DALLAS — One analyst sees California and Nevada with lingering problems with employment and housing that run the risk of a double-dip recession, but he does see some positives.
Brian Turner, director of advisory services for Southwest Corporate FCU, noted that in the Golden State "the median sales price in California had appreciated 10 times the rate of inflation over the past 20 years. That obviously was something that couldn't be sustained, and affordability became difficult for obvious reasons," he said.
The results are well known in California and elsewhere where mortgage markets boomed. "That is a problem that centers around California, and Nevada as well," he said. "It is more than coincidence that the same areas that had the most adverse impact from foreclosures and delinquencies are the areas that had the highest incidence of structured mortgages - because of the lack of affordability in those markets. People needed cheap financing to be able to afford a home."
In the latest S&P/Case-Shiller Index, things looked better in August than they did in July, but are still down from last year, Turner continued. Las Vegas continues to have the largest year-over-year change at close to 30% down. Los Angeles and San Francisco are down about 12% from last year. San Diego is down 9%.
Los Angeles, San Francisco and San Diego have seen prices rise in back-to-back months, but Turner cautioned these "increases" are still down year over year.
"The numbers are encouraging, but remember they are coming up from a pretty deep low."
Until consumers and businesses start spending more, any recovery will be slow, Turner predicted. But with consumers concerned over jobs, they are not opening up their pocketbook, and instead are paying off debt - some $130 billion in debt this year alone, which Turner said is historical.
"We haven't seen that in quite some time, but it is bad news for credit unions, which make money lending money to people. Some would say consumers were not in position to save over the past five years and they became overleveraged."
A double-dip recession is "very possible," Turner warned. He said one catalyst will be what Congress finally comes up with in terms of a fiscal budget for next year.
"We are spending an awful lot of money, and the question is whether there will be any long-term stimulus that comes out of the spending program. We won't know for a while."
An old analogy is the economy is like a gyroscope, Turner said. It is pretty resilient, unless someone or something intervenes.
"If someone touches it, it gets off balance. It eventually finds its center again, but it takes a while to find it. I'm not suggesting there should not have been any intervention-we needed to do something. The question is: Where do we go from here? There are so many huge government intervention programs all at once, it is difficult to fathom what the long-term effect will be on the economy."
The year ahead will be "interesting." Turner predicted there most likely will not be an upturn in short-term interest rates in the first half of 2010, but there might be some in the second have and into 2011.
"Any time you come from a deep low, there is always rapid growth. The key to avoiding a double-dip falls on consumer spending and business investment," he suggested. "We know government spending will be there, so if we can get consumer spending up and business investment up, things will improve. Right now it is a vicious circle: businesses don't want to invest because there is not a lot of demand, so they are watching the consumer. Consumers are worrying about jobs, so they are not buying stuff, they are paying down debt loads."
There is not much CUs in California or Nevada can do right now as they try to ride out the storm, Turner advised. He said credit unions should be aware of what they should not do: they should not deviate from good financial strategy.
"This is not the time to try risky things to offset current losses. It is a time to stick with prudent financial management. Don't entertain financial strategies that might create additional risk just for the sake of short-term earnings."
In terms of CUs' margins, the cost of liquidity continues to be very, very high, therefore they should be proactive about deploying their surplus funds into either investments or consumer loans, Turner offered. He said there still is room to consider lowering share rates, particularly on money market accounts because there is "no benefit from offering premium term certificate rates."
"It is easy for me to say go out and make loans, but if nobody is asking for loans, what good does that do? Share growth is high, which has created lots of liquidity, which is expensiv," Turner offered. "Most credit unions in California are bringing in shares, but not making loans."
