California weathering real estate slow down

In its recent first quarterly report of 2007, the UCLA Anderson Forecast remained steadfast in its belief that the national economy does not face recession and that California has weathered the real estate slowdown better than originally believed.

The "double-whammy" of slowdowns in construction and mortgage finance create a "drag on the rest of the state's economy" that may prolong the adjustment period, but the "essential logic of the no recession forecast remains," UCLA Anderson Forecast Economist Ryan Ratcliff said.

"While there's some wiggle room on how weak real estate will be and how much other sectors will offset this weakness," he said, "there is still no other sector that looks poised to combine with real estate to generate enough job loss to cause a recession."

While the collapse of the subprime mortgage market has implications ranging from the soundness of international financial institutions to job creation in Southern California, Ratcliff was optimistic that "a spike in defaults does not automatically imply a surge in foreclosure sales."

The report recalls two such incidents of high foreclosure rates, one in the 1980s and another in the 1990s.

Ratcliff suggests that while it's too early to tell, today's combination financial excess in an otherwise relatively healthy economy may more closely resemble the 80s, when many households experienced delinquencies but avoided foreclosure.

Other recent reports show a spike in foreclosure activity in the San Fernando Valley with 23 homes in five Valley neighborhoods lost to foreclosure and another 289 properties in some stage of the process as of April.

That represented a 131 percent increase, which sounds dramatic, but actually is relatively moderate because it comes after years of virtually no foreclosure activity.

The number of foreclosures would have to at least triple to have a serious impact on prices.

In 1996, when the national and state economies were in recession and were going through a major reconstruction, a record 79,538 default notices were issued.

This year the number of notices, which are the first step in the foreclosure process, are unlikely to come to even half that number.

The Anderson forecast asserts that the slowed national economy may well endure longer than previously expected, but that better-than-expected consumption, a "less-negative" trade sector and at least two and possibly three interest rate cuts will keep Gross Domestic Product positive throughout 2007.

In his national report, UCLA Anderson Forecast Senior Economist David Shulman remains consistent with the story the forecast has been telling for some time, that a recession is not imminent for the U.S. economy.

However, Shulman concedes that the period of below average growth will last longer than previously believed before the economy returns to normal.

Shulman's report, which was titled, "A Long Runway for the Soft Landing," calls for real GDP to be 2.1 percent, 1.7 percent and 2.5 percent in the first, second and third quarters of 2007 - marking six quarters of below trend growth. Then he expects the economy to return to trend in the fourth quarter and in 2008, averaging 3.5 percent growth during that span.

The unemployment rate is expected to rise from February's 4.5 percent to 5.0 percent by the third quarter, then gradually decline. The California forecast calls for job growth in the State to slow below 1.0 percent through the middle of 2008 while real taxable sales slow to the low 2.0 percent through this period.

"If the professional/ business services sector can sustain its momentum longer in 2007," Ratcliff writes, "we might see a more mild slowdown; but if the carnage in the subprime markets turns out worse than we expect, job losses in Southern California could make things a bit worse.

"But the essential logic of the no recession forecast remains."

By Winnie Davis, President, and David Walker