The declining value of residential real estate and the increasing price of commercial real estate were prominent topics at the quarterly economic forecast of the UCLA Anderson School of Management.
The forecast concluded that the U.S. has nearly slipped into a recession due to falling home prices and rising gas prices.
The economists at the forecast predicted that the downturn would last until as late as mid-2009. Despite the downturn, the forecast found that commercial real estate prices were holding steady.
Forecast economist Ryan Ratcliff said that job weakness in the field of real estate and high loan default rates will contribute to the slump.
He said he predicted a decline in residential building permits as well as a decrease in construction employment, which would lead to an economic downturn.
“The worst is yet to come … but I don’t see a recession,” Ratcliff said, adding that after sluggish growth in 2007, he saw improvements by mid-2008.
Forecast economist Jerry Nickelsburg held similar views to Ratcliff on the state of the housing market.
“The housing market is in a deep slump and home construction is falling,” Nickelsburg said.
But Nickelsburg said that despite the slump, the unemployment level for construction workers has not decreased.
“There’s anecdotal evidence that there are “˜hidden workers’ who don’t appear in the survey … (which) indicates that unemployment is higher than what is presented statistically,” Nickelsburg said, adding that the hidden workers include self-employed contractors and illegal immigrants.
Nickelsburg also presented the Allen Matkins Commercial Real Estate survey, which was a collaborative effort between forecast economists and the Allen Matkins real estate law firm.
The survey found that despite the fall in residential real estate prices, the office space market in Los Angeles will continue to tighten through 2010.
“Commercial real estate and residential real estate prices do not always move together,” Nickelsburg said.
He added that the continuing rise in commercial real estate can be partially attributed to the desirability of certain neighborhoods.
“A leading law firm based in Century City or Downtown Los Angeles will want to expand in their current location ““ not open a new branch in Van Nuys or Long Beach,” he said.
He added that the supply was not going to decline fast enough for vacancy rates to increase in local commercial real estate.
The keynote address, presented by Paul McCulley, the managing director and portfolio manager of PIMCO Bonds, was a mix of personal advice and economic theory.
“Stability always begets instability,” he said, quoting the late economist Hyman Minsky.
McCulley said the rule is always true because people get overconfident in a stable economic setting and take more risks, which consequently lead to instability.
McCulley tied in that theory to today’s housing market by noting that the market was dominated by a “Ponzi state of mind,” where people are buying more than they can afford, due to the prevalence of unchecked loans.
“We won’t know who is naked until the tide goes out,” McCulley said.