California’s economy is headed for a rough patch as the housing slump intensifies, but the Bay Area should fare much better than the rest of the state, according to a widely watched forecast.

A spreading housing downturn, marked by a construction slowdown, falling sales and prices, and rising foreclosures, will be the main drag on the economy, the UCLA Anderson Forecast predicts in its quarterly outlook set for release today. The construction and real estate finance sectors are already shedding jobs, and UCLA economists expect more of the same over the next year.

Jobs outside the farm sector should grow an anemic 0.6 percent next year and 1.1 percent in 2009, the UCLA forecast projects. That compares with 1.9 percent payroll growth in 2006, California’s strongest year since the technology bust at the beginning of the decade.

Still, California should be able to avoid a recession thanks to strength in other areas, especially the Bay Area’s now-thriving technology sector.

“We still think we’re just going to get grazed by the bullet,” UCLA economist Ryan Ratcliff said.

Residential real estate presents a grim picture.

Market rebound seen in 2009

Statewide, UCLA forecasters expect home building permits issued to drop to around 115,000 or less this year and next, just a little over half the 2004 level. Construction jobs will fall to 878,000 in 2008, down 5.2 percent from 2007, they project. The forecasters don’t expect California’s housing market to improve until 2009.

Despite the Bay Area’s notoriously high home prices, the housing slump won’t be as acute as in the rest of the state because supply and demand are in better balance, especially in the inner counties of San Francisco and San Mateo. Combine that with expected solid performances in such key sectors as technology and tourism, and the region should weather a slowdown well, UCLA forecasters say.

“Real estate losses in the Bay Area will not be that bad, and the rest of the economy should be doing pretty well,” Ratcliff said. “The Bay Area is positioned to do better than the rest of California for the next few years.”

Builders slash jobs

That’s not to say that the housing downturn won’t take a toll here in lost homes and lost jobs. Local builders are hunkering down.

“We’ve cut back, and we’re still in the process of cutting,” said Kile Morgan, chairman of Ponderosa Homes in Pleasanton.

A few years ago, Ponderosa was building 250 to 300 single-family homes a year, with a median price of about $850,000. Now it’s down to fewer than 150 homes and has slashed its workforce to 50 from about 65, Morgan said. Its subcontractors, who do actual construction, have shrunk similarly.

“Everybody’s looking for where the bottom is,” he said.

In much of the rest of the Bay Area, things are still fine, thank you.

The job market remains healthy for people with technical or professional skills, such as network engineers and accountants, reported DeVon Jensen, manager of the San Francisco office of the staffing firm Adecco.

“We definitely don’t see a slowdown,” she said. “Demand is extremely strong.”

Wells Fargo & Co. economist Scott Anderson agrees that the Bay Area is California’s strongest region, and he is optimistic about prospects for the region’s tech sector. But he stresses the risks of a statewide economic downturn more than UCLA forecasters do, pointing to how vital construction and other housing-related jobs have been to the state’s growth in recent years.

“The odds of a recession (in California) are closer to 40 percent, given the outsized dependence on housing,” Anderson said.

Home prices falling

Statewide, home prices could fall as much as 10 percent from their peak, Anderson expects. In the Bay Area, the drop should be less, no more than 6 or 7 percent, he said.

Both Anderson and UCLA forecasters stress that the biggest risk to California’s economy is that the housing slump will prove worse than they predict. It’s become harder for home buyers to get loans. And the high-water mark for rising rates of adjustable-rate mortgages is still several months away, which could mean more loan defaults, more foreclosures and more downward pressure on home prices.

“The downside risks have grown appreciably,” Anderson said.

– Home-sales forecast lowered.

– The gap between income and home prices grows. C3