Chapman University’s California Economic Forecast for 2007

After four consecutive years of robust demand for housing and double-digit home price appreciation, the housing market is showing a sharp decline in sales activity and price appreciation.

Looking forward, the pace of job growth is slowing, the inventory of resale housing units is high, housing affordability is low, mortgage rates, particularly popular adjustable rate mortgages, have increased, and regulators are warning lenders to curtail easy lending practices. More importantly, expectations about future home price increases have turned negative. All of the above suggest that the housing market's adjustment process is gathering steam. Our model points to a decline of 6.7 percent in the median resale single-family detached home prices.

The building industry is responding to the new market paradigm by drawing fewer permits. We are forecasting a decrease of 12.4 percent in total number of residential permits in 2007. This will mark three consecutive years of decline in the total number of permits issued since the peak of 213,000 units in 2004. In spite of relatively strong nonresidential construction activity, weakness in the residential sector will lead to 13,500 job losses in the construction sector in 2007.

Overall, our forecast calls for net job creation of 139,000 in 2007 — a rate of increase of only 0.9 percent. Most of the net new jobs will be in the services sector. The most rapid growth is forecasted to take place in the professional & business sector increasing 2.1 percent, followed by growth of 1.8 percent in both leisure & hospitality and education & health services sectors.

The slowdown in California job growth in 2007 will be the major factor leading to a slowing in personal income growth from an estimated 6.4 percent in 2006 to 5.5 percent in 2007. Weak real income growth, a sharp reduction in cash-out refinancing activity and weakening of home price appreciation will negatively affect taxable sales activities. Our forecast calls for total taxable sales to increase by 4.7 percent in 2007, compared to an estimated growth rate of 6.6 percent in 2006. Spending growth on furniture and appliances, building materials and service stations are forecasted below the average growth rate of 4.7 percent.