Anderson Forecast: U.S. Housing Market Seen Sliding in '06

LOS ANGELES – The U.S. housing market will see a sustained decline next year, causing a drag on the nation's economy but falling short of triggering a recession, according to a new UCLA economic report.

"We expect housing to start slowing the economy this quarter or the next," Edward Leamer, director of the quarterly University of California, Los Angeles, Anderson Forecast, wrote in the report to be released later Wednesday.

The cooldown in the housing sector is likely to be spread over several years, with as many 500,000 construction jobs and 300,000 financial sector jobs lost, the report said.

"Some jobs in manufacturing might well disappear as a result of weakness in housing, but this may be offset by jobs brought home or not lost to foreign competition," Leamer wrote.

The forecast said eight of the last 10 economic recessions were started by housing market slowdowns.

Previous UCLA Anderson Forecasts have suggested a decline in housing construction would begin by mid-2005.

The current report cites several signs that the decline could be underway:

• New construction of housing in October was down 5.6 percent from the previous month, with new construction of single-family housing accounting for a 3.7 percent dip.

• New home sales have declined.

• Applications for home mortgages have trended downward since late September as rates increased.

• In some regions, homes are remaining unsold longer and the pace of housing construction is outpacing population growth, which could spell a decline in demand.

"On all these grounds, we believe housing is due for a sustained decline," economist Michael Bazdarich wrote in the Anderson Forecast. "The remaining questions are how hard the fall will be and when it will begin."

The forecast for California, where housing prices lead the nation and housing-related jobs have been driving economic growth, resembles the national outlook.

Economist Ryan Ratcliff said the state's housing market will see a slowdown in spending along with job losses in construction and related sectors.

He expects California home prices to plateau while sales and new construction see moderate decreases during two years of weak growth.

"If the housing market slows more than we are expecting, a recession is not out of the question," Ratcliff wrote.

Counties showing signs of a cooldown include San Francisco, where housing sales have been off 20 percent since peaking in June, 2004. San Diego County has seen sales slow about 13 percent, while monthly price gains have plummeted to low single digits.

California's job picture has been lackluster in recent months. The rate of employment growth has slowed after a significant number of jobs were added in July and August.

Construction has remained the fastest-growing sector. But Ratcliff predicts a slowdown in construction activity through 2007 and moderate construction job losses.