MONTEREY, Calif. -
Speaking to the California/Nevada leagues' Big Valley Conference here, Dr. Esmael Adibi, director of the A. Gary Anderson Center for Economic research at Chapman University, urged caution in an area of lending credit unions are already worried over: housing. The A. Anderson Center director has a strong track record for forecasting, believes a recent dip in housing supply is just a temporary decrease, and that housing values in California will actually depreciate approximately 6% during 2007. It's a problem he said he fears will drag on into 2008.
"The good news is that while residential spending is down 10%, non-residential spending has been up," he said. "But watch out. A decline in non-residential spending usually follows the decrease in residential spending."
Adibi said the U.S. economy is slowing as per the Fed's direction, and he is projecting there will be no further changes this year in the Fed funds rate. He is also projecting the 10-year bond will crest 5% by year-end, but that the yield curve will remain inverted. But that was most of the good news.
"The construction and financial activities sectors are the two categories that have driven California over the last eight years," he said. "We think those are due for a correction, and that overall job growth will slow (in California) for 2007."
With the median home price in California north of $500,000, many borrowers have been forced to turn to non-traditional mortgages. As everyone in the Golden State knows, that has led to an implosion in the subprime mortgage market and other loan types as home prices have not continued to appreciate.
"Now the fundamentals are kicking in," said Adibi. "Fifty-one percent of the median family's income in California is needed to buy a home."
But what Adibi confessed really gives him the "shivers" is the percentage of homeowners who have entered into option ARMs that give them the option of paying interest only. "My message is be careful," said Adibi, who is a member of the board at Orange County Teachers FCU. "If you have a mortgage operation, you need to review the (100% LTV) financing."
