for you, Mara:
The California economy, which has shown signs of solid growth in the past year, will see much slower growth in 2006 and could even go into recession if the red-hot real estate market cools down, according to the latest economic forecast by the Anderson School at the University of California-Los Angeles.
Economists there, in a quarterly forecast released today, said most growth in the past year has been fueled by the sky-high real estate market in California and in the rest of the United States.
``We''ve got an economy driven by froth -- that''s going to cause big problems,'''' Christopher Thornberg, a senior economist of the UCLA Anderson Forecast, said in an interview.
Thornberg, who wrote a report in the forecast called ``The California Report: Beware the Froth,'''' has turned more bearish about the real estate market in recent months. ``We have an economy that is acting like we are in the midst of a big boom when we are not,'''' he said.
There has been recent debate over whether California and the Bay Area are in a housing bubble. Prices, however, keep surging unabated. Last month, the median resale home price in Santa Clara County jumped to $690,000, up nearly 17 percent from a year ago. Since 1997, real estate prices in California have soared 80.7 percent.
Thornberg said Federal Reserve Chairman Alan Greenspan missed the boat by not calling the current housing market a bubble, much as he did not identify the Internet bubble of 2000, which Greenspan referred to as ``irrational exuberance.'''' In his report, Thornberg mocked Greenspan''s obtuse language and his recent use of ``froth'''' to describe some regional real estate markets.
``It still remains unclear to this author what definition of `froth'' was intended to be used in this Greenspan speech, but an educated guess would be that it refers to many small bubbles,'''' Thornberg wrote in his report.
Will bubble pop?
Thornberg said a bubble does not need to pop at the end to cause problems.
``A bubble is when an asset price becomes disassociated completely from the fundamental,'''' he said. ``Rental prices remain weak. Mortgage rates are flat. Income growth is mediocre. There is no reason that a house should be worth 40 percent more today than it was two years ago.''''
In their reports, the UCLA economists note that California has seen the largest increase in real estate prices of any state across the nation, exceeded only by Washington, D.C.
Today''s is not the first of their reports to signal trouble ahead. They warned in September that the country could end up in recession by late 2005, a date pushed back by at least a few months in their latest forecast.
Thornberg cited two differences between the current run-up and previous housing run-ups -- a change in tax laws on capital gains and the sharp drop in mortgage rates. But even allowing for those, home prices have still ``clearly moved away beyond any rational level,'''' he said.
This real estate run-up, Thornberg said, has kept the California economy moving forward. The average Californian has seen his or her home appreciate by about $40,000 over the past two years.
``People feel flush and they are spending accordingly,'''' Thornberg said. ``Unfortunately that $40,000 check your average Californian has received is mostly illusion, and not real.''''
One way the real estate boom has helped the economy is by adding jobs. In the period from 2003 to 2005, when California added 159,000 new jobs, the biggest drivers of those jobs were construction, finance, insurance and retail trade. These jobs are mostly real estate-related, from the building of new homes, renovating old homes to the financing and refinancing of home mortgages. Construction jobs grew 37 percent from 2003 to 2005, and finance and insurance jobs grew 36 percent in the same period.
If prices for existing homes flatten, or even decline, current homeowners are likely to stop looking to upgrade to pricier new homes, a trend that has fueled a construction boom. The construction industry and the mortgage industry will both feel the pinch and the job growth in California will be hurt as a result, Thornberg said.
Key indicator
While most economists are loath to predict exactly when a pop might occur in the real estate bubble -- and some don''t agree that there is a bubble -- they do agree that a drop in U.S. home spending is a key indicator that can predict an economic recession.
Edward Leamer, director of the UCLA Anderson Forecast, said only two recessions have arrived without an early warning from the housing market, and one of those was the 2001 recession after Silicon Valley''s dot-com boom. On two other occasions, once in 1951 and again in 1967, economies that faltered following sharp drops in home spending were revived by wartime spending.
``It seems highly unlikely that the U.S. will be able to avoid an 11th recession in which housing plays a major role,'''' Leamer wrote in his report. ``We just don''t know when it will occur.''''
He thinks it''s at least a year away, however. Leamer said recent economic data has convinced him that there is virtually a zero chance that a recession still start before April 2006. Two consecutive quarters of declines in the gross national product is the definition of a recession for many economists.
According to Thornberg, in both California and the rest of the United States, the economy has been driven by the unbridled consumption of Americans who spend virtually all their disposable income on goods and services, not saving a dime.
``This process will have a detrimental impact on the economy even if (real estate) prices don''t fall,'''' he wrote. ``The wealth creation that has fueled consumer spending will go away. All those people who were banking on continued appreciation of their house to finance their children''s college education will suddenly find they need to go back to the old fashioned way of saving for the future -- spending less.''''
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Mara
our home is 2350 sq ft single story.i did look at a brand new 4400 sq ft custom home about 9 yrs ago,cheap at that time,no buyers.the asking price was 520k (it started at 590k) fully loaded with drapes,front & backyard landscaping,etc. a bigger house not only comes with a bigger mortgage,more property tax,insurance,utility.
My fiance and I were looking at condos for fun in the West Los Angeles area. Anything AROUND the $1 million dollar range is CRAP! (And that was far more than anyone should spend on a two bedroom condo.)
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