets suggests it may be mid-2009
before California sees a normal housing market again. The historical data on
building cycles paints a slightly more optimistic picture, suggesting that
building activity may get back to normal by mid-2008 if history is any guide.
Unfortunately, both of these perspectives argue that things in the housing
market will get worse before they get better. While we don’t see any calamitous
implosion of home prices in the near future, this pattern of flat to slight
falling prices and weak sales volumes will be the norm for some time to come.
This also means that the rest of 2007 and beginning of 2008
will be the period when real estate weakness finally spills over into the job
market. We predict that the combination of job losses in Construction and Real
Estate Finance will pull down overall payroll job growth in California to less
than 1% for the next 5 quarters, with unemployment rising to 5.5% and broad
measures of real output (GSP, Personal Income) growing at a less-than-average
rate of below 3%. Mid-2008 starts to look a little better, with normal levels
of growth returning in most indicators by the end of the year.
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