Turbulence.
That is the one-word title for the latest U.S. economic forecast by David Shulman of the Anderson Forecast at the University of California, Los Angeles.
“This is not a recession, but it is certainly close,” Shulman writes in the forecast, released today. “If our forecast is close to the mark, the period from the second quarter of 2006 to the first quarter of 2008 will mark a historically anomalous long period of below-trend growth.”
Shulman’s previous quarterly forecast report, released in April, was titled, “A Long Runway for the Soft Landing.”
His latest forecast anticipates a 10 percent peak-to-trough price decline in U.S. housing prices “that will likely extend into 2009.”
In an interview this week with Inman News, Shulman said the current real estate downturn is “completely different from anything we’ve previously experienced,” adding that the only comparable period may be the Great Depression.
“We’ve never had the run-up in house prices we saw between 2000 and 2005,” and the housing-market slump is likely to be similarly unprecedented, he said.
A rise in foreclosures and the withering of the subprime lending market are still “in the early innings,” he said, and foreclosure outlook is expected to get worse “well into 2008.”
There may be statistical errors with U.S. gross domestic product numbers, the report notes, and recent real GDP growth may have been understated.
While some economists expected the Federal Reserve to cut the federal funds rate to prop up the ailing housing market, worries about inflation risks have perhaps taken precedent, Shulman noted in his report.
“We do not expect much help from monetary policy until the fourth quarter,” Shulman stated in his report, and this “delay will push back the housing recovery until well until 2008.”
His forecast calls for the Federal Reserve to cut the federal funds rate from a current level of 5.25 percent to 4.5 percent, with the reductions beginning in fourth-quarter 2007.
The rate of housing starts is expected to average 1.35 million units in 2007 and 1.43 million in 2008, according to the report.
Weakness in the housing market “is finally spilling over into consumption spending,” the report states, and the U.S. economy has transitioned from “locomotive” to “caboose” among global economies.
“Today, Europe and Japan are strong and the U.S. is lagging. With the Euro-area expected to grow at 2.6 percent, the United Kingdom at 2.7 percent and Japan at 2.4 percent, our estimate of 1.8 percent (for the United States) is the laggard.
“Furthermore, China continues to grow at a blistering double-digit pace and India is not too far behind,” the report states, and the global economy “is powering the stock market to new highs.”
U.S. export growth, growth in business investment and especially commercial structures, and continued spending by wealthy consumers “will keep the U.S. out of recession in 2007,” Shulman expects. The housing decline should be behind us by mid-2008, he states.
In a separate report focused on California, economist Ryan Ratcliff stated, “So far, 2007 has been a bit of a puzzle in the California economy. Falling sales, weak prices and rising foreclosures have continued to rule the local housing markets, and both national and state measures of construction activity suggest that real estate has been a drag on economic growth for close to a year now.
“But in spite of all this bad news from real estate, the wider California economy is mostly unfazed: job growth has slowed only slightly and we’ve seen only a minor uptick in unemployment.”
About 27 percent of all job creation in the state from 2003-05 was from the construction sector, compared with about 11 percent from 1990-2005, the report states.
While previous forecasts anticipated “significant job loss” for the construction sector, Ratcliff notes in his report that construction has remained flat since early 2006, while the real estate finance sector “has lost enough jobs in 2006 to bring growth in financial activities to a halt.”
Mortgage-related industries have seen significant job losses in the past 12 months, the report states.
Strength of the commercial building industry may have served to buoy construction employment during this residential decline, the report suggests.
Shulman also said that there may be an issue with immigrant workers in the construction industry “getting paid off the books.”
Ratcliff’s report expects a combination of job losses in construction and real estate finance to hit home during the rest of this year and in early 2008, pulling down overall payroll job growth in the state to less than 1 percent for the next five quarters. The report also expects a rise in unemployment to 5.5 percent.
Ratcliff states that there are some mixed signals for real estate in California, such as a decline in median sales price of about 10 percent in some counties over the past year, “but some counties have actually seen appreciation accelerate in the last six months, and median sales prices for larger geographies are universally higher.”
The median sales price in the state hit an all-time high of $484,000 in April, he noted, while a home-price gauge by a government agency fell for two consecutive quarters.
Homes that have moved all the way through a foreclosure process “are rapidly approaching highs not seen since the 1990s, and several counties have surpassed their previous highs.” But despite surging foreclosure sales, “resale prices have been largely unfazed,” the report states.
Ratcliff expects that, based on the lengthy pipeline of mortgage resets, the state’s housing market may not return to normal until mid-2009. And that return to normalcy could come as soon as mid-2008, based on historical building-cycle data, he states.
“Unfortunately, both of these perspectives argue that things in the housing market will get worse before they get better. While we don’t see any calamitous implosion of home prices in the near future, this patter of flat to slight falling prices and weak sales volumes will be the norm for some time to come.”
