Anderson Forecast of the University of California, Los Angeles, forecasts the market prices of homes to hold steady over the next five years, which equates to a drop of about 15 percent to 20 percent in real terms because of projected inflation. Also, the forecast calls for a lowering of the Federal Funds Rate from its current level of 5.25 percent to 4.5 percent by mid-2007. It could take 6.3 years to 16.5 years to work off excess home-price appreciation in California, the report suggests.

Owners therefore have what seems to them the very attractive option of waiting until they get the price they want. So they wait and they wait. It is only after a couple of years of weak sales, and maybe some job losses, too, that the resolve weakens and home prices begin their very slow march south.

That borders on conventional wisdom now, the economy has to stink for 2 years before median prices decline.

Home builders, meanwhile, are motivated to sell whether the market is strong or weak, and the forecast states that regions with substantial new-home construction activity face a greater risk of price declines.

That’s what we’re seeing in metro Phoenix right now.

But unlike the recession of 1990, “manufacturing is not positioned to add to the loss of jobs that will occur in construction and real estate finance, and absent the loss of jobs in manufacturing the housing downturn will be considerably softened. Softer but longer lasting, too. Instead of a rapid and painful adjustment, expect a slow and aggravating one,” the report states.

A separate Anderson Forecast report states;

We are still firmly convinced that the national economy is the primary driver at the state level: statewide home prices (in California) are unlikely to decline significantly unless there is a recession. Real estate sectors will continue to decline, but without significant declines in another sector the net result will be a slowdown, not a recession.

A third Anderson Forecast report projected a 30 to 35 percent decline in California housing starts by the end of 2007 and building permits are expected to bottom out in 2008.

In summary, we forecast the economy is about to enter a period of several quarters of sluggish growth with inflation above the comfort level. The Fed will respond by gradually cutting the funds rate to 4.5 percent. Although not a recession, the unemployment rate will modestly increase and those sectors of the economy tied to residential construction will be in a cyclical decline.

As best as I can tell, the full Anderson Forecasts reports are available to members only and membership ain’t cheap, thus the long quotes here.

Anderson Forecasts tend to be overly pessimistic but if you adjust for their natural bias in the same way you adjust for the natural bias in reports from the National Association of Realtors, their work is very useful.