Stable Interest Rates Mean Higher Hopes for State’s Economic Comeback

California, in the third year of a modest economic recovery, breathed a sigh of relief Tuesday as the Federal Reserve Board held off on an expected boost in short-term interest rates.

Such a boost could have hurt the nascent rebound of the state’s important real estate market, where home sales are finally growing again. It could also have affected investment decisions in capital-intensive state business from farming to manufacturing, though economists say the state’s recovery would have continued nevertheless.

“The news that rates aren’t increasing is probably more good news for California than for other parts of the country,” said Gary Schlossberg, senior economist with Wells Fargo Bank in San Francisco.

California’s economy is generating new jobs at a 2.9% rate this year, compared with 2% for the U.S. as a whole, the UCLA Anderson Business Forecast reported this month. But the state’s recovery remains fragile.

With many homes financed by adjustable-rate mortgages, any increase in rates could raise the monthly payments for state homeowners, reducing their disposable income and consumer spending.

An increase in short-term rates, moreover, affects not only the cost of borrowing for such things as refrigerators and automobiles, but also the cost of business loans.

Farmer Ted Sheely, who grows pistachios, cotton and tomatoes on 1,100 acres in west Kings County, says he relies on short-term financing to plant crops and hire help.

“I already have a lot of my crops contracted for this year, and the [prices] don’t reflect a [subsequent] rise in interest rates,” he said. If the cost of money goes up, either his income falls or he is forced to cut back on hiring.

Although the rest of the nation is well into a recovery, California is lagging behind, only now seeing strong growth in all sectors and all parts of the state. And though there’s concern about inflationary pressures increasing in the rest of the nation, there is little concern in the state about sharply rising prices.

The growth of consumer prices in the state still lags the rest of the country. And though the state unemployment rate dropped in August, it was still 7%, compared with the nation’s 5.1%.

California’s struggling real estate sector is perhaps the most vulnerable to any rise in rates.

The average rate on a fixed-rate mortgage peaked at 8.42% in July and has dropped to 8.14% now, but it’s still well above the low of 6.94% in February, the California Assn. of Realtors reported.

Sales of existing single-family homes, meanwhile, have seen their best seven months this year since 1989, the year before the recession began in California, the association reported. Industry observers don’t want to jinx that with a rate hike.

“We’re very delighted” that the Fed failed to act Tuesday, said Leslie Appleton-Young, an economist with the California Assn. of Realtors in Los Angeles.

Some think a modest rate hike, such as the quarter- to half-point jump Fed watchers had expected, would have little effect on the state’s economy.

“They don’t dramatically affect our operations one way or another,” said Nelson Chan, a marketing executive with Sunnyvale-based SanDisk, which makes memory storage drives. “We have other, more pertinent issues . . . like the yen conversion rate . . . since a lot of our suppliers are in Japan.”