UCLA Anderson Forecast’s third quarterly report in 2015 for the United States considers whether or not the economy can withstand an increase in the prime lending rate. It concludes that the answer is yes.
The forecast for the national economy for the next two years is a healthy one, a slim chance of a recession and a slight chance of a surge in growth. In California, the forecast remains largely unchanged since June. Growth in employment in California will continue, albeit it at a slower pace by 2017, as the unemployment rate falls to about 4.8 percent, similar to that of the nation as a whole.
The national forecast
In his forecast for the national economy, UCLA Anderson Forecast director Edward Leamer provides historical perspective regarding the current expansion that is now in its 25th quarter. Leamer points out that the U.S. is in its fourth-longest expansion since 1948. Using history as a guide — and given that the Fed will ultimately start raising interest rates later this year — Leamer says that some might think there is an 80 percent chance of the current expansion ending soon. Not so, says Leamer, because the tepid pace of GDP growth, amounting to a modest, cumulative increase of 13 percent, so far is exceeded by only two of the other post-1948 expansions. As a result, the forecast says there is a 20 percent probability of an imminent recession.
Leamer says the expansion seems destined to continue for at least a couple more years and probably more due to other key factors: jobs, housing and cars. The modest gain in the employment-to-population ratio (3 percent more growth is expected to return to pre-recessionary levels) and the critical housing and automobile sectors are not yet in an overbuilt status. Therefore, when short-term interest rates do rise, sectors that are far from being overbuilt won’t likely crash. Although the rate of automobile sales has returned to 17 million units per year, Leamer points out that much of these sales reflect the replacement of older cars with new ones, indicating that the sector is not considered overbuilt.
The forecast for GDP growth is in the 2 percent to 3 percent range, and better in 2016 than the year after. The forecast anticipates an improving labor market, a declining unemployment rate and a rising employment-to-population ratio. Yields on bonds will be driven upward with a rise of inflation by about one percentage point.
The California forecast
In the California forecast report, senior economist Jerry Nickelsburg estimates total employment growth at 2.7 percent in 2015, 2.2 percent in 2016 and 1.4 percent in 2017. Real personal income growth is estimated to be 4.6 percent in 2015 and forecast to be 4.5 percent and 4.2 percent in 2016 and 2017, respectively. At the same time, the unemployment rate should drop below 6.0 percent through the balance of 2015. Unemployment will fall throughout the next year and will average 5.2 percent — unchanged from the June forecast. Nickelsburg expects the unemployment rate in 2017 to be approximately 4.8 percent, the same as for the U.S.
Nickelsburg’s September essay, titled “California Housing: Will it Ever Be Affordable?” takes a look at the state’s housing environment. Nickelsburg says that home prices in California will become increasingly less affordable over the next two years, as the amount of building will not meet new demand.
Housing is back
In a companion essay to the national and state forecasts, UCLA Anderson senior economist David Shulman examines the national real estate picture. Shulman writes that after a long, difficult period, housing starts are poised to approach the long-term average (from 1959 to 2014) of just under 1.5 million units in 2016. The housing forecast calls for starts of 1.14 million units this year, and 1.42 million and 1.44 million units in 2016 and 2017, respectively. Even though this level of forecasted activity would be far below the mid-2000s boom level of more than 2 million units a year, Shulman says there is reason to be optimistic. He cites a continued economic expansion with low probability of a recession in the near term, healthy employment growth of 200,000 new jobs monthly, rising household formations, relatively low mortgage rates and easing credit standards for mortgages.
Prices and existing home sales will continue to rise, despite higher interest rates in the forecast. Shulman notes that the housing recovery is occurring under the backdrop of an unprecedented decline in homeownership. Homeownership now is where it was in 1989, yet Shulman believes this trend has about run its course and will soon begin reversing. The flip side of the declining homeownership rate is a rise in renting which has triggered a boom in multi-family housing starts. Multi-family housing starts, which bottomed out in 2009 at 112,000 units will exceed 400,000 this year and average 460,000 units over the next two years. The high rental increases are being sustained by very low rental apartment vacancy rates. In fact, Shulman says, we are seeing a trend of investors purchasing new single-family houses for the rental market.
However, affordability has become a real issue, as 46 percent of renters, compared to 40 percent 10 years ago, paying more than 30 percent of their income for rent.
In another essay, economist William Yu looks at the turmoil in China’s economy and the potential implications for Los Angeles. Yu says that China’s economy was, is and will be more volatile than suggested by Beijing’s official numbers. According to Yu, China’s economy, housing market, stock market and currency are all in trouble.
Yu says that even though China has tried to contain its imploding crises, its economy has come to a restructuring crossroads. If it transitions smoothly to a service- and consumption-based economy, its medium growth rate could reach 5 percent. If not, its outlook will be more dismal, with 2 percent to 3 percent growth and an economy trapped in the middle-income level.
The implication for Los Angeles is that China’s turmoil might reduce the growth of Los Angeles’ exports and tourism, but Chinese investment in Los Angeles real estate will persist due to better and safer expected returns in the U.S. Los Angeles’ housing market, despite becoming more expensive and unaffordable, is not in a bubble. Its housing prices are highly unlikely to bust this year or next.
Housing is back
All of the economists’ reports will be presented at UCLA Anderson Forecast’s quarterly conference on September 28. The conference will feature a number of panels focused on the housing industry and a keynote address by John Williams, the president and CEO of the Federal Reserve Bank of San Francisco.