Calif. housing bubble seen deflating

California has a housing bubble, but it may not pop with a bang, UCLA researchers said in a quarterly economic forecast.

“There is no reason that a house should be worth 40 percent more today than it was two years ago,” UCLA Anderson Forecast economist Christopher Thornberg wrote in a report. “This is a bubble.”

Researchers predict predict mediocre economic growth at best and recession at worst next year as the market slowly cools.

The run up in home values in the Golden State in recent years -- the strongest of any state -- has fueled the state’s economic recovery and has left many Californians feeling flush, but its housing market has become “heated far beyond the point of sustainability,” Thornberg wrote.

He expects home prices to flatten as demand drops, especially for new homes.

That will squeeze home builders, who will slow construction, and the mortgage industry, which will reduce hiring.

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Additionally, consumer spending will slow in California as its housing market cools because homeowners will not feel as wealthy as they do now, according to Thornberg, who is bracing for a possible recession.

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“Our California forecast has a soft landing scenario built into it with growth in 2006 and 2005 relatively low. But keep an eye out,” Thornberg said. “We have to be very wary because this sort of thing could cause a downturn.”

In his soft-landing scenario, Thornberg said he expects nonfarm payroll growth in California to slow to 1.6 percent next year from 1.8 percent this year, and the state’s unemployment rate to edge up to 5.9 percent next year from 5.6 percent this year.