Housing market to slow this year

The red-hot housing market will slow later this year, hurting U.S. economic growth, but not pushing the nation into recession, at least in the near term, economists at the UCLA Anderson Forecast said Tuesday.

In their quarterly forecast, UCLA economists predict slower economic growth through 2006, though saying there is virtually zero chance of a recession before April 2006, the end of their forecast window. But they add that a drop in spending on homes has been a major part of nine out of 10 downturns since World War II.

"It thus seems highly unlikely that the U.S. will be able to avoid an 11th recession in which housing plays a major role. We just don't know when," Forecast Director Edward Leamer said in the report.

Leamer added that "later is not necessarily better" for a correction in the housing market, as each month of higher prices increases the size of the adjustment ahead.

The UCLA analysis predicts housing starts, now running about 2 million units annually, are outpacing demand and will start to decline late this year, slowing to a 1.6 million rate by the middle of 2006. U.S. economic growth, 3.5% on an annual basis in the first quarter of 2005, is expected to fall to about the 1.5% range by mid-2006.

If interest rates were to spike or home prices plunge, the slowdown could be greater, the report said.

The record housing market has helped propel the economy since the 2001 recession, as consumers have bought houses in record number or borrowed against the increased value of their homes. But the UCLA economists don't see home equity or income gains strong enough to provide a big boost to spending ahead. Higher business spending or stronger exports aren't expected to take up the slack.

The UCLA economists are among a growing chorus warning that the housing market is due for a slowdown or correction. Prices have soared in cities on the East and West coasts, rising 100% in California in the past five years and 80% in Florida and Hawaii. To keep up with higher prices, consumers have been using non-traditional financing such as 100% loans or interest-only mortgages, on which they pay no principal for a set period of time.

In Washington on Tuesday, Federal Reserve Governor Mark Olson said the central bank is concerned.

"Clearly, there are some markets where the increase in valuation is unsustainable," Olson said after a Senate hearing, Reuters reported.

Existing home sales figures for May, to be released Thursday, are expected to show large gains.

Steven Wood of financial services firm Insight Economics said the overvalued housing market is affecting about 60% of the USA. In a report this week, he said prices don't have to fall to significantly affect the economy. In 2004, homeowners extracted $750 billion of home equity, helping spending. That will slow if prices stop rising.