Housing woes will be drag on state

The real estate slowdown will be a major drag on California’s economy this year, but not enough to pull the state into recession, UCLA economists said in their forecast to be released today.

A jump in mortgage defaults and tightened lending standards, caused by the meltdown in the high-risk sub-prime lending market, will further slow home sales and result in more job losses, said economist Ryan Ratcliff, author of the California segment of the closely watched UCLA Anderson Forecast.

In recent months, several thousand employees at mortgage firms -- many in Southern California -- have lost their jobs. They included workers at Agoura Hills-based Ownit Mortgage Solutions Inc., Irvine-based New Century Financial Corp., Fremont General Corp. of Santa Monica and Countrywide Financial Corp. of Calabasas.

“If the carnage in the sub-prime markets turns out worse than we expect, job losses in Southern California could make things a bit worse,” Ratcliff said in his forecast.

But other sectors of the state’s economy, such as professional and business services, are holding up much better than real estate, he said.

“There still is no other sector that looks poised to combine with real estate to generate enough job loss to cause a recession,” Ratcliff said in his forecast.

Still, mortgage sector job losses, on top of continuing construction job casualties, will ratchet down annual job growth in California to less than 1% through the middle of 2008, with growth in personal income and real taxable sales slowing to about 2%, he said.

UCLA economists’ view is similar to that of other forecasters. In a separate forecast also to be released today, economists at the Business Forecasting Center at the University of the Pacific in Stockton also concluded that housing woes alone wouldn’t sink the state economy.

The slowing U.S. economy, housing market troubles and high energy prices “will take some wind out of the California economy’s sails,” said Chuck Williams, dean of the university’s Eberhardt School of Business. “The good news is that despite all of these things, California is still not taking on water.”

UCLA’s forecasting unit was one of the first to predict the 2001 recession, a key reason it has become a widely watched report.

California has weathered the housing slump better than expected, largely because fewer construction jobs were lost and more service jobs were gained in 2006 than initially estimated. That has bought the state some time, Ratcliff said.

But the implosion of the sub-prime market in the first quarter of 2007 has thrown a “major wild card” into the economic forecasting equation, he said.

The recent tightening of credit for sub-prime borrowers -- those with flawed credit or spotty employment histories -- forced many mortgage companies to shutter or downsize, throwing thousands out of work. The effect was concentrated largely in Southern California, and Irvine in particular, where many sub-prime lenders are based.

“Our forecast is definitely that the job loss in that sector is going to deepen,” Ratcliff said. “But is Irvine going to turn into an apocalyptic wasteland? I don’t think so.”

Ratcliff anticipates that tighter lending standards are expected to further depress home sales as fewer first-time and marginal borrowers are able to get the kind of risky financing that helped propel the housing boom in the last two years.

The bigger uncertainty is the effect of the recent surge in mortgage defaults -- the first step in the foreclosure process that results when a borrower misses at least one payment.

“The surge in notices of default is completely unavoidable,” Ratcliff said. “They were baked in the cake of the loans they were making in the last two years. The question is how many will turn into foreclosures.”

In February, the number of trustee sales -- the last step in the foreclosure process -- was 1,850, about 10 times the number a year earlier, according to DataQuick Information Systems, a La Jolla-based research firm. But the foreclosure sales have yet to affect home prices, said John Karevoll, chief analyst for DataQuick.

“We are still not finding that the presence of these default properties has brought values down in a significant way,” he said.

Karevoll added that the number of defaults may start to decrease as fewer loans are generated, but the percentage of loans going into default could nonetheless go up. “Everyone’s wondering how these two pressures will play out,” he said.

Economist Ratcliff noted that in the last two recessions -- in 1981-82 and 1990-91 -- defaults jumped as the real estate market slowed. But in the early 1980s, many households were able to keep lenders from repossessing their homes. The opposite was true in the early 1990s, when both defaults and full-blown foreclosures surged.

“The difference is, of course, the severity of the local recessions: The 1980s recession in California was mild compared to the deep slump of the 1990s” when there were massive layoffs, Ratcliff said.

“Given that our forecast calls for a slowdown and not a recession, it seems likely that the wave of defaults we’re likely to experience in 2007 will be more like the 1980s than the 1990s -- it’s hard to predict a major surge in foreclosures without major job loss in the economy,” he said.

*

annette.haddad@latimes.com