Economic Update
(Monday, November 16, 2020)
Last week, the stock market roared higher on the news that a highly effective Covid-19 vaccine appeared to be just on the horizon. That was great news, but there’s still plenty of economic damage the pandemic can cause between now and when a vaccine is distributed to a meaningful proportion of our population. Another day of record coronavirus cases and hospitalizations and several countries, states, and localities responding with activity restrictions seems to have served as a reminder of that. Chicago issued a stay-at-home advisory. New York is closing bars and restaurants at 10 p.m. and limiting gatherings. School districts across the country have gone online-only. Widescale lockdowns in Europe have been extended. And no one knows yet what California will do. Despite these efforts, experts worry that transmission of the virus is still likely to increase during the winter months, as more people spend time indoors, colleges across the country send students home, and families gather for the Thanksgiving and December holidays. The appreciation of the challenges facing our economic recovery with a resurgent pandemic recalls pre-election hopes for fiscal stimulus legislation. Remarks over the weekend from Federal Reserve Chairman Jerome Powell echoed his earlier pleas for Congress to pass a new stimulus bill as soon as possible. With this reality in mind, let’s wash our hands (again), put on our face masks (yes, you!), social distance, and get under the hood…
Consumer Price Index. The Consumer Price Index (“CPI”) was unchanged last month, the Bureau of Economic Analysis announced on Thursday. That means the cost of living (a/k/a “inflation”) leveled out in October, which in turn is a reflection of the ongoing stress on our economy caused by the accelerating coronavirus pandemic. If you recall, the cost of living had risen sharply over a fourth-month span from June to September, but it was mostly just catching up after a steep decline in prices early in the pandemic. Within the CPI, the cost of groceries and electricity rose slightly in October, but those increases were offset by price declines for gasoline, car insurance, clothing, home furnishings and medical care. Grocery prices, known as “food at home,” have risen 4% in the past year. Of course, food prices have climbed with so many people working from home, cooking more and avoiding restaurants. Yet households are spending less on gas, travel and other services they would purchase in normal times. Inflation has softened considerably during the pandemic and poses no threat to our economy for the time being. For example, the yearly rate of inflation slowed to 1.2% in October from 1.4% in the prior month. Before the pandemic, inflation was running at a much higher 2.3% clip. Some economists predict inflation will surge back to 2% by next year if a vaccine becomes available and our economy speeds up, but it’s still a ways off. The nation’s inflation watchdog, your friendly Federal Reserve, cut its key interest rate to near zero this year to aid our economy. Further, central bankers have indicated they won’t raise rates again until inflation tops 2% for an extended period, an outcome that’s unlikely in the next year or so.
New Foreclosure Rules. Investors listen up! Get ready for a well-intended but crazy new California law that effects properties you buy at trustee’s sales. The new law applies to one- to four-unit properties sold at foreclosure auctions. If you are the highest bidder at the auction and win one of these houses, people who want to live in it (i.e. owner-occupied), as well as any nonprofit organizations and government entities, get an additional 45 days to submit higher offers. You can’t, but they can. And if the house is a rental, the tenants living there can also buy it by submitting offers. But these would-be buyers must offer more than you, even if its only one dollar! In other words, if you’re the successful bidder, you must now wait 45 days after the trustee’s sale before you receive clear title. So get ready for this new source of post-sale competition. Known as SB 1079, the law takes effect January 1, 2021. State Senator Nancy Skinner (D-Berkeley), the bill’s author, said her goal is to make it easier for individuals and affordable-housing groups to compete with investors, just like you. But how will it work in practice?No one knows for sure. But it sounds like the trustee who conducted the auction is now required to maintain a website that details the highest bid at the auction and how other buyers can submit competing offers. But funding could be an issue. The new rules require all offers submitted must include the entire purchase price in cash or cashier’s check in full (just like you had to do at the trustee’s sale), which means potential buyers would need their lenders to hand over money to the trustee outside the typical escrow process. Personally, I don’t think a traditional mortgage lender would lend like this. In other words, the new law gives nonprofits a streamlined way to purchase such properties, if they have the money. But without additional revenue sources, nonprofits are going to be in the same position as during the last recession (when many owner-occupied houses were auctioned off and turned into rentals). Many nonprofits are already strapped for cash, and the new law doesn’t earmark any money for these house purchases. Besides, by requiring a 45-day window for competing offers, the new law could create additional costs for lenders that are foreclosing on properties, — costs they may pass along in the form of higher interest rates to the broader market.
Reasons the Housing Market Will Stay Hot. While the overall economy will be directly affected by coronavirus-related and political developments in the coming months, recent trends suggest that our housing market (which has withstood every pandemic-related challenge), will continue its strong momentum in the months ahead. The housing market will remain strong for four primary reasons: 1. Demand Is Strong among Millennials. The nation’s largest generation, “Millennials,” long viewed as perennial home renters (who were reluctant or unable to buy), are now emerging as a driving force in the U.S. housing market’s recent recovery. 2. Mortgage Rates Are Historically Low. All-time low interest rates are also driving demand across all generations. Strong demand created by this rate drop has triumphed over other economic disruptions (e.g., pandemic, recession, record unemployment). In addition, Freddie Mac just forecasted mortgage rates to remain below 3% through next year. 3. Prices Continue to Appreciate. The continued lack of supply of existing homes for sale coupled with the surge in buyer demand has experts forecasting strong price appreciation over the next twelve months. 4. History Says So. History suggests that the slowdown is largely concentrated in the month of November (during and after the election). In fact, the year after a presidential election (i.e. 2021) is typically the best of the four-year cycle. This suggests that demand for new housing is not lost because of election uncertainty, but rather gets pushed out to the following year as long as the economy stays on track.
What Happened to Our Beloved Streetcar System? If you’ve lived in LA long enough, you probably remember fondly the red streetcars, rumbling through the city. It was one of the most elaborate rail systems in the country. But the Pacific Electric Red Car System was completely dismantled by the early 1960s. Why? Well, one of LA’s most enduring conspiracy theories is that an alliance of companies pushing an “auto-centric future” for Los Angeles schemed to bring down its sprawling rail network. In a nutshell, the theory goes that back in 1945, a sinister corporation called National City Lines took over the railway system. Then, over the course of the next two decades, LA’s extensive streetcar network was eliminated and the city’s iconic read and yellow trolleys were replaced with shiny new buses. The principal investors in National City Lines? None other than General Motors (a leading bus maker as well as an automobile retailer), and other giant oil companies. The streetcar system, as the theory goes, was deliberately destroyed by National City who stood to gain the most from its demise. Not only would this facilitate the sale of buses, it would induce greater demand for automobiles—along with tires and oil. But in truth, streetcars were already struggling to survive. By the 1930s, LA’s streetcars had become wildly unprofitable and were quickly losing riders. In "Transport of Delight," Jonathan Richmond points out that Pacific Electric managed to turn a profit in only one year between 1913 and the beginning of World War II. Cheaper to operate and requiring less maintenance, buses began phasing out the streetcars very early. In other words, by the time that National City Lines entered the picture, the dismantling of the streetcar system was well underway. Streetcars became increasingly unreliable as the automobile grew more popular. With more cars on the road, streetcars, which were bound to the same traffic rules as cars, slowed to a crawl. The number of residents of Los Angeles County exploded from under 200,000 in 1900 to more than 2 million in 1930, moving out into low-density suburbs, full of single-family homes. Buses became a more attractive choice for transit operators; they were much cheaper than streetcars and could be easily rerouted as new urban areas developed and rider demand shifted. Worse, local and state officials repeatedly failed to finance badly needed infrastructure that could have salvaged the streetcar system. Instead, local leaders eagerly gobbled up federal funding to build new roads and eventually freeways. These investments made automobiles even more appealing to Angelenos (who could afford them), further cutting into the streetcars’ ridership base. In the end, the demise of LA’s streetcar system was less a conspiracy against the public and more a public failure to anticipate the smoggy, traffic-jammed streets, and congested freeways we have now. Imagine how valuable that rail system would be today!
Office Market Slowdown. As expected, Covid-19 has taken its toll on the market for office buildings this year. As you know, the pandemic has prompted many businesses to turn to work-from-home models, which has created questions about the future of workplaces. Multi-tenant office buildings are now facing questions regarding leasing, leaving some investors in wait-and-see mode. Covid-19 has created a stagnant market for multi-tenant office buildings sales, and the majority of office buildings in Los Angeles are multi-tenant in nature. Total sales volume in L.A. this year is 58% of what it was last year, and will likely get worse in 2021. Still, there have been some big sales over the last six months. Production facilities, such as those in the Hudson Pacific deal, are still in high demand. Several studios changed ownership in the past few months, including Television Center in Hollywood, which Santa Monica-based BLT Enterprises added to its production portfolio for $64 million. There’s also demand for medical offices and life science buildings. That’s what’s driving the market. But in your traditional multi-tenant office buildings, there’s almost no sales since Covid hit. The only office buildings seeing interest have long-term leases with quality tenants in place. Despite a handful of big-dollar deals, owners are not looking to sell. Why should they? There’s no motivation from the owners today to sell their buildings. After all, sellers would have to take a substantial price discount, so owners are unwilling to list unless they absolutely need to sell.
The Donut King. Few foods are as universally adored as fried dough. The United States alone is home to more than 25,000 donut shops and they generate more than 10 billion donuts each year. Nearly every independent donut shop in Southern California hides a story — a story that starts with an unlikely impresario, a Cambodian refugee named Ted Ngoy. In the early 1970s, Cambodia was in the midst of a brutal civil war that displaced two million people, more than a quarter of the country's population. Ted, his wife Christy and their two kids fled to Thailand and then the U.S. Along with thousands of other Cambodian refugees, the Ngoys ended up at Camp Pendleton. Peace Luthern Church in Tustin then sponsored the family, allowing them to live in the church where Ted worked as a janitor. He took two additional jobs, working almost 24 hours per day. One night, during his shift at a gas station, the scent of freshly baked goods wafted toward him. He ran to the shop across the street where he bought a donut. It was love at first bite. Ted soon got a job working at Winchell's, which was then the dominant donut chain on the West Coast. After completing the company's training program, they gave him the keys to a store in Newport Beach to manage. The entire family — Christy and the three kids — worked alongside him. Long hours. Hard work. No days off. By 1976, Ted had saved up enough money to buy his own shop, which he named Christy's. The family still had the Winchell's so now they had two stores to run. As word of Ted's success spread, Cambodian immigrants started seeking him out when they arrived in Southern California. Over the years, he sponsored more than 100 Cambodian families and paid for their airfare. When they arrived, "Uncle Ted" let them stay at his house while he taught them the donut business. Ted bought donut shop after donut shop, leasing them to these Cambodian immigrants, who ran the stores with their families, and taking a monthly cut of each store's profits. At the peak of his success, Ted owned 65 donut stores in Los Angeles and Orange counties, and was bringing in over $100,000 per month. All that money paid for expensive clothes, luxury cars, fancy trips and an opulent home in Mission Viejo. But with great riches come great temptations. On one of his Las Vegas trips, Ngoy took up gambling. It was small amounts at first, but he was soon blowing bigger figures and he couldn't seem to stop. Perpetually in need of cash, he'd ask the people running his donut shops for loans. Since many of them had gotten their start in the business — and the United States — thanks to Ngoy, they were happy to help. But when he couldn't pay them back because he had gambled the money away, Ted signed away his ownership stakes in those stores. One by one, Ted lost all of his donut shops. Broke, Ted and Christy returned to Cambodia, and shortly thereafter divorced. Ted now resides in Cambodia where he splits his time between Phnom Pen and Kep, a province in Southern Cambodia. He has slowly found his way into real estate development and is trying to build donut shops in Cambodia. After all, you can’t keep a good man down. That’s his story; what’s yours? [Ted’s rages-to-riches-to-rages story is now the subject of a new documentary called “Mr. Donut King,” which is available on-demand.]
Mookie Betts to Encino. Fresh off a World Series victory, Dodgers star Mookie Betts is treating himself to a new house. The four-time All-Star purchased an Encino mansion owned by UCLA football coach Chip Kelly for $7.6 million. Earlier this year, the outfielder inked a massive 12-year extension with the team worth $365 million — the largest contract in Dodgers history and one that’ll keep him in Los Angeles until 2032. So Mookie can certainly afford the mansion and the costs that come with it. The house spans 9,300 square feet on a long, thin lot, with nine bedrooms and 10 bathrooms across two stories. A motor court with two garages approaches the crisp black-and-white exterior. The property includes a main house, guesthouse, swimming pool and sports court. But where will he place the batting cage? A two-story foyer with herringbone floors and a sweeping staircase sets a dramatic tone, while living spaces display a modern farmhouse style. Highlights include a chandelier-topped dining room, marble kitchen, indoor-outdoor living room, movie theater and walk-in wine closet with a candy machine outside. Upstairs, a striking black fireplace runs floor-to-ceiling in the owner’s suite, and an office expands to a balcony overlooking the grounds. Out back, a cabana with a TV adjoins a custom swimming pool with a spa and a conversation pit accessed by steppingstones. Betts, 28, was drafted by the Red Sox in 2011 and spent six seasons in Boston, including a historic 2018 campaign in which he became the first MLB player in history to win MVP, Gold Glove, Silver Slugger, the batting title and a World Series championship all in the same season. He was dealt to the Dodgers in 2020 and helped our boys win its first World Series title in 32 years (defeating the Rays in six games). Betts will have a bit of a commute to work though, as the property is about 20 miles from Dodger Stadium. Apparently, Mookie isn’t aware of our freeway traffic as yet. Meanwhile, it’s a nice profit for Kelly, who paid $7 million for the home two years ago. And Kelly may need it because he is rapidly becoming the worse coach in UCLA football history. Hired in 2017, the Bruins have gone 7-18 during his tenure.
Traffic Accidents. The decline in LA’s traffic accidents began in March, the month that Mayor Eric Garcetti ordered all nonessential businesses to close, leading to more people staying home due to the coronavirus pandemic. In March, there were 2,917 collisions, a 41% drop from the same month a year ago. The difference is most stark between April and July, when very few people were driving to work or to run errands. This year, the LAPD recorded between 1,723 and 2,159 collisions each month. The 2019 figures were all at least twice as high, bouncing between 4,487 and 4,858. As traffic began to start again, the number of collisions in August climbed to 2,983, a boost of more than 800 from July. September was a bit lower, with 2,662 collisions, according to the LAPD, but the figure is still well above March-July levels when the roads were all but empty. One thing that has not changed is where accidents happen. Downtown is still the top spot for collisions both this year and last. However, the 1,234 collisions from January through September downtown is down still 43% from the same time frame last year.
Weekly “Robbing Elbows” Podcast. LAREIC is proud to announce our new weekly podcasts, “Rubbing Elbows” staring our Director of Acquisitions, Chuck Dorfman, and his co-host, Lior Yehuda. Every Thursday live at 2:00 pm (and streaming anytime thereafter), Chuck and Lior interview real estate professionals ready to share their insights and advice. Its real estate uncensored and unfiltered. These guys may be wild, but they know what they’re talking about. You can enjoy “Rubbing Elbows” on whatever app you use to view podcasts (i.e. YouTube, Facebook, Google, Apple) and at www.LAREIC.com/RubbingElbows.
LAREIC’s December Virtual Meeting. Our December holiday meeting will take place virtually on Thursday night, December 10, 2020, 7:30 to 9:30 pm. Every year, we try to schedule someone unique and special for our holiday meeting. This year I think we’ve outdone ourselves! Our special guest will be Armen Mardirousi, who is the “Real Estate Yogi.” Armen is a triple threat: a yoga master, a Realtor and a real estate investor. The title of Armen’s presentation is “Become a Conscious Real Estate Investor.” So if you’re ready to experience the conscious connection between real estate and yoga, don’t miss his’s presentation. RSVP: https://www.accelevents.com/e/DecemberMeeting. But hurry because we only have limited capacity on our Zoom broadcast. (As you know, we were sold out the last three months and had over 100 people on our waiting list.)
This Week. Looking ahead, investors will continue watching accelerating Covid case counts, progress on vaccines, and final election results. Beyond that, Retail Sales will be released tomorrow (11/17). Since consumer spending accounts for over two-thirds of all economic activity in the US, the retail sales data is a key indicator of growth. Two important indicators for real estate investors also come out this week. Housing Starts will come out on Wednesday (11/18), and Existing Home Sales will be released on Thursday (11/19).
Calendar:
Tuesday, 11/17: Retail Sales
Wednesday, 11/18: Housing Starts
Thursday, 11/19: Existing Home Sales
Weekly Changes:
10-year Treasuries: Rose 0.08 points
Dow Jones: Rose 900 points
NASDAQ: Fell 150 points
For further information, comments, and questions:
Lloyd Segal
President
Los Angeles Real Estate Investors Club, LLC
310-409-8310
