Scratch the surface of California's seemingly healthy economy and you'll see an economy buoyed by a real estate bubble that could deflate at any time, say economists at the UCLA Anderson Forecast in their quarterly report released today. Both the region's and nation's economy remain in a fragile state, and longstanding problems rather than any temporary fallout from Hurricane Katrina are more to blame.

The widely respected forecast sees a soft landing rather than a crash, however, and likely not until at least 2006. But the housing market is showing signs of slowing down.

That would impact the region's job market. In Los Angeles County, real estate-related job growth this year has only been eclipsed by the information sector, with about 85 percent of that growth coming from a surge in television production.

"Right now the market appears to be at a tipping point," said senior economist Christopher Thornberg, who considers property in California overvalued by up to 45 percent. He notes that much of the recent growth in the real estate market seems fueled by high-risk financing programs that lenders could end at any time, such variable rate, interest-only loans, adding, "There are signs that the housing party is ending."

One indicator that Los Angeles County housing prices have departed from fundamentals: the Office of Federal Housing Enterprise Oversight's Home Price Index noted 22 percent appreciation in the second quarter, compared to a 6 percent increase in average rents.

While much of the region's 1990-93 recession was caused by the collapse of the local aerospace industry, L.A. still ranks high on several indicators that the forecast cited more than a decade ago when forecasting a downturn: exceeding high housing appreciation (the county ranks 17th in the nation with 106 percent appreciation over the past five years); a high concentration of vulnerable wholesale trade jobs; and a high proportion of workers with less than a high school education. Added to that continued contraction in the manufacturing sector, with traditional sectors such as cut-and-sew apparel down 3,000 jobs this year as of August.

Still, "predicting when a speculative bubble will end involves more psychology than economics," said forecast economist Ryan Ratcliff, author of the report's Los Angeles County section. "At some point lenders will say, 'We've been lending to people we never should have and we better stop it.' Then maybe it end."

The forecast sees a slight improvement in California's non-farm job growth this year to 1.6 percent compared to 1 percent last year, but it expects that to tail off to 1.2 percent in 2006. Job growth is expected to be even more modest in Los Angeles County, up an estimated 0.8 percent in 2005 from 0.2 percent in 2004. It's expected to improve slightly to 0.9 percent in 2006.

Katrina, and to a lesser extent Hurricane Rita, are seen as depressing U.S. growth in late 2005 from outright losses, but then boosting it in 2006 as significant reconstruction spending kicks in. Even so, the quarterly forecast expects rebuilding in the Gulf Coast will only add about 50,000 new housing units a year for the next three years, and even less if some displaced residents decided not to return to New Orleans and other hard-hit areas.

California businesses could benefit from reconstruction-related contracts and the diversion of film production, conventions and tourists that might otherwise have gone to Louisiana, the forecast said.

The forecast expects U.S. construction activity to add about 0.3 percent to national gross domestic product growth in the fourth quarter, with reduced consumer spending subtracting less than 0.5 percent from GDP. Overall real GDP growth will slow to an estimated 3.5 percent this year from 4.2 percent in 2004. It will further slow to 2.7 percent in 2006, according to the forecast.

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