Economic Update (Monday, December 21, 2020)
Economic Update
(Monday, December 21, 2020)
Certain years are so eventful that they are regarded as pivotal in history, years when wars and slavery ended and deep generational fissures burst into the open – 1865, 1945, and 1968, among them. The year 2020 will certainly join this ominous list. This year will long be remembered and studied as a time when more than 1.5 million people globally died during a pandemic, racial unrest gripped the world, and democracy itself faced extraordinary tests. No one could escape the virus of 2020. This year was a 12-month stress test. It interrupted and upended our world. One day we will look back on this year and wonder how we ever survived. But we did! Welcome 2021, thank God you’re almost here!
Retail Sales. Retail sales sink 1.1% in November according to the Commerce Department, as COVID-19 buffets our economy. Sales at U.S. retailers fell for the second month in a row and posted the biggest decline since the onset of the pandemic, underscoring fresh strains spawned by the record rise in coronavirus cases. Sales in October were also revised down to show a slight decline instead of a small increase. The reversal in retail sales in the past two months adds to a portrait of a U.S. economy sagging under the weight of the coronavirus again. Sales fell at restaurants, auto dealers, gas stations, clothing stores, department stores and places that sell home furnishings and electronics. Bars and restaurants suffered a 4% drop in sales, marking the second decline in a row and the largest since April during the height of the pandemic. More people avoided going out to eat or were unable to do so because of new government limits on indoor dining (and outdoor in some cities). Sales fell 1.7% last month at auto dealers, but overall it’s been a surprisingly good year for the industry. Low interest rates helped boost sales and more people are driving instead of taking public transportation. The biggest losers in the pandemic have been traditional department stores. Sales sank 7.7% last month in that category. The only segments to post higher sales were grocers, home centers and Internet retailers — and even then the increase in receipts were small. Sales at Internet retailers, the segment that’s performed the best during the pandemic, rose a scant 0.2% in November. Like a puppet on a string, we have been beholden to the course of the pandemic. Retail sales is just the latest indicator flashing red and signaling our economy is hitting the brakes. Nevertheless, the emergence of COVID-19 vaccines is foreseen helping us regain good health by the spring or summer of 2021. But the winter months won’t be easy. Of course, as I have emphasized before, what will really help between now and then is additional aid from the federal government. And after months of stalemate, the good news is that those pesky Democrats and Republicans finally approved a new stimulus package to provide more money for unemployed workers and loans for struggling businesses.
New Home Construction. U.S. home builders started construction at a seasonally-adjusted annual rate of 1.55 million houses in November, representing a 1.2% increase from the previous month’s figure, the U.S. Census Bureau reports. Compared with last year, housing starts are up 13%. Similarly, building permits for new homes occurred at a seasonally-adjusted annual rate of 1.64 million, up 8.5% from a year ago. A surge in the multifamily sector — which includes apartment buildings and condos — drove the increase in both housing starts and building permits. Multifamily starts were up 8%, versus 0.4% for single-family homes. And the number of permits issued for buildings with five or more units rose nearly 23% between October and November, compared with a 1.3% uptick for single-family structures. America’s building boom is continuing for now — and that’s good news for prospective home buyers. The severe shortage of existing homes for sale has pushed prices higher. As a result, the new-home segment of the market holds renewed importance. But the pace at which builders completed their projects slowed in November. The number of completions fell nearly 1% for single-family homes and 35% for multifamily buildings.
Home Flipping Declines. ATTOM's third quarter “2020 U.S. Home Flipping Report” shows that 57,155 single-family homes and condominiums in the United States were flipped in the third quarter of 2020. Those transactions represented 5.1 percent of all home sales in the third quarter (or one in every 20 transactions). That percentage was down from 5.5 percent (or one in every 18 sales) in the third quarter of last year. However, while the home-flipping rate dropped again, both profits and profit margins increased. For example, the gross profit on the typical home flip nationwide (the difference between the median sales price and the median paid by investors) rose in the third quarter of 2020 to $73,766 – the highest amount since 2000! That amount was up from $61,800 in the third quarter of last year. The gain pushed profit margins up, with the typical gross flipping profit of $73,766 in the third quarter translating into a 44.4 percent return on investment (“ROI”) compared to the original acquisition price. The ROI in the third quarter stood at its highest point since the first quarter of 2018 (when it was 48 percent). The continuation of opposing trends, with flipping rates down but profits up, reflects broader national housing market patterns as the worldwide Coronavirus continues spreading across the United States. Homes flipped in the third quarter of 2020 were sold for a median price of $240,000, with a gross flipping profit of $73,766 above the median investor purchase price of $166,234. The highest third-quarter 2020 home flipping profits, measured in dollars, were again concentrated in the West and Northeast. Among metro areas with enough data to analyze, 22 of the top 25 were in those regions, led by San Jose, CA (gross profit of $290,000); Ventura, CA ($180,000); Bridgeport, CT ($177,500); Los Angeles, CA ($161,500) and San Francisco, CA ($158,500). Nationally, the portion of flipped homes purchased with financing barely changed, rising from 42.4 percent in the second quarter of 2020 to 42.6 percent in the third quarter of 2020. Meanwhile, 57.4 percent of homes flipped in the third quarter of 2020 were bought with all cash. Home flippers who sold homes in the third quarter of 2020 took an average of 192 days to complete their transactions – the highest level since the third quarter of 2003.
$130,000 for an 8-foot-by-8-foot shed? Only in LA. Yes, Los Angeles is paying $130,000 per unit in their effort to house the homeless. In other cities, 64-square-foot aluminum and composite sheds are being used as quick and inexpensive emergency shelter for homeless people. Not in Los Angeles. Here, plans to employ the minimalist structures, known as “tiny homes,” have blossomed into expensive development projects with access roads, underground utilities and concrete foundations — and commensurate planning delays. At the city’s first tiny home village, scheduled to open in January, each of the 39 closet-sized homes is costing $130,000, about 10 times what some other cities are spending! Five more villages are planned to open next year. Total cost: $5.2 million. The cabins the city purchased are about the size of a jail cell, or of a medium-sized backyard shed that can be purchased for a few hundred dollars at Home Depot. Constructed of an aluminum frame with composite sheets for walls, they measure 8 feet, 6 inches by 7 feet, 6 inches — technically 63.75 square feet — and will have two retractable bunks each. Food will be brought in and handed out at an eating area. Showers and restrooms will be in separate trailers piped into sewers. Understandably, the “Tiny Home Program” is facing criticism both for its cost and the skimpy quarters. Here’s the problem. At about $8,600 each, the price tag for the individual shelters account for only a small fraction of the overall cost. But a breakdown provided by the Los Angeles Bureau of Engineering shows that the contract provides $1.5 million just to prepare the site. It also includes $122,000 for underground utilities, $253,000 for concrete pads (one for each shelter), $312,000 for an administrative office and staff restroom, $1.1 million for mechanical, electrical and fire alarms and $280,000 for permits and fees. Additionally, the city has budgeted $651,000 to connect to the street sewer line and $546,000 in design, project management and inspection costs. That is insane! In contrast, the Riverside City Council voted last year to purchase 30 shelters. The village opened March 13, at a total cost of $512,000 — just over $17,000 per shelter. The structures were placed directly on the asphalt, leveled on wood blocks and secured with screws and brackets fashioned by city workers. Ironically, when a self-styled homeless activist started delivering hand-made tiny homes to people living on the streets of Los Angeles for free, our city ruled the structures illegal and quickly stamped out the movement.
Landlords Sue Santa Monica. In September of this year, Santa Monica City Council passed a new law that requires that residential leases in the seaside town of 91,000 last a minimum of one year. Also, landlords cannot rent out furnished apartments. It was an obvious attempt by the city to clamp down on Airbnb short-term rentals. In response, a slew of apartment landlords are now suing the City of Santa Monica, claiming this new law banning short-term rentals is “arbitrary, capricious, and lacking in evidentiary support.” The property owners behind 32 limited liability companies filed the lawsuit, which seeks to toss the measure. Filed on Monday in Los Angeles County Superior Court, the lawsuit paints a picture of property owners who now feel blindsided by local government, and are trying to fight back. The complaint details the two-year process by the city’s planning department to study a new rent-term measure, partly in response to concerns about the rise of Airbnb and other short-term rentals (many of them unregistered). Santa Monica officials initially decided against a mandatory long-term lease requirement, according to the lawsuit. But the suit claims the city eventually “bowed to political pressure,” from UNITE HERE, the powerful union that represents hotel workers. The lawsuit says the city then “openly pushed an agenda that solely benefited the hospitality industry.” It alleges Santa Monica is violating the California Coastal Act, which puts restrictions on city laws that govern land within 1,000 yards of the Pacific Ocean. The short-term rental law, according to the lawsuit, also violates the U.S. Constitution’s equal protection clause because it disproportionately affects tenants hurt by Covid who may be looking for temporary residence near hospitals. The measure also goes against the property rights of landlords, the lawsuit argues. A statement from the city said officials are “reviewing the challenges raised in the complaint that was recently filed.”
Motel Dwellers Forced into Homelessness. L.A. County was all set to purchase its 10th vacant hotel and convert the property into housing for the homeless as part of California's new “Project HomeKey” program, but there was one minor problem. The Studio 6 motel in Commerce wasn't vacant! Earlier this month, after the motel owner supposedly kicked everyone out, dozens of occupants claimed they'd been living in the motel for months — or even years — and were being forced into homelessness. Several other families believe they were illegally evicted and denied rights like relocation fees. Others say they were locked out of their rooms this month or that management didn't give them any notice about the sale. Now, county officials have delayed the close of escrow, while they sort out if occupants have rights of residency — and if not, where they will go. Workers from the Los Angeles Homeless Services Authority came with pickup trucks and hotel vouchers to help some of those displaced. Under California law, people staying at a hotel more than 30 days qualify as tenants, which entitles them to relocation payments. County officials said they always hire professional relocation consultants to visit each of the county's new HomeKey sites during the purchase process to determine whether any guests are long-term residents. The owner of this property told the county that there was no one who had been staying at this site for more than 30 days except for the on-site manager. The owner probably thought there were no long-term occupants, because the motel has a policy requiring them move out for one day a month before moving back in (a practice which is illegal). Or it could be that he thought occupants who rent with assistance from homeless agencies would be getting help to move elsewhere. Either way, the County says it's committed to providing relocation fees to anyone who can prove legal tenancy at the motel. Officials are also promising that no current or recent occupants of the Studio 6 will be forced out of the motel and into the street. L.A. County is paying $15 million for the Commerce motel. After the escrow closes, they'll have just 3 months to convert the property into permanent supportive housing and bring 80 people inside. The site in Commerce is one of 41 projects purchased by cities and counties in Southern California for Project HomeKey, a state grant program that has awarded $800 million since September. Nevertheless, there's obviously no upside to making a person homeless in order to make room for a presently homeless person.
House of Horrors. At the center of this controversy is La Strada, infamous developer Mohamed Hadid’s hillside Bel-Air spec mansion on Strada Vecchia Road, which, in the nine years since Hadid broke ground, has morphed into a $50 million albatross. Hadid’s original sin dates back to 2017, when he pleaded no contest to three misdemeanor charges stemming from alleged building violations in the construction of the nearly 30,000-square-foot mansion (one of those violations included the installation of an un-permitted IMAX movie theater). A 2019 visit to La Strada by L.A. County Superior Court Judge Craig Karlan determined that the structure did not appear safe and needed to come down. In June of this year, Judge Karlan ordered him to tear down the structure after years of legal battles comprised of a catalog of accusations that include illegal building, extortion, and bribery, all of which have triggered multiple lawsuits, a criminal case, and an FBI probe. In November, Hadid claimed—after several failed bids to appeal the June ruling—that he was too broke to pay for the court-ordered demolition. “I’m so sick of this house,” Hadid now admits. In the depths of his paranoia, Hadid believes there is a web of complicit actors (Los Angeles’s version of a Deep State, if you will) that are all out to destroy Hadid and his legacy. That list includes the Bel-Air Association, dozens of building inspectors, the Department of Building and Safety, local news media, his former contractor, L.A. city council member Paul Koretz’s office, Judge Karlan, and the wizard behind the curtain, his neighbor, Joseph Horacek, Hadid will face off against Horacek (and one other Bel-Air resident) in a civil suit that’s scheduled for January. The parties have sued and countersued and are seeking unspecified damages. Before he became known as the father to supermodels Gigi and Bella Hadid and a regular on The Real Housewives of Beverly Hills and Second Wives Club, Hadid made a fortune developing multi-million-dollar mansions around Southern California, including Le Belvédère in Bel-Air, which sold for $50 million in 2010.
Hatfields versus McCoys (Laguna Beach Style). Last year, billionaire bond investor Bill Gross installed a one million dollar mammoth Dale Chihuly’s blown-glass sculpture on his property overlooking the Pacific Ocean. His neighbor, tech entrepreneur Mark Towfig, objected to the installation, claiming the sculpture was blocking his ocean view. Then one morning, Gross discovered the sculpture had mysteriously been severely damaged overnight, suffering over $50,000 in damages. Gross accused Towfig. But Towfig claimed innocence and suggested a tree branch must have fallen on the sculpture (although there are no trees anywhere nearby). Gross responded by installing protective netting over his artwork. From there, the carnage escalated quickly. Gross and his wife accused Towfiq of being a “Peeping Tom,“ obsessed with seeing them nude in their pool. Then they accused Towfig of preventing them from entering their home at one point because trucks from HBO’s Ballers blocked their driveway when Towfiq rented his house to the show for a week. Towfiq, in turn, accused Gross of blasting the Gilligan’s Island theme song (and other ghastly numbers) to torture him and his wife, keeping them up at night. Of course, the conflict inevitably led to a lawsuit and dueling restraining orders. Now the parties are facing off in Orange County Superior Court. As testimony finally begins in a Santa Ana courtroom, Gross is calling for both parties to abandon their restraining orders, drop the lawsuit, and donate their legal fees to charity. Towfig’s attorney, Jennifer Keller, turned down the settlement offer as a publicity stunt. Property lawsuits between neighbors are always ugly and this one will undoubtedly be no exception! Believe it or not, the courtroom drama will be broadcast live on YouTube (if you’re in to that sort of thing).
Hancock Park House. Fans of 1962 psychological thriller “What Ever Happened to Baby Jane?” will be delighted to learn that the Hancock Park house used in the film is for sale. Your homicidal sibling now has the perfect place to call home—that is if you have $3.8 million to spare. For the first time in 50 years, the Mediterranean estate Bette Davis and Joan Crawford’s characters called home is on the market. Located at 172 S. McCadden Place in the “heart” of Hancock Park, the home has four bedrooms (plus a study), three bathrooms, a pool, and a two-story guest house with a sauna and kitted-out apartment upstairs. Built in 1928, this historic estate is situated on a sprawling 11,000 square foot lot. An original Hollywood icon, it has endless architectural details in the 4000 sq. ft. main residence, including a grand, double-height entry & spiral staircase (where Bette Davis once paraded down), a formal dining room, and sunken living room with original beamed-ceiling and fireplace. Downstairs layout features the cook’s kitchen, a private guest suite, which leads out to the yard. Upstairs there are four large bedrooms, 3 bathrooms, office/study, and balcony (where police never think to look). The 2-story guesthouse features a cabana full bathroom/sauna downstairs, and full studio with kitchen (excellent for hiding murder weapons). The private yard has a massive saltwater pool, spa, lawn, and secluded patio area famous for dead bodies. According to writer and locations buff Lindsay Blake, the estate has a rich cinematic history, with many film and TV roles. Just, whatever you do, don’t move in with your sister!
Announcing Pantone's Color of the Year 2021. Listen up rehabbers and interior designers. For over 20 years, Pantone's “Color of the Year” has influenced product development and purchasing decisions in multiple industries, including fashion, home furnishings, and industrial design, as well as home rehabbers, product packaging and graphic design. The Pantone Color of the Year selection process requires thoughtful consideration and trend analysis. To arrive at the selection each year, Pantone's color experts comb the world looking for new color influences. This includes the entertainment industry, films in production, traveling art collections, new artists, fashion, all areas of design, popular travel destinations, as well as new lifestyles, playstyles, and socio-economic conditions. Influences also stem from new technologies, materials, textures, and effects that impact color, relevant social media platforms, and even upcoming sporting events that capture worldwide attention. So when December rolls around every year, we know that means Pantone will announce the color for the upcoming year. But for 2021, they chose not one but TWO colors! They chose…(drum roll!)….PANTONE 17-5104 Ultimate Gray and PANTONE 13-0647 Illuminating Yellow, two independent colors that highlight how different elements can come together to support one another (in other words, the exact opposite of our partisan politics). The union of PANTONE 17-5104 Ultimate Gray + PANTONE 13-0647 Illuminating Yellow is one of “strength and positivity.” “It is a story of color that encapsulates deeper feelings of thoughtfulness with the promise of something sunny and friendly” according to Pantone. PANTONE 13-0647 Illuminating is a bright and cheerful yellow sparkling with vivacity, a warming shade imbued with solar power. PANTONE 17-5104 Ultimate Gray is emblematic of solid and dependable elements that are everlasting and provide a firm foundation. (Pantone wrote that – not me!)
Trump’s Boyhood Home. Want to buy “soon-to-be-ex” President Donald Trump’s boyhood home in Queens, New York? No; I didn’t think so. But let me tell you about it anyway. The Donald was raised in this unassuming home at 85-15 Wareham Place in Jamaica Estates. The neighborhood was once gated (though no longer) and remains pleasant in an affluent early-20th-century-suburb way. Fred Trump, the ex-president’s father, was one of the area’s developers, and this was among the houses he himself put up. The home, like most of its neighbors, is a Tudor on a smallish lot. Considered strictly as a piece of real estate, it’s nice enough but also old-fashion, with an unrenovated kitchen and, by today’s standards, dim, cramped rooms. The house has been bought twice during these grim four years, apparently by buyers who saw it as a potential growth asset. Not long before the inauguration in 2017, it went for $1.4 million, and it was auctioned within months to another buyer — said to be a Chinese investor — for $2.14 million. (Comparable houses nearby sell for considerably less than that.) It was offered at auction again last year but failed to sell, which perhaps explains why the owners are now trying a GoFundMe scheme. In a fittingly grifty real-estate move, the owners of the home have started a GoFundMe campaign to allow MAGA fans to buy the house as a gift to their man as he leaves office (whether he does so voluntarily or not). The sellers want $3 million, after which they’ll hand the keys to Trump so he can gold-plate it, or turn it into a petite presidential library full of torn-up-and-taped-together memos, or do whatever else he wants with it. But, as of today, the campaign to raise that $3 million has taken in only $125, which will barely cover the electric bill for a week or two. I wonder why? As a practical matter, making an institutional building out of Trump’s old house would be nearly impossible. A presidential library is large and requires a visitor center and a parking lot.
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 sharing 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” wherever you view podcasts (i.e. YouTube, Facebook, Google, Apple) and LAREIC.com/RubbingElbows.
LAREIC’s January Virtual Meeting. Our first meeting of the new year will take place virtually on Thursday night, January 14, 2021, 7:30 to 9:30 pm. Our special guest will be Brian Lauchner, visiting us from Southlake, Texas. Brian is brilliant when it comes to using discounted promissory notes to create passive cash flow. The title of Brian’s presentation is “How to Create Multiple Streams of Passive Income Using Non-Performing Notes.” Don’t miss Brian’s presentation. RSVP for login and password at: https://www.accelevents.com/e/JanuaryMeeting. 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 Covid case counts, vaccine distribution, and negotiations for additional government stimulus. Beyond that, Existing Home Sales will be released tomorrow (12/22) and New Home Sales on Wednesday (12/23). The core PCE price index, the inflation indicator favored by the Fed, also will come out on Wednesday (12/23). Most businesses and markets will close early on Thursday (Christmas Eve) and will be closed on Friday for Christmas. Merry Christmas!!!!!!!!!!!!!!!!!!!!!
Weekly Changes:
10-year Treasury: Rose 0.02
Dow Jones Avg: Rose 100 points
NASDAQ: Rose 300 points
Calendar:
Tuesday, 12/22: Existing Homes Sales
Wednesday, 12/23: New Home Sales
Wednesday, 12/23: Core PCE
For further information, comments, and questions:
Lloyd Segal
President
Los Angeles Real Estate Investors Club, LLC
310-409-8310
