LOS ANGELES-Just when you think you’ve heard all the bad news you can stomach about the economy, the latest data provides another shot to the solar plexus. Citing a recent study by Goldman Sachs, economist Stuart Gabriel said analysts there believe California home prices are roughly 35% to 40% overvalued. According to the study, the median sales price of a home in California was $589,000 in August, but should be around $375,000.

Those figures elicited a collective groan from the audience at yesterday’s annual UCLA Real Estate Conference. While Gabriel, director of the Ziman Center for Real Estate at UCLA, said he didn’t necessarily concur with the Goldman figures, he added that home prices in California could drop 10% to 20%. The state’s inland area–from Sacramento down to the Inland Empire–would be hit the hardest.

“California was the epicenter of non-affordable housing and the epicenter of subprime loans,” Gabriel said. “You can go up and down the [interior part of the] state–this is where a huge amount of these [subprime] loans originated.” Subprime loans accounted for 40% of loans in California in 2006.

Gabriel said domestic GDP hit a surprising 4% for Q3 2007, but that robust growth will slow to a trickle beginning in Q4. “We expect growth to decelerate sharply. GDP could go as low as 1% [for Q4].”

The slowdown should come as no surprise, when taking ongoing housing problems into the equation. “In the 10 recessions since World War II, housing has led us into nine of the recessions. And those were without the exacerbation of the credit crunch,” Gabriel said.

For now, consumers are hanging in there and hanging in strong, he noted. “Consumers made up 2% of the GDP growth.” The biggest question then becomes: Can the consumer hang on by his/her fingernails or will they finally lose their grip and cave into the uncertainty created by the housing crisis?

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