Economic Update (Monday, December 7, 2020)
Economic Update
(Monday, December 7, 2020)
Everyone keeps asking when will Congress pass a new stimulus package that our economy so desperately needs? The good news is that Congress is once again considering several stimulus proposals, including a Democrat $908 billion package and a Republican $550 billion package. And now there is renewed hope of a bi-partisan compromise. The vote could be any day now. But time is quickly running out on this “lame duck” session. Unless something is passed before Congress adjourns this Friday, December 15th (for the holidays), nothing will happen until next year. If that happens, it appears likely that Congress will wait for the outcome of the two senate races in Georgia before passing a new stimulus bill. In Georgia, its Republican Senator David Perdue versus Democrat challenger Jon Ossoff, and Republican Senator Kelly Loeffler versus Democrat challenger Rev. Raphael Warnock. Reliable polls have both races “too close to call.” If Republicans win at least one of those two seats, they will control the Senate and the stimulus will likely be closer to $550 billion. If Democrats win both seats, they will control the Senate and their stimulus package could be as much as $1-2 trillion. In other words, on January 5, Georgia will conduct a trillion dollar Senate election, the most expensive state election in American history! That’s why all eyes are on Georgia, and donations are pouring in. So with “Georgia on My Mind,” let’s wash our hands, put on our face masks, social distance, and get down in the weeds…
Employment Report. Nonfarm payrolls increased by just 245,000 in November, well below Wall Street estimates as rising coronavirus cases coincided with a considerable slowdown in hiring. Overall, the Bureau of Labor Statistics report is very disappointing. The November gain represents a pronounced slowdown from the 610,000 jobs added in October. In all, our economy has brought back 12.3 million of the 22 million jobs lost in the first two months of the crisis. That means there are still over 10.7 million Americans unemployed (compared with 5.8 million in February). At the pace added in November, the economy would not be back to pre-pandemic employment levels until 2024, which is dreadful. The November job gains would be considered strong under normal circumstances, but the pandemic has left millions of Americans out of work from jobs lost in the early stages of the crisis. The total represents the slowest job growth since the employment recovery began in May as the number of workers unemployed for at least 25 weeks surged 11% to nearly 4 million. With COVID cases surging again and policies being put in place to try and slow the spread, hiring has clearly slowed down. Also, worker availability is a significant limiting factor as well, with many unable to go to work due to COVID concerns or family care obligations. Plus, the spike in coronavirus cases threatens to push the U.S. health-care system to the brink. Though the U.S. is coming off its fastest growth quarter ever, economists worry that the next quarter or two could see flat or even negative growth before rebounding. The unemployment rate (“C-2”) decreased to 6.7% in November from 6.9% in October, but don’t get too excited. I say this because the .02% drop was simply many Americans who gave up looking for work. A more accurate measure of joblessness (“C-6”) is still at 12%, while the number of Americans outside the labor force remains just above 100 million.
Retail Rental Market Shows Life. It’s no secret that Covid-19 has affected the retail environment, with a rapid shift to ecommerce reshaping the shopping experience for consumers (and businesses). These dramatic changes, in turn, are having a ripple effect on the retail real estate market, where rents have slipped, and vacancies have climbed during the pandemic. In the third quarter, the average asking rental for retail properties decreased 15 cents to $2.86 a square foot on a triple-net basis quarter over quarter, according to CBRE Group Inc. Vacancy rates, meanwhile, have jumped to 6.2%, up from 5.8% last year. There are signs of improvement, though. Commercial real estate agents say leasing activity is slowly starting to pick up after months of challenges. As you would expect, fitness tenants and full-service restaurants may not be chomping at the bit to sign leases, but daily-needs tenants (like pharmacies and grocery stores) are doing deals. While rental rates are down in some areas, so is the volume of new leases, which means there are fewer properties to use as comps. Although many landlords are stubbornly keeping rents high, tenants are seeing greater concessions in the form of free rent or tenant improvements (“TI”) to keep those coupon rates high. It’s not uncommon for landlords to offer concessions, including shorter lease terms, instead of rent reductions, especially if building owners are thinking of selling at some point. This is because many lenders require certain rental rates to be met. Further, tenants are interested in space that has already been built out that they will not have to spend money. Plain, vanilla space is a lot more challenging unless landlords can provide the concessions to get a tenant over the issues that they are now facing. More troubling, once Los Angeles County’s eviction moratorium ends, you can expect an increase in vacancies as tenants who haven’t paid their rent are evicted. Both landlords and tenants expect to see more concessions and lower rents going forward. Realistically, lower rents could last through the second quarter of next year. And if workers do not return to office buildings, some areas could see rents drop dramatically. Right now, it’s clearly a tenant’s market.
Home Prices Rise Again. Southern California home prices jumped 14% in November compared with a year earlier, according to DQ News. The six-county region’s median price of $605,000 was down slightly from a record $610,000 in October, although it’s not unusual for prices to fluctuate month to month. The median is up 14.2% from a year earlier. Economists and real estate agents say the housing market has been red hot because of the COVID-19 pandemic. People who still have jobs want more space, and federal policy aimed at spurring economic growth has helped drive average interest rates on a 30-year fixed mortgage below 3%. That’s bringing more people into the market and allowing them to pay more than they otherwise could. Another big part of the demand surge has come from millennials who are entering their 30s and have accelerated plans to buy because of the pandemic. But here’s the challenge, as people venture into the market, they are finding fewer homes for sale than last year and are bidding up prices. Though the six-county median price last month was slightly below October’s record, prices in Los Angeles and San Bernardino counties still set all-time highs in November, while San Diego matched a record. The regional median was up by double digits compared with last year — the third consecutive month of such sizable increases. And you can expect continued “strong price growth” given the mismatch of supply and demand. Because the median is the point at which half the homes sold for more and half for less, it also reflects a change in the types of homes sold. One thing that has made the median price rise so much in recent months is that higher-income households are less likely to have lost their jobs in the pandemic, leading a greater share of home sales to be in the luxury segment now than at the same time last year. In Los Angeles County, the median home price rose 15.3% from a year earlier to $715,000, while sales climbed 11.2%. In Ventura County, the median price rose 12.9% to $655,000, while sales climbed 12.4%.
Rise in Purchase Mortgages. ATTOM Data Solutions released its third-quarter 2020 Residential Mortgage Origination Report, which shows that 3.25 million mortgages secured by residential property (1 to 4 units) were originated in the third quarter of 2020 in the United States. That figure was up 17 percent from the prior quarter and up 45 percent from the third quarter of 2019 (to the highest level in 13 years). With interest rates dipping below 3 percent for a 30-year fixed-rate loan, home mortgages originated in the third quarter of 2020 represented an estimated $974.1 billion in total dollar volume. That number was up 20 percent from the second quarter of 2020 and up 52 percent from a year ago (to the highest point since 2005). The increases came in part from a jump in purchase mortgages, which grew faster on a quarterly basis than the number of refinance loans for the first time in more than a year. As a result, the amount of money lent to buyers taking out new mortgages in the third quarter of 2020 represented 34.5 percent of all lending, up from 30.6 percent in the second quarter of 2020. The home-loan industry got even busier in the third quarter of 2020, with the housing market still operating as if the recession and pandemic don’t exist. Buyers, lured by low mortgage rates, kept lining up for loans at levels not seen in more than a decade. Metro areas with at least 1 million people and the biggest quarterly increases in purchase originations include Boston, MA (up 75.3 percent); Hartford, CT (up 52.6 percent); San Jose, CA (up 49.8 percent); and our very own Los Angeles, CA (up 43.3 percent). Among homes purchased in the third quarter of 2020, the median loan amount was $275,500 – a new high since 2000. The amount was up 10.3 percent from the prior quarter and up 24.2 percent from the third quarter of last year.
Mortgage Credit Availability Index. Mortgage standards are nothing like they were back in the 2004-2007 bubble. During the housing bubble, it was difficult NOT to get a mortgage. Today, it is tough to qualify. The Mortgage Bankers’ Association released its "Mortgage Credit Availability Index" which indicates the availability of mortgage credit for borrowers at various points in time. The higher the index, the easier it is to get a mortgage. As shown below, during the housing bubble, the index skyrocketed. Currently, the index shows getting a mortgage is even more difficult than it was before the bubble.
Prices Slowly Rising in Opportunity Zones. If you’re an investor interested in Opportunity Zones, listen up. ATTOM Solutions released its third-quarter 2020 special report analyzing qualified Opportunity Zones (established by Congress). In this report, ATTOM looked at 1,737 zones with sufficient sales data to analyze, meaning they had at least five home sales in the third quarter of 2020. The report found that median home prices increased from the third quarter of 2019 to the third quarter of 2020 in 74 percent of the zones and rose by more than 10 percent in slightly more than half the zones. Those gains reveal that housing markets in Opportunity Zones continued improving in the third quarter of 2020, even as the Coronavirus pandemic spread throughout the nation. The COVID-19 impact generally hit hardest in lower-income communities that include most of the zones targeted for tax breaks designed to spur redevelopment. The report also shows that 76 percent of the Opportunity Zones analyzed had median home prices in the third quarter of 2020 that were less than the national median of $283,813 (roughly the same percentage that were below the national figure in the second quarter of 2020). About 36 percent of the zones still had median prices of less than $150,000, also about the same as in the prior quarter. Home prices in Opportunity Zones around the country continued riding the wave of a nationwide boom that has defied the economic damage from the widespread Coronavirus pandemic. The increases point towards the country’s most distressed communities having great potential for revival. At the same time, though, prices remain depressed in Opportunity Zones, and a notable number actually dropped in the third quarter (a potentially very troubling indicator). Those dueling trends will be important for investors to monitor in the coming months amid a highly uncertain economic outlook.
Federal Eviction Protections Expiring. With coronavirus cases surging all over the country and unemployment benefits about to expire, it couldn’t be worse timing for a lame-duck president and Congress. For the whopping 43 million Americans at risk of losing their homes due to the pandemic (and landlords looking for their rents), there’s a lot riding on this lame-duck period, when two provisions (that have thus far prevented the nationwide evictions tsunami) are set to expire. Federal eviction protections put in place during the pandemic will expire on December 31. The CDC’s nationwide moratorium on evictions will also expire before the New Year and those two rules have helped keep people in their homes. If Trump does let these provisions expire, the period between January 1 and inauguration could be housing chaos. Evictions don’t take that long (i.e. weeks, not months) and with the CDC moratorium expired, landlords would have one less roadblock to executing an eviction order in situations where a court has already rendered a verdict. Even with the patchwork of local, state, and federal protections, 109,811 evictions have been filed since March, in the 26 major cities, according to Eviction Lab who is tracking. Many of those cases would be able to move forward in the first weeks of January, and thousands of new eviction proceedings could be filed as well. The situation could potentially create enough momentum that the feared eviction tidal wave would finally force thousands of Americans out onto the streets. Either that, or laid at the lap of newly inaugurated President Biden another catastrophic mess to figure out, and quickly, on January 20th.
Nithya Raman, Our Newest City Council Member. Nithya Raman hasn’t even been sworn in as a Los Angeles city councilmember, but her election on November 3rd has already had ripple effects. Raman’s Fourth District splays back and forth over the Hollywood Hills, a series of irregular polygons delineating a handful of L.A.’s wealthiest neighborhoods. In November, Raman, who is 39, pulled off something virtually unheard of in L.A. politics: having never held office, she beat a well-funded incumbent, David Ryu, by staging a grassroots get-out-the-vote movement despite a pandemic. LA went from having 24,000 people typically vote in a city council race to having over 130,000 people vote — which is a staggering increase in turnout. In fact, she received more votes then any L.A. councilmember in history! For all the concerns about being outspent, Raman outraised Ryu in one jaw-dropping aspect: according to campaign filings, she brought in over $200,000 in small-dollar donations. Winning the district has traditionally meant pandering to some of the city’s most vocal NIMBYs (“Not-In-My-Backyard” voters), who have slowed or stopped the construction of homeless shelters, apartment buildings, and transit projects. For a city that has struggled to manifest even the most basic elements of urban infrastructure — smooth and useful sidewalks, a thriving tree canopy, new housing developments — it’s promising and beguiling that Raman, an urban planner with degrees from Harvard and MIT, might ascend to office at this moment. But what Raman, who has worked as a consultant and started multiple nonprofits, thinks she brings to the table is a realistic assessment of how bureaucrats can work effectively with city departments to get things done! Raman, who lives in Silver Lake with her husband (a TV producer) and their twins, co-founded a neighborhood nonprofit that provides showers and meals for the homeless. When she officially starts work on December 12, she will be able to activate her campaign slogan, “It’s our time to lead.”
HGTV shows changed homebuying trends. Known as the “HGTV-effect,” today’s homebuyers are influenced by these binge-worthy TV shows more than ever. With this growing interest in real estate, TV programs have inspired more people to complete their own renovations or buy houses that need rehabbing (and compete with investors). Like shiplap walls and refurbished planks (often painted white), many trendy home features are dictated—then popularized—by home improvement TV shows. Popular rehab shows, often seen on the HGTV, DIY Network and TLC channels, have recently led the way in popularizing home features. For example, there has been a movement from darker, cherry wood kitchens to lighter and brighter ones, often with a modern-farmhouse twist. Tuxedo cabinets, which are two-tone, are also popular right now. Other features creating a buzz with the help of TV exposure are rattan fixtures, subway tiles, stainless steel appliances, pale grey paint colors, and the resurgence of mid-century modern furniture— just to name a few. Design trends are looking a bit more mid-century modern coupled with Scandinavian, with the idea that “less is more.” Rehab TV shows have encouraged buyers that taking on a fixer-upper property is, in fact, possible. This is likely caused by the satisfaction of seeing a before-and-after reveal as a house goes from uninhabitable to beautiful in a half hour (on the screen only, of course). Without these scenes, it’s hard to visualize a beautiful home when standing in front of a dilapidated structure. But with the process laid out in half-hour segments, home renovations seem less daunting. Of course, the timeline seen on TV is often a much quicker turnaround than in reality. Many buyers inspired by DIY shows may be in for a shock when materials are on backorder and timelines get pushed out. Nevertheless, reality TV shows have raised interest in our industry as a whole, increasing buyers’ awareness and understanding of real estate. Viewers watch these shows as a source of entertainment, but ultimately retain information and apply it to their own buying, selling, and rehabbing journeys.
You Never Know What You'll Find When Rehabbing. When Nick Drummond and Patrick Bakker, were told their newly-purchased 100-year-old house in Ames, New York (one-hour west of Albany) was built by a notorious bootlegger, they passed it off as “urban legend.” But during a recent rehab, the New York couple discovered something that revealed the legend was indeed true! In early October, they found more than 66 bottles of whiskey (from the Prohibition-era) hidden within the walls and floorboards of the house, which was built in 1915. "Our walls are filled with bundles of booze!" Drummond, who documented the unexpected discovery in a series on social media, drunkenly wrote on his Instagram. "I can't believe the rumors are true! He was actually a bootlegger! " Drummond, a designer, historic preservationist, and neophyte rehabber, told CNN he was removing outside skirting along the bottom of the mudroom attached to the house when a mysterious package fell out. Drummond went on to find more crates of smuggled whiskey under the floorboards after entering the mudroom through an uncovered hatch inside the floor. He said the couple continues to find more bottles. Initially they found seven bundles of six in the wall and then at that point they found four more bundles and less than a week ago they found still more. The liquor is a brand of Scottish whiskey labeled “Old Smuggler Gaelic Whiskey,” which is still made today. Each bottle was carefully wrapped in tissue paper and straw, and bundled in packages of six. The original owner of the house was a German man known as Count Adolph Humpfner. After researching newspaper articles and various legal websites, Drummond found out that Humpfner was known to be a man of mystery in the town and took part in many scandals. He died a sudden and mysterious death and left behind the smuggled liquor ( as well as a heavily disputed fortune). The couple plans to leave the bottles they found empty or evaporated preserved in the house -- and sell the bottles they found full. After all, the full bottles are valued at around $1,000 each! But the couple said they will keep at least one of the full bottles of whiskey to enjoy themselves. Smart idea!
The Mighty Voting Muscle of LA County. Consider this: Los Angeles has no electoral votes, but it cast more ballots than 38 states. Generally overlooked is Los Angeles’s outsized role in the electoral process. Although candidates of both parties flock here to raise money, its impact in votes is even greater. Examining data from the Trump-Biden battle reveals that residents of Los Angeles County alone cast more ballots than were tabulated in 38 states and District of Columbia. As of last Friday, 4,261,742 votes had been cast and processed in our county, according to the Los Angeles County Registrar-Recorder/County Clerk Dean Logan. That is more votes than had been tabulated in the battleground state of Arizona (11 electoral votes, 3,381,446 ballots processed). It is also more than three times the number of ballots cast in the battleground state of Nevada (6 electoral votes, approximately 1.34 million total votes). Los Angeles County, with approximately 10 million residents, has 5.8 million registered voters, according to Logan’s office. Despite concerns about the reliability of the United States Postal Service, nearly 80% of voters in our county participated by mail. That participation level in Los Angeles County surpasses the 67.5% turnout in the 2016 presidential election and the 68% recorded in 2012. President-elect Biden garnered 71.2% of the votes in our county, while Trump had 26.77% (a small portion was divided among a quartet of fringe candidates). Even more impressive, Los Angeles County accounts for more than 25% of all the votes cast in California this month! The local figures pose an interesting question: How many electoral college votes might Los Angeles County hold if it were its own entity? Examining the sheer numbers can be instructive. The county’s vote total was slightly higher than the 4,024,253 ballots that had been tabulated in the state of Washington, which has 12 electoral college votes. Of only 11 states with more votes cast than Los Angeles County, the closest is Virginia, where 4.4 million ballots had been tabulated. Virginia has 13 electoral college votes.
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 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, the “Real Estate Yogi.” Armen is a triple threat: a Kundalini 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 Armen. 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 COVID-19 case counts, progress on FDA approval of vaccines, and negotiations for additional government stimulus. Beyond that, JOLTS is released on Wednesday (12/09). The Consumer Price Index (CPI) will come out on Thursday (12/10). CPI is the most widely followed monthly inflation report that looks at the price change for goods and services. The next European Central Bank meeting also will take place on Thursday (12/10).
Calendar:
Wednesday, 12/09: JOLTS
Thursday, 12/10: CPI
Thursday, 12/10: ECB Meeting
Weekly Changes:
10-year Treasury: Rose 0.10 points
Dow Jones: Rose 300 points
NASDAQ: Rose 200 points
For further information, comments, and questions:
Lloyd Segal
President
Los Angeles Real Estate Investors Club, LLC
310-409-8310
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