Your search results

UCLA Anderson Forecast Predicts Real Estate Slowdown in California – No Statewide or National Recession Seen

Posted by admin on May 4, 2012
| 0
The Following Article is from the Summer 2006 Newsletter

For 50 years, the UCLA Anderson Forecast has provided forecasts for the economies ofCalifornia and theUnited States. The UCLA Anderson Forecast forCalifornia is the most widely followed and oft-cited in the state and was unique in predicting both the seriousness of the early-1990s downturn, and the strength of the economy.

The UCLA Anderson Forecast issued in late June 2006 anticipates a slowdown in real estate across theUnited Statesand inCalifornia.   In the latest report, UCLA confronts an essential question: “(Will) housing difficulties be amplified by problems elsewhere in the economy, producing a nasty recession, or will the pathology be mostly contained in the real estate sector (including construction, real estate and financial services)?”

The Forecast suggested that the American economy would experience slower growth through 2006 due to dampening of the housing market.  Housing prices have soared in recent years.   TheUSreal estate market continued to amaze economists through 2005. Even as real prices continue to grow at a historically unprecedented pace, investments in residential properties have remained at their record high. The frenetic pace of overall sales activity is beginning to show signs of a slowing market.

Interest rates are on the rise, market inventory levels are starting to expand and some of the nation’s hottest markets, including those here in theWest Sideare starting to show signs of softening. Is the doom and gloom of the naysayers becoming a self fulfilling prophecy reversing the state’s economic rebound since 1993?  No!  Absent other factors that historically precede recessionary conditions nationally and in the state, no recession is foreseen.  The forecast concludes that the problems will likely be confined to the real estate sector and will not produce a national recession.

The UCLA National forecast does not expect real estate prices to fall significantly, noting that sales volume is what typically drops, and drops more precipitously than prices, as the price cycle lags behind the volume cycle. The number of homes sold will drop as owners decline to sell in a weak housing market. Prices, however, should hold. The real decline in the housing market according to the forecast will come from “residential investment,” which includes construction of new homes, repair and remodeling of new and existing homes. 

Thankfully, the decline in residential investment and the associated decline in construction employment will not be matched by a decline in manufacturing employment, as the latter has not yet recovered from the recession of 2001. Unless there is a further decline in manufacturing employment, the national economy will avoid recession in what they call “a close call.” 

The California forecast takes note of the state’s slowing real estate markets and concludes that the real estate slowdown will lead to a flat housing market and a slower economy.  “We do not predict a recession, nor do we predict a substantial decline in average nominal home prices,” the forecast states. “This forecast is based on two arguments. There is not enough vulnerability in the usual sources of employment loss to create a recession, and the historical record suggests that average home prices do not usually fall without this kind of job loss.”

As in the national forecast, they are acknowledging declines in real estate and associated job losses in real estate-sensitive sectors.  However, absent job losses in manufacturing or other sectors, there will be no recession, they say.  The report does note the possibility of some downside risk to the forecast, however, due to the potential impact of exotic real estate financing and uncertainties about the effects of home prices on consumption.

The Southern California Data Analysis For the past several years, the UCLA  Forecast emphasized that consumer’ spending rates kept the American economy buoyant, fueling the expansion. Their ability to do so was driven in part by the dramatic rise in real estate values.   This is an economic trend that both analysts believe although unique among post-war expansions can no longer continue under similar circumstances. As the housing market cools off, consumer spending will cease to be the economic driver it became.

Despite this warning, The Forecast suggests that a recession is not imminent.   They feel strongly that there are certain precipitating events that must occur before a recession can be forecasted. They indicated these events have not occurred yet.  The conditions are in place for a recession (such as the cooling of the housing market and the related wealth effect), but they are not seeing evidence that it will happen within the current forecast period.

Reflecting the burgeoning crop of “for sale” signs popping up in the region, Southern California home sales in May fell to their lowest level for that month in seven years while prices flattened.  The region’s median home price of $485,000 in May was virtually the same as in March and April and only 6.4% above the level a year earlier, according to DataQuick Information Systems, a La Jolla-based research firm. That was the smallest year-over-year price gain since July 2000, coming during a month that normally is one of the busiest for home sales.  The data portray a region in which the housing slowdown has become more pronounced.  But the UCLA Forecast suggests no reason to panic.  They expect that home prices probably would not fall much from current levels.

“Absent a recession, the price of a home five years from now is not likely to be substantially lower than it is today,”  The UCLA forecast said the cooling housing market was more likely to lead to slower growth for California’s economy, but not a recession.  Nonetheless, the latest DataQuick statistics was the strongest indication yet of how the balance of power in the region’s real estate market has shifted from sellers to buyers in recent months.

One reason for the slowdown: rising supply and shrinking demand. There are plenty of homes on the market as sellers, worried that prices may fall, seek to cash out the gains they’ve made in recent years. But demand has fallen, in part because there are fewer speculators who — as they did during the peak of the boom a couple of years ago — are snapping up houses only to sell them (“flipping”) quickly for a profit.  Hurting demand also is rising mortgage rates that are being fueled by concerns of inflation that we are experiencing from fuel cost shocks, which have made the cost of financing a purchase higher today than a year ago.

Analysts say the caution of buyers is normal but had been forgotten amid the frenzied buying and selling of the six-year boom.  And because the region’s economy is strong, there is no significant panic selling by people losing their jobs, as was the case in the housing downturn of the early 1990s.

This year 50% more homes have come on the market region wide versus the same time a year ago, according to local listing services.  The number of transactions that closed in May fell 11.7% from a year earlier, to 27,278 — the slowest May since 1999. It was the sixth consecutive month that sales volume declined, DataQuick said.

All but one Southern California County saw a drop in sales last month, with San Bernardino County, considered the region’s most affordable market, was the only area to see sales rise from a year earlier, up 2.6%. It also was the biggest gainer in terms of appreciation, as the median price rose 17.2% to $361,000.

But three counties posted new record-high medians in May, including Los Angeles, which rose 10.9% year-over-year to $509,000. Orange County gained 7.6% to $635,000, and Riverside County jumped 9.4% to $417,000.  The median is the price at which half of all homes sold for more, half for less.

To many, a cooling real estate market is preferable to the home-buying frenzy of the last six years that pushed up prices well above inflation. The economists at UCLA have long argued that real estate prices in California and the U.S. are unsustainable, partly because property values have climbed faster than personal incomes.

Additionally, they contend, the vast number of jobs created by the real estate boom will recede as the market slows, leading to unhealthy levels of unemployment.  The slowing housing sector has placed California’s economy “at a tipping point,” the Forecast stated.  Because real estate has been a major driver of economic growth, its retrenchment is bound to have some consequences.  But, he noted, there are few signs that the slowdown is spilling over into the wider economy. The creation of jobs in construction, sales, mortgage financing and other real estate-related fields has slowed. But other sectors, such as leisure and hospitality, trade and professional and business services, have gained steam, offsetting the housing-related job squeeze.

Table: Median price and number of new and previously owned homes sold in May, by county and overall in Southern California

County Number ofhomes sold % Change  From year ago Median Price(thousands) % Change fromYear Ago
Orange 3,113 -31.6% $635 +7.6%
Ventura 1,078 -24.3 586 +3.0
San Diego 4,217 -18.0 490 +0.4
Riverside 5,468 -8.6 417 +9.4
Los Angeles 9,654 -4.7 509 +10.9
San Bernardino 3,756 +2.6 361 +17.2
SouthernCalifornia 27,286 -11.7 485 +6.4

Source: DataQuick Information Systems

Joseph Levy, is the Owner of Affiliated Capital Resources, a mortgage banking firm in Santa Monica, CA.  Mr. Levy received his MBA Degree in Real Estate Investment Finance from University of Connecticut.

 The opinions expressed here are strictly those of AFFILIATED CAPITAL RESOURCES and are subject to change without notice. AFFILIATED CAPITAL RESOURCES is a mortgage banking firm which advises accounting and business management firms pertaining to residential and commercial real estate financing services for their clients. DRE License No. 01125517

Click Here to download the entire Summer 2006 Newsletter

Compare Listings