Red-hot housing may cool economy

Article published Sep 28, 2005

Mediocrity is the best Californians can hope for on the economic horizon, according to today's third-quarter report from the UCLA Anderson Forecast.

The worst scenario -- a real estate-led recession -- could bring about weak growth for the next two years. And it all revolves around the red-hot housing market and its cousins -- construction and finance -- the dominant force in the state's economy for many years running, Anderson Forecast senior economist Christopher Thornberg said.

The recovery mode the state finds itself in has not been seen before, according to Thornberg, author of the Anderson Forecast's California Report.

"It's being driven by consumer spending that is itself being driven ever higher by the fabulous sense of wealth homeowners are feeling," according to the report.

"In the meantime, sectors core to California's long-run economic health -- information, manufacturing, professional services -- continue to languish," Thornberg wrote.

Jobs, especially in manufacturing, are at risk, and growth in what Thornberg called "real workplace earnings" is expected to slow down more that it has already.

In a telephone interview from his Los Angeles office, Thornberg said that when homeowners realize their sense of wealth -- "completely unjustified based on fundamentals" -- diminishes, it will come fast, and that will cause problems.

"People need to be saving, and they are not saving," he said.

"The primary drivers of job growth are in retail, construction and finance. When those three drivers go away, it's going to be ugly. You have a lot of people getting over their head thinking that appreciation will bail them out, but that wealth is going to go away," he said.

Thornberg expects a big decline in housing-market activity, primarily in resale homes.
"When this real estate boom does come to an end, as it inevitably must, the economy is going to feel the impact directly and indirectly in almost every sector of the economy. In many ways, the forecast for California is dominated by one question: When is the party going to end?" the report asked.

University of the Pacific economist Sean Snaith, director of the Business Forecasting Center at the Eberhardt School of Business, believes 2005 will be looked upon as the peak of the housing market in terms of new-home starts and appreciation in value.

Earlier this month, he predicted in his U.S. economic forecast that the "housing market soufflé" should peak this year and begin to cool off during the next three years.

"Our region is one of the stronger performers in California, and Stockton in particular stands out, being driven by population growth," said Snaith, who issues a quarterly business outlook focusing on San Joaquin County.

Right now, according to the Anderson Forecast, the housing market is at a crossroads. Keeping an eye on sales and inventory is the key. In the past six months, housing inventories have doubled while overall market activity has been flat statewide, despite a high pace.

Some of the most expensive markets in the country, such as San Diego and the Bay Area, are still seeing appreciation in home prices but total sales falling off.

The quarterly Anderson Forecast also looked at the national economy, predicting a "soft landing" for the housing sector when the bubble bursts.

UCLA senior economist Michael Bazdarich, writing on U.S. conditions, said the bottom line for the nation calls for an improvement in our trade deficit due to slower consumer spending, followed next year by a decline in housing activity. He expects economic growth over the next two years to be in the mid-2 percent range.

The report touched briefly on the effects of Hurricane Katrina, which should amount to little economic impact in California or the nation in the long run.

"Katrina will work to slow U.S. growth in late 2005 and boost it in 2006 and 2007," the report said.

A lot will depend on how long gasoline prices remain high. At $3 a gallon, the price has finally hit the inflation-adjusted price of the early '80s.

"As long as Americans have the time to adjust to the new realities, we don't expect much secondary effects. After all, remember that Europe and Japan have been paying much higher prices than Americans for years," the authors said.

Builders say state and local government to blame for housing crunch

Thursday, September 1, 2005
Last modified Wednesday, August 31, 2005 8:18 PM PDT

By: GIG CONAUGHTON - Staff Writer

SAN DIEGO ---- Demanding more land to build on and fewer regulatory fees, building officials Wednesday accused state and local governments of creating a housing crisis in California that is making first-time home buyers an "endangered species."

Standing in front of a sign showing the black silhouette of a family holding hands emblazoned with the words "Missing: First-time home buyers," leaders of the Building Industry Association said builders want to build homes that people can afford ---- but government has made it impossible.

Wednesday's event, held in front of the Boardwalk Housing Community in San Diego, was the kickoff of a statewide campaign by the building association, a statewide trade organization.

The association hopes to collect signatures from people up and down the state to force Gov. Arnold Schwarzenegger and the Legislature to fix the housing market that has seen prices double and even triple in recent years.

The median price of a single-family home in North County was $624,000 in July, according to the most recent figures from the North County Association of Realtors.

Tim Coyle of the California Building Industry Association and Scott Sandstrom of the San Diego County chapter of the association said Wednesday that the skyrocketing prices were the government's fault.

They said state and local governments have made it too hard for builders ---- by charging them tens of thousands of dollars in fees, taking decades to approve projects, not making enough land available to build on, and allowing "frivolous" lawsuits that cause more years of delays.

"As builders, we want to help first-time home buyers," Sandstrom said. "We must break down governmental barriers to do that. They're blocking the opportunity of home buyers to own a home."

Coyle said the association was endorsing several state bills that would reform current development laws by requiring courts to review building fees if they're challenged and to streamline environmental laws for city housing projects.

Mitch Mitchell, meanwhile, of the San Diego Chamber of Commerce, said that unless the state and region find ways to produce more homes that people can afford to buy, it could wreck San Diego County's economy.

Mitchell said the high prices will force businesses to relocate because their employees won't be able to find homes.

"We have a vibrant economy here in San Diego, with low unemployment and a growing technology center," Mitchell said. "But our economy will be dead ---- it is in jeopardy (now) because an important piece of our economy is employees. And an employer's ability to retain and recruit quality employees is vital to our survival."

Government officials reached after Wednesday's news conference said builders had legitimate points about governments throwing obstacles in the way of development.

But they also said they thought it was wrong to blame the entire housing crunch on government.

"I would say that's an oversimplification," said Ivan Holler, the county of San Diego's deputy director of planning and land use. "There are a number of things you can point to. When you start talking about the high housing costs in Southern California, hey, a lot of people want to live here."