by Calculated Risk on 9/28/2005 02:45:00 AM

Economists at the UCLA Anderson Forecast will present their quarterly outlook today in Los Angeles. The LA Times previews the report: "Peak for Housing Said to Be Near"

California's housing boom appears to be peaking, and the resultant slowdown is expected to produce "weak growth" in the state's economy during the next two years and a possible recession by the end of 2007.

That's the view of economists at the UCLA Anderson Forecast... "There are some signs that the housing party is ending," said Christopher Thornberg, senior economist at the UCLA group and author of its California forecast.

UCLA forecasts that prices may just stablize, not fall:

Thornberg said that a peaking housing market doesn't necessarily mean prices will plunge. Prices could continue to rise, but at a much slower rate. That's already started to happen in previously hot markets such as San Diego and the Bay Area, he said.

The latest UCLA outlook is slightly more downbeat than its previous report in June "because I think we're at the peak" of housing, Thornberg said. UCLA economists have long warned that a decline was coming and could end badly, but this is their strongest suggestion yet that the top may finally be at hand.

And UCLA projects that the slowing housing market will impact consumer spending, especially in California:

Because the state's job growth and consumer spending have been supported by rising home prices, any flattening of real estate values would cut into overall hiring and prompt consumers to rein in their pocketbooks, the UCLA forecast said. Job creation in other sectors is not strong enough to fully offset declines in housing-related fields such as construction, the state's fastest-growing job sector, the report said.

"When consumers realize they can no longer expect that appreciation bonus to subsidize their consumption habits, they will very likely pull back on spending," Thornberg said.

How soon?

Typically, it takes 12 to 18 months before a slowdown in housing dampens the overall economy, UCLA's Thornberg said. The UCLA forecast calls for the state's job growth — the best indicator of expansion — to slow from 1.6% this year to 1.2% in 2006 and 0.8% in 2007.

I think the economy will slow significantly about 8 to 10 months after the housing peak - sooner than Dr. Thornberg is projecting. I base this prediction on previous housing slow downs. If New Home Sales peaked in July, then I would expect the economy to slow in early '06. However one month does not make a trend, and it is possible but unlikely that housing will rebound.