Orange County and the rest of the Southern California economy may dodge the housing bubble bullet, but it isn’t out of the woods yet, Wells Fargo & Co.’s senior economist said Wednesday.
Scott Anderson, senior economist with Wells Fargo in Minneapolis, warned of a high percentage of people squeezing into pricey homes with interest-only mortgages, estimated at 40% here by LoanPerformance.
“Creative financing could backfire on these people,” Anderson said. “It depends on whether home prices appreciate or decelerate. They are living bubblish.”
Another cautionary sign, he said: evidence of increased buying of homes on speculation of price rises.
The median price paid for an OC home was $590,000 last month, up 8.7% from a year ago and 2% from April, according to La Jolla-based DataQuick Information Systems.
The gain was the slowest yearly increase in some time and reflects a tempering in the runaway price rises for the housing peak, when the median grew at 20%-plus annual jumps.
“In Orange County, I don’t think there is a bubble,” said Anderson, pointing to support for strong housing prices due to demand, tight supplies and favorable interest rates. “But this market can’t continue. It probably will appreciate another 5% to 6% this year.”
Anderson told an audience of roughly 200 Wells Fargo clients and other business and government officials at his bank’s annual outlook presentation that the Federal Reserve isn’t done raising rates.
The Fed funds rate currently is at 3%. The central bank has raised its target rate for overnight loans between banks eight times since last June in quarter percentage point increments.
It could make another move Thursday.
Anderson calls for a few more rounds of 25-basis point increases through December, pushing the fed funds rate to 4%.
He said he expects the rate to remain there through mid-year 2006, after which time it could turn higher or lower depending on variables ranging from extremes such as the possible devaluation of the U.S. dollar overseas, to shocks caused to the national economy by the skyrocketing price of crude oil. Crude futures in New York traded below $58 a barrel Wednesday after hitting more than $60 earlier in the week.
An improving economy after mid-year 2006 could result in some softening of rates, possibly as low as 3.75% by the end of the year, Anderson said.
Last week, two Chapman University economists said they expected fed funds rate to hit 3.5% by the end of the year, where they expected it to remain through 2006.
