Could California Escape a Recession–And Spark a Housing Market Recovery?

California has given us many wonderful things–Hollywood. Disneyland. A gold rush.

And now, it may be about to give the housing market a huge gift: Hope.

That comes courtesy of a quarterly report from the University of California, Los Angeles–released today–which says that while California home prices are still low, the number of condos and single-family homes being sold is rising in some areas.

Why should we care about home sales in one state? Because it’s California, which is:

  • The most populous U.S. state;
  • One of the regions that saw the biggest price increases during the housing boom and, during the following housing bust, saw prices plummet–early on-more than many states;
  • An area where subprime mortgage issues were especially prevalent, increasing foreclosures and causing home price declines. Mortgage defaults grew 143 percent to the highest level in 15 years in the first quarter of 2008,
    according to DataQuick Information
  • And because California could be the first state to indicate the housing slump is beginning to turn around.

According to the Times, the lower home prices have increased first-time buyer activity, opening up homes to a group that couldn’t previously afford to buy in the pricey California market.

That’s not to say the housing market in California is going to radically improve soon. The UCLA Anderson Forecast said that the effect housing will have on the economy could be the worst since the Great Depression.

But although the report said the state’s economy won’t fully recover until 2010, it said California will avoid a recession.

"The witch’s brew of the popping of the housing bubble, a wounded
financial system and increasing inflationary pressures coming from
rising commodity prices will keep the economy on a sub-prime growth
path for the next several quarters," David Shulman, a senior UCLA economist, told the Los Angeles Times.

According to the Anderson Forecast UCLA report, foreclosures will still be an issue in California–and the housing market isn’t out of the woods yet.

But the sales gain in parts of the state is a good sign, Bloomberg said. It indicates that–unlike the 1990s recession–California’s pain will be severe, but quick (Well, quicker.)

When aerospace and defense and other workers lost their jobs in the 1990s, foreclosures rose. But they didn’t hit their high point until the decade was close to over–in 1997–after employment had already risen.

In the current housing slump, the falls were fast and furious–but hopefully won’t outlast the next two years.

In which case, California could be a sign that the entire market is on the mend.

What do you think?