HOME BUBBLE COULD WEAKEN.

Byline: Gregory J. Wilcox Staff Writer

UCLA economists say the housing-price bubble will continue to grow, but the residential real estate market could soften in the latter half of this year, slowing the state and national economies.

Still, Edward Leamer, an author of the quarterly outlook from the university's Anderson School of Business, stopped well short of forecasting a recession this year. ``The probability remains essentially zero ... before April 2006.''

Leamer said the first indication of a turn for the economy will be fewer home sales with properties sitting longer on the market. Then builders will retreat and pull fewer permits, and jobs that depend on home sales will be lost. While a price softening and not a collapse is expected, this series of events will trickle down through the overall economy.

He noted a drop in spending on homes played a major role in nine of the past 10 economic downturns since World War II.

While the outlook for the economy over the next 12 months is positive, predicting after that gets dicey, but real estate will play a large role in what happens.

``The bad news is that we have real problems in the housing sector that will cause the economy a good deal of stress soon enough,'' Leamer said in his report, referring to home prices that have reached unsustainable levels in some markets.

The forecast, released Monday, calls for slightly better job growth in California the rest of this year and in 2006 than had been anticipated in March. Nonfarm job growth this year is now expected to be 1.6 percent, rather than the 1.5 percent in the March outlook. The forecast falls to 1.3 percent in 2006, still rosier than the 1.2 percent predicted earlier.

Christopher Thornberg, who wrote the California forecast, said slight quarter-to-quarter changes reflect ``economic noise'' and are not cause for concern.

The prior forecast also concluded that the Bush administration's economic expansion had reached middle age and that a recession was likely. But now, as then, it's a question of when. The answer depends on how long the bullish real estate market, whose strength has caught economists by surprise, continues.

Markets at risk besides California include South Florida, Las Vegas and parts of the Northeast.

The Anderson forecast economists are at odds with Federal Reserve Board Chairman Alan Greenspan, who this spring cast doubt about a national real estate bubble while acknowledging that bubbles could exist in regional markets. He said the real estate sector presented a conundrum.

``History doesn't support that view very much,'' Leamer said.

So far this year, sales in California are on a record pace, but the annual rate of appreciation has fallen into the middle teens, percentagewise, something that had been anticipated for months.

Greenspan's remarks also referred to high prices in certain markets as froth. That prompted Thornberg to include a definition of ``froth'' from the online version of the Merriam-Webster Dictionary: ``bubbles formed in or on a liquid or a foamy slaver sometimes accompanying disease or exhaustion.''

Thornberg favors ``exhaustion'' to explain what can happen in the housing market. ``Everybody says: What's the spark going to be? There doesn't necessarily have to be a spark; it could just run out of steam.''

Jack Kyser, chief economist at the nonprofit Los Angeles County Economic Development Crop., said his job growth outlook for the state closely tracks UCLA's, and he agrees that the housing market presents concerns.

Lenders are still aggressive and keep coming up with new ways to get buyers into homes, Kaiser said. ``You have to say the lending institutions are setting themselves up for some big problems, especially the subprime lenders.''

Gregory J. Wilcox, [phone]

greg.wilcox(at)dailynews.com