• printer friendly
• mail this article
• iPod format
• digg

The Anderson School of Management released an economic forecast last week that predicted a “bubble burst” in the housing market, stating that housing prices, which have been rising rapidly, will eventually decrease and set the conditions for a possible economic recession in the future.

According to the forecast, which is directed by Professor Edward Leamer, there is an expectation for a real estate turndown because home values have risen too much, too quickly. Leamer said the economy will continue to experience sluggish growth through 2006, but “the likelihood of a recession within a year is minimal.”

For several years, the UCLA Anderson Forecast has said consumer spending rates were fueling the expansion of the economy.

But experts say the weakness in housing can affect the economy indirectly.

In a paper on the state’s economy, UCLA economist Christopher Thornberg wrote that home buyers are “gambling on massive amounts of appreciation. ... It’s not worth the price compared to the rental value.”

Experts said the decrease in real estate value may cause a decrease in wealth for families trying to pay for college, which could have a direct effect on college students.

The Anderson Forecast also predicts GDP growth will slow down from 3.5 percent to 1.5 percent by 2007, which will negatively affect the job market for students straight out of college.

UCLA economics Professor Moshe Buchinsky believes that the bubble is expanding and will eventually burst, but it may not happen until next year or later.

Harvard University economics Professor Francis M. Bator said a sharp drop in the growth of the housing market would result in increasing interest rates, leading to higher mortgage rates.

Bator said people will be affected by a decrease in real wealth – the ability to afford other consumption goods – because they will have to pay higher prices for housing.

If a drastic decrease in consumption occurs, the entire economy will be affected and the government will not obtain as much revenue from consumption goods with indirect taxes, Bator said.

With a decrease in government revenue, there may be cuts in government expenditures, particularly in education, and universities could suffer from a decrease in funding that is necessary to fund programs, scholarships, construction, technology, and many other sectors.

The decline in the housing market might create many sellers but few buyers. A decrease in the demand for houses could “possibly result in workers being laid off,” Bator said.

“The extent to which the housing market will affect the entire economy is uncertain,” Buchinsky said.

The UCLA Anderson forecast was recently honored for its accuracy by the Bank One Economic Outlook Center at Arizona State University’s W.P. Carey School of Business.

The forecasting team is credited as the first major U.S. economic forecasting group to declare the recession of 2001.