Forecast: Higher mortgage rates, food prices ahead

The Central Valley’s limping recovery will slow to a crawl over the next two years, a university forecaster says, if projections of less water and higher interest rates come to pass.

The annual forecast by California State University, Stanislaus, professor Gökçe Soydemir mirrors the rising regional indicators noted in a report out of the University of the Pacific in Stockton last week. But Soydemir’s report looks forward, predicting the upturn will level out and even dip in some areas through December 2018.

Interest rates, tamped down to spur economic growth since the Great Recession, are expected to rise now that the national economy is humming along, notes the fall 2016 Business Forecast Report released Wednesday.

“One sound (bit of) advice for the Valley consumer would be to switch from adjustable-rate mortgages to fixed-rate mortgages because interest rates are expected to start increasing pretty soon,” Soydemir said Friday.

Higher mortgage rates will also burst the modest bubble around local real estate prices, the report says. Home values will continue to grow, but more slowly, following an interest rate increase. Home prices and the availability of new homes are intertwined, however. The slowdown in construction, seen this year and likely to drop further with a rate hike, will help bolster home prices, the report also points out.

A second major economic factor here is water. The drought reined in agriculture’s comeback, and even as it eases it continues to dampen growth, the report says. State reductions in water supplies, now under discussion, would further muddy the farm economic outlook. Ag income also will be trimmed back by new regulations on cow emissions and overtime pay for farmworkers.

The rising dollar, a boon for travelers and buyers, also makes Valley farm exports a tougher sale. Uncertainty surrounding the British exit from the European Union, or Brexit, is pushing the dollar higher.

When farm costs rise, so do food prices, noted Soydemir, but tempering that will be slightly higher wages overall.

“Wage growth will keep up with inflation, keeping the purchasing power unchanged from the previous year for the Valley consumer,” he said.

Consumer purchasing power, in turn, will help boost retail employment. Retail was a bright spot in 2016, especially in Turlock and Riverbank, the report notes. Education and health services, both bolstered by state income sources, also have done well this year.

Employment gains will slow in the coming year, predicts the report, in part because the region does not have the wherewithal to support continued labor expansion.

“It is important to have an infrastructure that would sustain such growth in the Valley, which means finding ways to increase water storage, extending the passenger railway system inland and establishing new east-to-west highway corridors,” the report says.

Soydemir is a Foster Farms-endowed professor of business economics. Find this and past reports at www.csustan.edu/sjvbfr.

This story was originally published November 5, 2016 at 4:12 PM with the headline "Forecast: Higher mortgage rates, food prices ahead."