California housing market at ‘tipping point’: UCLA

By Jim Christie

SAN FRANCISCO (Reuters) – California’s housing market is
overvalued by up to 45 percent and at a “tipping point” that
will end its red-hot growth cycle, the UCLA Anderson Forecast
projected on Wednesday.

California’s housing market, one of the strongest and most
closely watched in the United States and the engine of the
state’s economic recovery, is heading toward a “soft landing”
that will slow the state’s economy, UCLA Anderson Forecast
senior economist Christopher Thornberg wrote in a report.

The forecasting group said in June that California was
facing a housing bubble and predicted it would deflate slowly
rather than pop as many analysts have projected.

As the state’s housing market cools, many of the building
and finance jobs it created will start to disappear and
consumers emboldened by rising home values will pull back on
spending, Thornberg wrote in his latest forecast report.

“Our economy is being driven forward primarily by the
housing sector, with construction and finance contributing to
the recovery in a way not seen before,” Thornberg wrote, adding
that there are “signs that the housing party is ending.”

“This is not good news for the state, since other
externally oriented sectors that might be able to pick up some
of the economic slack in the event of a cooling down of the
housing markets have yet to show any signs of solid job growth
either, even with solid profits,” Thornberg wrote.

He forecast California’s jobless rate would rise to 5.8
percent next year, followed by a rise to 6.4 percent in 2007,
from 5.5 percent this year.

“It’s a soft landing scenario,” said Thornberg, who based
his estimates on trends in the state’s housing market.

That market, torrid in recent years in terms of both sales
and prices, is poising the state for weak overall growth in
2006 and 2007, according to Thornberg.

“When you think about where jobs and income are heading –
think real estate,” Thornberg wrote, noting that California’s
housing market is “clearly starting to lose steam.”

Soaring home prices are forcing new home buyers to take on
risky variable-rate, interest-only loans, representing a market
“starting to reach a breaking point,” Thornberg wrote.

Additionally, the market appears to be at a “crossroads” in
terms of sales and inventories. Sales in some regions are
falling while inventories in some regions are building.

“It certainly looks as if we’ve peaked,” Thornberg told
Reuters, noting he expects job growth in home building in
California to underscore his view.

Construction payrolls in the state will expand by 1.3
percent next year and shrink by 1.0 percent in 2007 after
growing by 6.3 percent this year, Thornberg predicted.

Overall nonfarm payroll growth in California will slow to a
rate of 1.2 percent next year and to 0.8 percent in 2007 from
an estimated 1.6 percent this year, according to Thornberg.