Copyright© 2007 by School Services of California, Inc.

                                      Volume 20                   For Publication Date: June 22, 2007             No. 14

UCLA Forecasts More Tough Times for California Housing 

Economists with the UCLA Anderson Forecast predicted continuing weakness in California’s housing market, pointing to the high proportion of troubled home loans that will likely default over the next two to three years. The forecast suggests that a normal housing market may not return until mid-2009, when the majority of the higher risk variable rate loans are reset and their payment status is determined. 

On June 19, 2007, several speakers at the UCLA forecast conference highlighted the vulnerability of both the state and national economies to further deterioration in the housing market. Among the states, California is at greatest risk because of the high volume of risky loans that were made over the last several years, especially in Orange County. Several presenters noted that Orange County is ground zero for the subprime market. That is, loans made with little or no down payment, below market interest rates, negative amortization, high balloon payments, and other high risk features. Many of these subprime loans were made after only a cursory evaluation of the borrower’s credit risk. Because a significant number of these loans are predicted to default in the next several years, California’s housing market is expected to get worse before it gets better. 

The UCLA forecast calls for greater job losses in 2008, as weakness in the real estate and construction sectors spills over into the broader job market. Job growth is forecast at less than 1% for the next five quarters and the unemployment rate is expected to reach 5.5%. We note that the most recent report from the State Employment Development Department showed the state’s unemployment rate at 5.2% in May. UCLA forecasts personal income growth, the broadest measure of state economic activity, at 4.7% in 2008. By way of comparison, the Governor’s May Revision forecasts personal income growth at 5.3% for the same period. Thus, the 2007-08 State Budget may face a downside risk if the UCLA forecast proves to be the more accurate of the two. 

The outlook for the national economy is similar to that for California. U.S. real Gross Domestic Product (GDP) growth has stalled at 0.6% for the first quarter of 2007, and for the calendar year it is expected to reach only 1.8%, “roughly on par with the near-recessionary environment of 2002 when real GDP advanced at a 1.6% rate.” Nevertheless, while the UCLA forecast acknowledges that the U.S. economy is vulnerable to a recession, none is predicted. The report points to strength in the global markets—especially Europe, Japan, China, and India—as the primary factor that will avert a national recession. 

In light of this weakness, UCLA expects the Fed to cut interest rates by a total of 75 basis points (or 0.75%) beginning in the fourth quarter of this year. By mid-2008, the forecast anticipates that the housing slump will be over, the trade deficit will improve, and business investment will strengthen, which together will yield a return to +3% GDP growth rates.

—Robert Miyashiro