Economists at UCLA have invoked the B-word again.
In an outlook to be formally released today, forecasters say California and the nation are beset by a housing "bubble" that will depress construction next year, slowing the nation's economic recovery.
Yet the fallout from the bubble in California won't be devastating, according to the UCLA Anderson Forecast. Indeed, the Golden State's economy will expand at a faster clip than the nation's in 2005, thanks in part to a recovering Bay Area, the widely watched forecast says.
All in all, next year is shaping up as "solid but not spectacular" for California, said Christopher Thornberg, a UCLA Anderson Forecast senior economist and author of its state outlook.
Across California, nonfarm payroll jobs are expected to grow 1.6% next year, up from 0.8% this year, the UCLA forecast says. Personal incomes are projected to increase 5.2% next year, compared with 5.6% this year.
Although UCLA economists have raised the specter of a housing bubble in previous reports, they are now identifying it as the biggest risk to the U.S. economy.
"The housing sector's high and unusual contribution" to economic growth "is not going to continue in 2005," said Edward Leamer, director of the forecasting group and author of its national outlook.
The less-than-upbeat analysis is sure to raise plenty of eyebrows because the UCLA group was among the first to foresee the 2001 recession as well as slower growth earlier this year.
For all that, though, many experts inside and outside the housing industry reject the notion that there's a bubble waiting to pop.
They say real estate prices today are rationally propelled by low mortgage rates and high demand, while construction is justified by population growth. In California, they note, demand continues to be strong, and building in many areas has been constrained by land limitations and regulatory hurdles.
"To have a bubble, you have to have oversupply," said Alan Nevin, chief economist for the California Building Industry Assn. "We don't have oversupply."
For their part, UCLA economists contend that inflation-adjusted mortgage rates are on par with those of the 1970s and early '80s, and above those of the 1960s -- all periods when prices did not rise as fast as they have today. What's more, they contend, current population growth is being driven by lower-income immigrants who cannot afford homes at current prices.
UCLA economists pointed out that inflation-adjusted home prices have risen by more than 5% annually over the last five years, five times the usual rate. Prices nationwide are now 25% above their historical long-term average, they said.
In the eyes of the UCLA analysts, the main culprit for California's housing bubble is excessive price increases rather than overbuilding.
"People here have been buying homes as if prices are going to go up 10% every year" forever, Thornberg said. But when prices finally level off or even decline, he suggested, consumers will curb spending, and that could slow the state's economy.
It's too hard, Thornberg added, to predict just when the bubble will burst -- or whether it will simply deflate slowly. "Bubbles, once they get going, tend to take a life of their own," he said.
In Southern California, particularly, housing prices continue to appreciate by at least 20% a year. Evidence is emerging, however, that prices are starting to flatten on a month-to-month basis as the supply of homes on the market grows.
The UCLA analysts foresee the number of residential building permits slipping in California to 204,800 next year from 207,000 this year.
The state's building industry trade group is forecasting a similar trend but it considers the decline marginal.
"It's a pretty bright projection for 2005," Nevin said. California builders are on pace to construct the most homes in 2004 than in any year since 1989.
Outside of California, overbuilding is viewed as the main problem by UCLA. One telling statistic: The nation has added one new residential unit for every adult added to the population over the last two years. The historical average is one unit for every 1.7 new adults.
The bottom line: Today's pace of construction can't be sustained, Leamer said. Housing starts nationwide are expected to slow to 1.8 million units next year from 1.94 million this year.
In turn, the home-building slowdown will throttle U.S. economic growth to an annualized pace of 2.8% by the second half of next year, Leamer predicted. That is about half a percentage point lower than UCLA's previous forecast in September and contrasts with an expected inflation-adjusted growth rate of 4.4% for all of this year compared with 2003.
Other experts agree that housing will slow the expansion next year. A survey of 28 industry analysts and economists conducted last month by the Federal Reserve Bank of Chicago said the U.S. economy would cool next year because of a sharp slowdown in housing.
Still, other growth estimates tend to be higher than UCLA's.
The National Assn. of Realtors on Tuesday raised its forecast for sales of new and existing U.S. homes in 2005. But it still expects both categories to fall, which would result in the first such decline in five years.
The trade group anticipates that existing-home sales will hit 6.38 million next year, down from 6.58 million this year. New-home sales are expected to reach 1.13 million in 2005, compared with 1.18 million this year.
"A lot of buyers have found the home they've been looking for, and we can expect a bit of a breather in 2005," NAR Chief Economist David Lereah said.
Michael Bazdarich, another UCLA Anderson Forecast senior economist, said a home-building slowdown could mean one bit of good news for consumers: The trend should prompt the Federal Reserve to slow its pace of interest rate hikes.
The Fed's benchmark short-term interest rate, now at 2%, will hit 3% in 2005 and level off at 3.5% in 2006, he predicted.
Times staff writer Annette Haddad contributed to this report.