It wasn’t supposed to happen.
"Housing prices weren’t supposed to decline absent a significant decline in employment, but they have: big time," according to a quarterly economic forecast released today.
"Put bluntly, housing consumers and financiers are in a state of shock," states the latest University of California, Los Angeles, Anderson Forecast report. "Consumers no longer believe that home ownership is a path to wealth, and lenders are busy raising standards to avoid repeating the debacle of this decade."
Anderson Forecast senior economist David Shulman, in a report section titled, "Stalled," also states that the economy is operating at "stall speed" in which "any modest shock can trigger a full-blown recession."
The federal takeover of secondary mortgage market giants Fannie Mae and Freddie Mac "only reinforces our view that a major overhaul of the regulatory structure is imminent," Shulman writes. "The entire financial system, as a practical matter, has already become a ward of the Federal Reserve and the U.S. Treasury.
"The Wild West regulatory environment with respect to housing finance is being replaced by a stringent system of direct federal control and oversight."
Housing starts may bottom out in the fourth quarter in the 800,000-850,000-unit range, though it is "likely that prices won’t bottom until well into next year or possibly 2010," according to Shulman.
Housing starts won’t likely reach a more normal 1.6 million to 1.7 million units per year "until well into the next decade."
The housing troubles have spilled into the auto sector, he said, with new-car sales hitting 15-year lows and "a very real risk that the Big 3 automobile manufacturers could all be facing bankruptcy next year" — the federal government is expected to come to the aid of this industry too, in the form of $25 billion to $50 billion worth of loan guarantees.
The economy is headed for a period of "well-below-trend growth" for several quarters and below-trend growth "thereafter," he concludes.
Edward Leamer, forecast director, wrote a separate report section titled, "What’s a Recession, Anyway?" that includes an exhaustive analysis of historical and modern financial economic data and concludes that the nation is in the midst of "misery, but no recession."
"The low rates of interest, the innovations in the financial markets and the tax cuts have turned us into a consumption-loving debt-ridden foreign-depending society," Leamer states. "The structural adjustment that lies ahead seems certain to come with unbalanced sluggish growth and weak labor markets for a considerable period of time."
In California, "the continuing plunge in housing prices and skyrocketing foreclosures," as well as sluggish imports to major ports and mortgage finance-related problems, "are taking their toll," with the service sectors powering the state’s employment growth, according to a forecast report article by economist Jerry Nickelsburg.
Price declines and foreclosures are accelerating, he reports, and the new and remodeled home market has yet to hit bottom.
"Suffice it to say, the housing market has yet to hit a level commensurate with long-run home-value appreciation, an event we think will occur before year end. When that happens, home prices and mortgage interest rates will once again stimulate the demand for housing, though not nearly to the extent we have seen in 2003-05."
Jobs losses in the financial sector have exceeded forecast projections, the article notes, and the overall unemployment rate tied the 2001 recession rate in the state at 7.3 percent — in August it slid further to 7.7 percent.
Nickelsburg noted that the Anderson Forecast for the previous quarter concluded that home prices in California would have to fall another 8 percent to 12 percent before they reached more normal levels, and "we got halfway there in the last quarter." He also noted that prices tend to overshoot when they are declining from "unsustainable high levels" as prospective buyers wait too long in trying to time the bottom.
"If the housing market continues to decline due to a lack of funding for new mortgages, then weakness in housing extends into the period of weakness in consumer durables and state and local government."
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