UCLA economists are starting to utter the "R" word.

The end of the inflated housing market could lead to a recession in Southern California next year, according to the UCLA Anderson Forecast, even if the market bubble doesn't pop but just deflates.

Anderson School economists, sounding a familiar theme in recent months, concluded that the housing market is artificially propping up the economy, particularly in Southern California. The concern is that any leveling off in housing prices or even a small decline could put the brakes on consumer spending and might precipitate a recession, as it has in nine of the last 10 downturns.

"Southern California has been producing jobs, but they all have to do with the real estate market," said Edward Leamer, director of the Anderson Forecast. "We're going to lose $100 billion to $150 billion in reduced spending on homes by consumers, and you have to make that up, so it either has to be in exports or in defense spending."

Relatively few economists have warned about a recession, given that growth continues to be strong with little sign of stepped-up inflation. But the run-up in housing prices has gotten the attention of private economists and government officials, most notably Federal Reserve Chairman Alan Greenspan.

UCLA economists found that since World War II, spending on housing declined sharply 10 times, and recessions followed eight of those times. The two exceptions were at the beginning of the Korean and Vietnam wars, when higher military spending offset the housing declines.

The market is now showing signs of weakening, with lower sales volumes, slower appreciation and growing difficulty in selling expensive homes. In May, the median price of a home in Los Angeles County rose 15 percent, to $445,000, the slowest rate of appreciation in three years.

"When that trouble really starts, you'll see declines in building permits, and finally spending on construction," Leamer said. "Southern California home sales data is already flattening out."

The report concludes that the real estate market, driven by low interest rates, has made current housing construction levels unsustainably high, outpacing by far the growth of the adult population. Current housing start permits are set to exceed 2 million in 2005.

Anderson economists project that housing starts will begin to fall by the end of 2005 and hit 1.6 million by mid-2006, a level consistent with population growth.

"Don't kid yourself, this process will have a detrimental impact on the economy even if prices don't fall," writes Christopher Thornberg, senior economist with the Anderson Forecast, in the latest quarterly report. "All those people who were banking on continued appreciation of their house to finance their children's education will suddenly find they need to go back to the old-fashioned way of saving for the future spending less."

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