California economy to withstand housing drag: report

A foreclosed home is shown in Stockton, California in this May 13, 2008 file photo.

SAN FRANCISCO (Reuters) - The economy of California, the most populous U.S. state, will remain weak this year as the downturn in its housing market persists, but strong exports and agricultural activity will help offset that drag, according to a UCLA Anderson report released on Wednesday.

"Though you still hear talk of recession these days, it does not appear that California will exhibit the kind of job loss that typically goes with a national recession," the report said. "Indeed, for California this is primarily a housing related adjustment to a very overheated speculative market."

"The carnage is palpable but contained as California benefits from some very traditional industries and its position in the sun on the edge of the Pacific Rim," the report added.

California's job losses in once torrid home-building and home-financing have been severe, but payrolls in services are growing along with exports and agriculture, two important activities in the state that are gaining momentum after not growing much in the recent past, the report said.

They will help prop up pay gains and restrain the rise of unemployment.

"We are looking for a 2008 growth rate of 1.5 percent in personal income after adjusting for inflation. Not a barn burner, but not bad in a slow economy," the report said. "Most of that growth will take place later in the year. Through 2009 the growth rate will increase towards more normal trend levels."

"We have shaved a couple of tenths off the unemployment rate having it now top out at 6.1 percent by the end of the year and slowly falling back down thereafter," the report added.

HOUSING TURMOIL EASING?

California may also catch a break from its housing slump.

The state's home sales and its housing prices are falling amid weak demand, a glut of foreclosed properties and tightened mortgage lending standards. As a result, UCLA Anderson's forecasters see the state's homes, among the priciest in the nation, becoming increasingly affordable.

"Suffice it to say, the housing market has yet to hit the affordability bottom, an event we think will occur before year end," their report said. "When that happens, home prices and mortgage interest rates will once again stimulate the demand for housing, though not nearly to the extent we have seen in recent years."

California's mortgage industry will not necessarily benefit from that recovery. Earlier this decade it boomed by providing risky loans to borrowers who previously had been shut out of the mortgage market.

The subprime mortgage debacle forced many of the lenders to close shop and few now are willing to back risky borrowers to the extent they had previously.

"The home mortgage finance industry, centered in California, was structured, in part, to provide financial services for a market which has now disappeared. As a consequence it will suffer a permanent loss of jobs," the report said.

That will be felt hardest in Orange County, south of Los Angeles. The county had been the epicenter for California's mortgage industry. If Orange County's other sectors do not start growing faster, its regional economy may not fully regain jobs lost from the mortgage industry's implosion until 2012 or 2013, the report said.

As for new home construction, the end of its steep decline is within sight. UCLA Anderson forecasters predict a recovery by early next year.

(Editing by Diane Craft)