PRICES SET TO BUBBLE OVER? FORECAST STIRRING HOME-COST CONCERN.

Byline: Gregory J. Wilcox Staff Writer

UCLA economists warn that soaring home prices in Southern California have reached the point where the bubble could burst, but they predict that steady growth in the state and regional economy could soften the impact, according to the Anderson Forecast to be released today.

This is first time the quarterly Anderson Forecast has raised concerns about a home-price bubble and much of today's conference on the University of California, Los Angeles, campus will be devoted to the issue. Forecasters say price bubbles have also formed in coastal areas on both sides of the country, including Washington, D.C.; Boston; New York; Miami; and San Diego.

Christopher Thornberg, a senior UCLA economist who wrote the Southern California forecast, said if mortgage rates climb into the 7.5 percent to 8 percent range, prices could fall by 20 percent to 25 percent.

``The recent surge in price creates a clear bubble ... despite tight supply. Eventually there needs to be some return to sustainable price levels - likely when interest rates continue to rise through 2004.''

But while a correction is coming, Thornberg does not believe it will be anything like what happened in the early 1990s, when the market collapsed. He predicts a slight price decline or price stability while fundamentals catch up with the market.

A number of economists and analysts who follow the state residential real estate market think rates will reach close to the 7 percent range by year-end. They maintain that prices will continue to rise, but at some point will slow from their current torrid pace.

For example, the price of a previously owned single-family home in the San Fernando Valley soared an annual 33 percent, to a record $490,000 in May.

``We're clearly on an unsustainable (price) path, which is the issue to remember,'' Thornberg said during an interview. ``Are we in for a soft landing or are we in for a hard landing?''

The latter is likely if consumers keep spending and piling up debt. And sales now seem to be driven by panic buyers scrambling to get in before rates go even higher.

Last week's survey by mortgage giant Freddie Mac had the 30-year fixed-rate mortgage averaging 6.32 percent, up slightly from the prior week, when it averaged 6.30 percent. Last year at this time, the 30-year rate averaged 5.21 percent, the lowest in at least 40 years.

Rates today are still considered low by historical standards.

``They (home buyers) see this as a good time to invest, and they are going to invest, come hell or high water,'' Thornberg said.

During the past six years, a lot of the home-price appreciation was justified, but about 25 percent is attributed to the bubble premium of the past year, he noted. ``If rates get to 7.5 percent or 8 percent, you can basically kiss that fourth goodbye.''

But prices won't fall to their recent lows, those of the mid-1990s.

Others dispute the likelihood of a bubble forming, instead arguing that price increases will be moderate.

``I don't see prices dropping. I think they will go up at a slower pace,'' said Leslie Appleton-Young, vice president and chief economist of the California Association of Realtors.

Jack Kyser, chief economist at the Los Angeles County Economic Development Corp., agreed.

``It's interesting because you do have some people out there beating the drum of housing bubble, housing bubble, housing bubble. But then you talk to other people, and they say there is still strong demand in Southern California, and the economy is good and showing signs of getting better.''

Despite the price-bubble concern, the economy should continue to plod along.

According to the forecast:

--The state's economy, as measured by jobs, will grow by 1.9 percent next year and by 2.1 percent in 2006.

``On balance, California's economy will grow modestly in 2004 - not slugging along like the tired old turtle we saw in 2001-2003,'' said senior economist Joseph Hurd, who prepared the state report.

His chief concern is the state's budget imbalance.

``We need to get our state budget fixed, and, of course, we don't know what to do. What's been proposed to be done doesn't really fix the problem. It just defers it,'' Hurd said.

Personal income grew by 3.7 percent last year, which translates into an inflation-adjusted gain of 1.4 percent. That's the first positive gain since 2000, he noted.

--Southern California is starting to feel some of the growth taking place in the U.S. economy, Thornberg said.

The regional economy remained strong during the downturn and is now accelerating. Los Angeles County's job growth will be 1.5 percent in each of the next two years. Most of those positions will be in the service sector.

--The biggest gain will be 3.6 percent and 3.8 percent in the next two years in the Inland Empire. Ventura County's economy will grow by 1.8 percent in 2005 and 2.2 percent the next year. Orange County's economy will grow by 2.2 percent, then slip to 2.1 percent.

Although Los Angeles County has the smallest percentage gain in jobs, it remains the region's economic star.

``Los Angeles is still the dominant economic beast in Southern California,'' Thornberg said.

Gregory J. Wilcox, [phone]

greg.wilcox(at)dailynews.com