UCLA's Anderson Forecast expects the declining real estate market to take a bite out of growth, but not create R-word problems for the California economy. That's because other sectors are holding up reasonably well. "Statewide home prices are unlikely to decline significantly unless there is a recession," writes economist Ryan Ratcliff. More noticeable price declines might be seen in new home sales (builders are more willing to cut prices than owners). As for jobs, the gains in leisure/hospitality (waiters, maids, etc) have been able to offset some of the real estate losses, but those are not great-paying jobs. That could be a problem.

Sounding especially glum this time out is senior economist David Shulman. Shulman's projections carry special weight because he's the guy who pointed out in 1986 that the country was overbuilt and by 1989 predicted a national real estate recession. Which is pretty much what happened. He was gloomier still about the outlook for Socal - and he was right about that too. Now, as senior economist of the Anderson Forecast, he expects a bumpy ride through the first half of 2007. Not horrible, but not great either. Specifically, he's looking at GDP growth to average 1.8 percent over the three quarters ending in June 2007. Just to give you an idea, first quarter GDP was 5.6 percent and second quarter was just under 3 percent. So we're talking slow. He also expects nationwide unemployment to reach 5.1 percent by the end of 2007 - not great, but not horrible either.

What Schulman is especially worried about is stubbornly high inflation.

The combination of sluggish growth and rising prices will have the look and feel of low level stagflation. Although the term stagflation conjures up images of the mid-1970s, when output declined and inflation rose, the current cycle will appear rather mild. Nevertheless policy makers will have a great deal of trouble dealing with it.

Ed Leamer, director of the Anderson Forecast, sounds a bit more circumspect. "Expect home prices five years from now to be about the same as they are today, though lower in real terms (inflation adjusted) by 15-20 percent. In the meantime, housing contribution to GDP will be very weak, with building and finance and real estate commissions suffering significant declines."