October 2007 Quarterly Forecast
> California
CALIFORNIA
By Ryan Ratcliff
The second quarter of 2007 has largely lived up to
our expectations, showing substantial job loss
in real estate-related sectors and sluggish
growth elsewhere. Unemployment and mortgage
defaults continue to rise. While these fairly
dismal results may sound a lot like the
beginning of a recession, overall job growth
remains positive, and personal income growth
remained strong in the first quarter of 2007. In
fact, these are the beginnings of exactly the
economy we have predicted for some time:
sluggish, but no recession. However, the
difference between the two is getting smaller
all the time.
The ongoing increase in mortgage defaults and foreclosures continues to occupy center stage in any discussion of local housing markets, with much of the debate centering on whether these trends are driven by cut-and-run real estate investors, or the consequences of the predatory exploitation of working class families. According to the results of our wide study of national, state, and local data on this topic, investors were a significant portion of the sales boom, and the defaults that have followed it. Nonetheless, the majority of mortgage defaults have occurred in owner-occupied homes. Furthermore, the counties in California with the highest foreclosure rates have been those with a combination of middle of-the-pack home prices, but extremely high usage of adjustable rate mortgages (ARMs) – exactly the combination we’d expect when working families stretch beyond their means to buy a home. But we find little evidence that mortgage defaults have led to wider financial distress for consumers.
The end of 2007 will mark the peak of subprime ARM resets, so we expect to see mortgage defaults peaking sometime in the first half of 2008. With elevated foreclosures, a severe pullback in mortgage lending, and low levels of building activity, we predict that real estate markets will continue to be a drag on California growth through at least the end of 2008. With no other sectors picking up the slack, we expect to see overall growth in non-farm payroll employment of less than 1% through this time next year. This prognosis is worse than previous forecasts in part because of the worse-than-expected job loss in Financial Activities. Unemployment will reach a peak of 5.9% at the end of next year, with corresponding weakness in personal income and gross state product. A pickup in building permits and a moderation in mortgage problems in late 2008 / early 2009 marks the light at the end of the tunnel, with the California economy returning to relatively normal levels of growth by the end of 2009.
Forecast of Growth in CA Non-farm Payroll Employment (SAAR)
Source: CA EDD, UCLA Anderson Forecast
Forecast of CA Building Permits Issued (1000 units, SAAR)
Source:
CIRB, UCLA Anderson Forecast
|
