Housing-Led Recession Looms In California by Broderick Perkins
As goes the housing market in the Golden State, so goes its economy. Those are dire words from a group credited with being the first to call the nation's 2001 recession and California's early-1990s economic slump. Unfortunately, that's the underlying message in a June report aptly named "The California Report: Beware The Froth" by the University of California-Los Angeles Anderson Forecast. While the report puts housing high on a pedestal for helping hold together California's lackluster economy, it also warns housing could be the next recession's helping hand. Just as RealtyTimes.com was among the first to report in "Mortgage, Home Buying Consumers Save Economy" and later in "Housing Is The New Economy," a previous Anderson report says most economic growth in the past year has been fueled by the sky-high real estate market in California. Housing emerged from the last recession virtually unscathed, pulling the rest of the economy with it. Chances are this time it not only will get bruised but it will start the fight for economic recovery. Historically, economic expansions last only 14 quarters or less. The current expansion is already 12 quarters old. A host of experts on either side of the "housing market bubble" debate tend to agree that the economic strength of housing has just about run its course. When the strength will wane and by how much causes much disagreement. There's concern for California's housing sector because prices have skyrocketed too far too fast. The Office of Federal Housing Enterprise Oversight's latest Home Price Index for the first quarter 2005 reveals California's home prices have risen 25 percent in one year, second only to Nevada and 103 percent in the last five years, second to none. "Froth" author UCLA economist Christopher Thornberg says buyers are gambling both their household budgets and the economy on spending habits based on home price appreciation and related equity. A housing slowdown would trigger a slump in consumer spending because home owners rely heavily upon home equity to fund college education, business start ups, cars, home improvements and furnishings, retirement and other purchase typically purchased with income, savings or other investments. With consumers relying heavily upon continued equity gains, even prices flattening could squeeze them and, ultimately, the state's economy. While there has been some strength in the state's entertainment, tourism, manufacturing and still sluggish high-tech industry, there is not likely enough strength in those sectors to offset a housing slowdown. A key indicator of a housing slowdown is home-related consumer spending including new home building, remodeling and brokers' fees, according to Anderson. Right now, the figure is approximately $4,000 per U.S. worker. In the past, it's only risen to about $3,000. The Anderson forecast also sees a 10.7 percent decline in residential construction in 2006. Over the next few years, the weakening housing market will "sap off strength" in other parts of the state's recovering economy. Weakened by the housing drag, the economy could slip into recession by as early as 2006. The Anderson report is particularly troubling, in a sense, because it has been so accurate. If this report follows, California's housing bubble is probably already losing air. The Bank One Economic Outlook Center at Arizona State University's W. P. Carey School of Business recently honored Anderson for the accuracy of its forecasts. Said UCLA Anderson Forecast director Edward Leamer about the honor, "Our role as forecasters is not simply to tell our subscribers and the public in general what they want to hear, but rather to help them be prepared for what might be on the horizon regarding the economy." | 
