Several other recent economic forecasts, including one by Chapman University, have also predicted a housing price slowdown, although USC's Lusk Center for Real Estate says projections of a bursting bubble are overstated. UCLA typically is the most pessimistic of the forecasts. The California Association of Realtors last week projected home prices in the state would increase 10 percent in 2006, but that sales would slow as interest rates go up slightly.
The problem for Orange County, Thornberg said, is that so many jobs are tied to the mortgage industry, especially subprime lenders that make loans to people who have credit problems or can't qualify for a traditional mortgage.
Strains are already beginning to show in that sector. Three Orange County mortgage real estate investment trusts in the last week have cut their dividends citing difficult market conditions.
"I think Orange County is in for a rude shock," Thornberg said. "When this thing ends, it's going to be bloody."
Thornberg's Anderson Forecast colleague, Ryan Ratcliff, also said Orange County could be facing some hard times in a housing downturn, based on his analysis of how jobs in Los Angeles suffered after the last housing boom ended in the 1990s.
His analysis concluded that in Los Angeles, every 10 percent of housing appreciation from 1985 to 1990 predicted a 0.67 percent loss in payroll jobs for the next two years. In Orange County, home prices are up 125 percent percent over the past five years. Ratcliff declined, however, to predict how many jobs could be lost if home prices plunge here, noting that the 1990s recession represented a worst-case scenario. If his model is correct and there's a real estate collapse, Ratcliff said Los Angeles would lose 2.5 percent of its payroll jobs over the following two years.
Orange County, however, has the advantage of having a higher percentage of skilled workers than Los Angeles. Areas where many people lack a high-school education could expect significantly higher job losses, Ratcliff said.
Still the Orange County workforce is at risk if housing stalls, he said.
"The share of finance and insurance jobs –– where most mortgage-related jobs are classified –– was the single biggest risk factor for an economy in 1990," he said. Orange County is No. 2 in the state in terms of the percentage of the local workforce in finance and insurance.
Ratcliff said wholesale trade was another factor that put jobs at risk in the early 1990s downturn. Orange County is No. 1 statewide in percentage of local jobs in wholesale trade.
Overall, the 2006 forecast said California's economy will be fighting a slowdown in the industrial and retail sectors, which suggest the consumer boom that has been supporting the economy is fading.
"The forecast for California is mediocre at best. At worst we are liable to dip into another recession," the report said.
Among UCLA's other predictions:
California average payroll job growth will dip to 1.2 percent in 2006, down from an estimated 1.6 percent this year
Statewide average unemployment will edge up to 5.8 percent in 2006 from an estimated 5.5 percent this year.
U.S. average gross domestic product will slow to 2.7 percent in 2006 from an estimated 3.5 percent this year.
The Federal Reserve will raise short-term rates to an average of 4.4 percent in 2006 from 3.1 percent this year.