SAN FRANCISCO (Reuters) - California’s sputtering economy is going to get worse, a report released on Wednesday said.

A home that has been foreclosed and repossessed by the bank is put up for sale in Burbank, California July 20, 2008. REUTERS/Fred Prouser

The state’s jobless rate will hold above 7 percent through next year as the homes slump grinds on and finance payrolls shrink, according to the UCLA Anderson Forecast.

A “strong undercurrent of housing and finance generated weakness” is dragging down growth in the eighth-largest economy in the world, the report said.

“Our near term quarterly forecast has things getting worse,” it said.

“Unemployment will continue to increase to the thin air of 7.4 percent by the end of the year and it will stay in that neighborhood for each quarter in 2009,” the report added.

The diversified economies of the Los Angeles and San Francisco Bay areas had been offsetting the drag of the housing downturn in many other parts of the state.

During the housing boom earlier this decade, the Golden State’s housing prices skyrocketed, fueled in many areas by risky mortgages responsible for the current foreclosure surge. Home prices in the California have been falling from their peaks, putting new home developments across the state on hold.

Home building’s woes combined with worse-than-expected job losses in mortgage financing over the last three months “have finally overwhelmed other sectors of the economy,” the UCLA Anderson Forecast report said.

As a result, employers have pared hiring plans and the unemployment outlook for most populous U.S. state is “ugly,” the report said.

AFFORDABLE HOUSES?

Home prices are falling to affordable levels in many areas, suggesting buyers will step into the housing market and help stabilize it, which should help lift home-building and finance, the report said.

New home buyers will enter the market by the middle of next year provided the existing inventory of unsold homes in California shrinks significantly and new mortgage money becomes available, the report said.

Until then it will be slow going. “Basically, the California economy will muddle along the balance of this year and next,” the report added.