The U.S. economy is growing and employment should soon pick up steam, but housing will continue to lag behind other sectors, economists at the UCLA Anderson Forecast said in their latest report.

"Housing continues to wallow in its modern-day depression as low interest rates are being more than canceled by the glut of new product created during the bubble years of 2004-2007, the tidal wave of foreclosures, and increased credit standards being imposed by lenders," said UCLA Anderson Forecast Senior Economist David Shulman in his forecast.

Although housing prices are down 30 percent, that would-be incentive to buyers has been offset by increased down-payment requirements, Shulman said.

Fears of "a further ratcheting down in prices, along with the shock of witnessing an unprecedented collapse in price structure, has kept buyers out of the market. Put simply, the investment value of homeownership has declined. Furthermore, the usual factors associated with housing weakness … tepid job growth and high unemployment, are suppressing demand."

The U.S. economy is growing and employment should soon pick up steam, but housing will continue to lag behind other sectors, economists at the UCLA Anderson Forecast said in their latest report.

"Housing continues to wallow in its modern-day depression as low interest rates are being more than canceled by the glut of new product created during the bubble years of 2004-2007, the tidal wave of foreclosures, and increased credit standards being imposed by lenders," said UCLA Anderson Forecast Senior Economist David Shulman in his forecast.

Although housing prices are down 30 percent, that would-be incentive to buyers has been offset by increased down-payment requirements, Shulman said.

Fears of "a further ratcheting down in prices, along with the shock of witnessing an unprecedented collapse in price structure, has kept buyers out of the market. Put simply, the investment value of homeownership has declined. Furthermore, the usual factors associated with housing weakness … tepid job growth and high unemployment, are suppressing demand."

The Anderson Forecast calls for only a "modest" recovery in housing starts, which are expected to grow 12 percent this year, to 658,000. Housing starts peaked at 2.1 million in 2005, and bottomed at 554,000 in 2009.

Once the employment situation improves, housing starts should break the 1 million mark in 2012 and approach 1.5 million in 2013, with pent-up demand offsetting an expected rise in mortgage rates, the forecast said.

But a glut of housing in fringe areas will continue to keep a lid on construction of single-family homes in the "exurbs," Shulman predicted.

All in all, Shulman said, "The U.S. economy is getting better. Slowly, in fits and starts, real (gross domestic product) is growing and employment is increasing."

The UCLA Anderson Forecast predicts real growth in GDP of 3.8 percent the first three months of this year, and 3 percent through 2013.

That growth should drive payroll employment to increase to a pace of 1.9 million in 2011, 2.6 million in 2012 and 3 million in 2013, Shulman said. But because so many jobs were lost during the recession, employment still won’t have bounced back to the peak level reached in first-quarter 2008.

The forecast predicts unemployment will rise modestly in the second quarter before beginning to decline, and will not fall below 8 percent until the end of 2013.

State and local governments, struggling under the weight of pension and health benefits, will continue to lay off or furlough employees and seek pay cuts, Shulman said.

In his forecast for California, UCLA Anderson Forecast Senior Economist Jerry Nickelsburg said the "sideways" movement in the state’s labor markets raises the question of whether California’s "legendary" problems with government, business climate and taxation are at a tipping point where the state will be left behind in the recovery.

Texas and California, he noted, used to have very similar unemployment rates. At the end of 2010, however, California’s unemployment rate was 12.5 percent — 4.2 percentage points higher than the 8.3 percent unemployment rate in Texas.

Nickelsburg expects California’s growth will "run slightly hotter" than the U.S. overall, thanks to increased international trade and business investment in equipment and software.

But he expects unemployment will remain elevated at around 10.5 percent next year, not falling into single digits until early 2013.

To get back to pre-recession unemployment levels, California not only has to regenerate the 1.3 million jobs lost during the recession, but generate additional jobs to accommodate the growing workforce.

The implosion of the housing market left California with at least 350,000 job seekers who won’t be able to find work in the fields they’d been employed in, Nickelsburg wrote.

California may be losing jobs to Texas, he theorized, although the state continues to attract more venture capital.

Shulman said there’s a "whiff of inflation" in the air, driven by rising oil and commodity prices. Perhaps more significantly, he said, apartment rents are also on the rise, as would-be homeowners remain renters. Large real estate investment trusts (REITs) are reporting rent increases of 2 percent to 3 percent — higher than the 1 percent reported in the official consumer price index, he noted.

The consumer price index tends to lag REIT data by about six months, but the numbers suggest that the core consumer price index will hit the Fed’s "informal" 2 percent target in the middle of next year, and exceed it in 2013. Before that happens, Shulman expects the Fed to start unwinding its latest $600 billion quantitative easing program and, in early 2012, start hiking short-term interest rates.

Long-term rates could rise before then — possibly as soon as the second quarter of this year — in anticipation of the Fed’s new tack. Shulman said he thinks 10-year U.S. Treasurys could rise to 4 percent by this summer, on their way to 5 percent by the end of 2013.

"Of course, interest rates move far more violently than what are estimated from econometric models, so we won’t be surprised to see a more dramatic move sooner," Shulman warned, noting that yields on 10-year Treasurys jumped from 2.5 percent to 3.5 percent from November to December.

"The economy is being propelled higher by strong increases in corporate spending on equipment and software. The fuel for this spending is coming from extraordinarily low interest rates, a rapidly recovering stock market and investment incentives coming out of Washington, D.C.," he said.

Investment is also being spurred by "technological innovation in wireless and cloud computing, along with new natural gas drilling technologies that are reshaping the nation’s energy map."

A weaker dollar makes American exports more competitive, and the newly emerging economies of Asia are importing American made airliners, machinery, medical devices and farm products, Shulman noted in predicting that exports are on track to grow at 8.5 percent to 9 percent over next three years.

Unlike housing, the auto industry is already on the mend. Auto sales had plummeted 38 percent from 2005-09, bottoming at 10.4 million units. Last year, auto sales rebounded to 11.5 million, and appear to be headed to near 16 million by late 2013.

Part of what’s driving the "remarkable recovery" for Detroit is the simple fact that cars wear out, Shulman said. Automakers have to crank out 13 million cars a year just to meet replacement demand. Meeting pent-up demand for autos "has become a decisive factor" in the industry’s recovery.

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