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Study Sees Minimal Economic Impact from Katrina, Rita

A private business forecast released Wednesday says recent hurricanes on the Gulf Coast will have a minimal impact on the U.S. economy. The quarterly forecast by the University of California, Los Angeles, says a downturn in the U.S. housing market is more of a worry.

The forecast by the UCLA Anderson School of Business says Hurricane Katrina will reduce the U.S. gross domestic product by half of one percent. The report says spending for rebuilding should boost next year's GDP by almost as much, however.

Economist Christopher Thornberg says the recent hurricanes were a tragedy for those along the Gulf Coast, but the financial impact will be small compared with the effects of an expected slowdown in the housing market in other parts of the country.

He says an economic boom in states like California and parts of the northeastern and southeastern United States has been financed by unreasonably high home prices. Rising prices have given homeowners a sense of prosperity, and in some cases, cash. Many have borrowed against the rising value of their houses, fueling a national boom in consumer spending.

An upsurge in housing construction has also generated jobs. Mr. Thornberg says, in California and other U.S. states, home building is the chief driver of the economy.

"It's people building houses," Mr. Thornberg says. "It's people financing the building of houses. It's people working in the stores that are furnishing those houses, and of course, the real estate agents who are making this all happen."

He says all of that stimulus will probably fade from the economy starting next year.

He says home costs are out of line with two economic factors that should determine market prices -- the cost of mortgages, which are used to finance a house, and the value of a home on the rental market. He says many U.S. regions are experiencing a bubble and that home prices must come down, but probably not quickly.

"We say it's a bubble, but a housing bubble does not pop like a stock market bubble," Mr. Thornberg says. "A stock market bubble, when it pops, lots of market activity, prices dropping rapidly. Housing prices don't drop that way because there's a huge fixed cost. You don't day-trade your home."

He says when a housing bubble pops, prices go down slowly. But the economist says the adjustment will be painful, and will probably be felt through the whole economy.