Report: Recession Unlikely But More Pain in Housing

Tuesday, May 1, 2007 | Despite “storm clouds” of near-record foreclosure and default rates, weakness in the real estate market won’t be enough to trigger a recession locally, at the state level or nationwide, a team of California economists say.

Real estate encompasses a vast majority of the economic concerns for San Diego County identified in a new report from the University of California, Los Angeles Anderson Forecast, a widely respected panel of thinkers on state and national economics. The report is to be released to paying subscribers of the Anderson Forecast on Tuesday, and discussed in a breakfast seminar at downtown’s Manchester Hyatt hotel.

The fact that foreclosures are spiking even though home prices haven’t plummeted and the economy has remained relatively strong is historically unprecedented, said Ryan Ratcliff, the economist responsible for the San Diego County and California sections of the forecast.

He said the fallout from mortgage defaults will prove a “major wild card” in the next two years. And the crunch and subsequent tightening in the mortgage sector over poor-credit, subprime loans will most likely sap the region’s housing market of any quick rebound, as new restrictions will drastically reduce the pool of able buyers.

In the report, economists say they are looking to coming months to see the impacts of the popular exotic loans issued in 2004 and 2005. Most borrowers hoped to refinance or sell before their low introductory rates expired, but that prospect has dimmed with the slowdown.

“The reset crisis is really going to hit its peak early this summer,” Ratcliff said. “Then we’ll see how bad this is going to get.”

The impact of the real estate slowdown on jobs is just starting to be seen, the report says. Just 1,800 construction jobs were added in 2006, compared to 3,100 the year before. And financial institutions, such as those providing mortgages or other credit to homebuyers, lost 900 jobs, versus the addition of jobs in 2005.

But without another job sector poised to take a nose-dive in the region, Ratcliff said the local economy fits what his colleagues have forecast for the nation — a “long runway for the soft landing” with no likelihood of a recession.

“It just doesn’t look like there is an industry that looks like it’s ripe for enough job losses to trigger a recession,” Ratcliff said.

Ratcliff and University of San Diego economist Alan Gin, who penned the employment and income section of the report, said the region has largely made up for its drops in real estate job growth with a boom in leisure and hospitality. Though the job numbers thus largely remain stable, the leisure and hospitality jobs are generally lower-paying and contribute less to measures of the region’s productivity, Ratcliff said.

“This is a story about wages,” he said.

And with fewer new subdivisions, fewer restaurants are built, leading Ratcliff to predict leisure and hospitality will “lose steam” in the middle of the year. But there’s no chance of tourism drying up, he said.

“You go out and build some new homes, and the second thing to come along is a strip mall and places to eat and all of that. That’s going to slow down,” Ratcliff said. “But it’s not like San Diego woke up one morning under a big radioactive cloud and nobody wants to come here anymore.”

In addition to real estate, Gin said consumer confidence among San Diegans and the economic health of the region often respond most dramatically to rising gas prices.

“For every 10 cents (increase), that takes $7 million a month out of the local economy,” Gin estimated. “If it goes up 50 cents … that’s $35 million.”

And when gas prices go up, consumers have less disposable income, said Michael Shames, director of the Utility Consumers Action Network.

“They spend less money on other things, and the companies catering to the low- and middle-class consumers are the ones that appear to be hit the most,” Shames said. The all-time record was set last year in May at $3.43 per gallon, and Monday’s average is just two cents from that high.

Ratcliff argued San Diego isn’t a perfect poster child for housing slowdowns everywhere.

Home prices are now at about the same level they were in 2004, a 5 percent decline from the peak in 2005. But prices have stayed relatively stable for about six months, and Ratcliff sees the quick spike and subsequent drop between the summer of 2005 and 2006 as the aberration, not the price dips the county is now seeing.

But Ratcliff conceded that tightening lending standards in response to the subprime crunch will ensure continued weakness in the first-time buyer market in San Diego, as fewer first-time buyers qualify for loans and the weakness depresses the number of homes selling “all the way up the food chain.” Sales, in that case, will remain weak for at least a year, and prices will stay flat or dip slightly during that same time.

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