Economic Update (Monday, Feb 28, 2022)

Economic Update

(Monday, February 28, 2022)

Following back-to-back double-digit percentage gains at the end of 2021, NEW home sales took a breather to start off the new year. The good news is that sales activity hit a bottom in October of 2021 and an upward trend has re-emerged.?However, new home sales still remain well below the peak we saw a year ago. Why? I think for two main intertwined reasons: (1) a lack of supply of completed homes, plus (2) rapid price appreciation (versus pre-COVID levels).?The good news is that builders have been ramping up activity, with the total number of single-family homes under construction currently at the highest levels since 2006.?Ultimately, that added supply will facilitate more sales while slowing the pace of new home price appreciation.?In the meantime, buyers are still stuck dealing with very few options when it comes to completed homes. It's true that overall inventories have been rising recently and now sit at the highest level since 2008.?Doing a calculation of only completed homes on the market shows a months' supply of a meager 0.6, near the lowest level on record back to 1999.?The good news is that the inventory of newly completed homes has been rising consistently since July, signaling a return to an upward trend after nearly a year straight of declines.?As more new homes become available, you can expect demand will remain strong and help boost sales in 2022. Speaking of new, let’s dig into this week’s economic and real estate related news…

Consumer Confidence Dips in February on Worries About High Inflation.?A survey of U.S. consumer confidence fell slightly in February to 110.5 from 111.1, as Americans remained somewhat pessimistic about the path of our economy in the upcoming months.?During the pandemic, the index has ranged from a high 128.9 (after a lull in the pandemic last summer) to as low as 85.7 at the onset of the crisis.?Lately the index has drifted lower due to the delta and omicron outbreaks and a surge in inflation.?The smaller decline in consumer confidence is a good sign, but Americans are still worried about high inflation. Fewer people plan to buy homes, cars, autos and other big-ticket items.?The big drag from inflation could slow our economy unless it begins to ease soon.?A measure of how consumers feel about our economy right now rose edged up to 145.1 points from 144.5.?A similar gauge that looks ahead six months dipped to 87.5 from 88.8.?“Consumers remain relatively confident about short-term growth prospects. While they do not expect the economy to pick up steam in the near future, they also do not foresee conditions worsening.” said Lynne Franco, senior director of economic indicators at the board.

Disney Plans First 'Story-living' Community In Southern California. Disney?is continuing its decades-long push into residential development, spearheading plans to develop master-planned home communities in Southern California.?The?Walt Disney Co.?will build the first “Story-living by Disney” community in?Rancho Mirage?in?Coachella Valley (“a location where Walt Disney?himself owned a home and would spend leisure time with his family,” the company announced Wednesday).?Disney will partner with Scottsdale, Arizona-based DMB Development for the first 618-acre community, called “Cotino,” which will include a range of home types, including estates, single-family homes and condominiums, and at least one section for 55+ residents. This isn’t the first time Disney has delved into homebuilding. The media and theme park conglomerate first explored options in the 1960s to develop housing as part of the centerpiece of what is now Walt Disney World in Florida, but those plans were nixed after Walt Disney died in 1966, according to Forbes. The company’s housing plans first came to fruition in 1996 when Disney opened Celebration in Florida, a 4,900-acre community that sold to a private investor in 2004.?The Southern California project will be a mixed-use district with retail, dining, a beachfront hotel and park with recreational water activities. The public can purchase a day pass to use the amenities. The development will also include?a 24-acre “grand oasis” using Crystal Lagoon technology, a growing concept?that enables “crystalline lagoons of any size to be built sustainably, with low water consumption and using a minimum amount of additives and energy," Disney said.?

Real Estate Master’s Degree Prepares CEOs For A Sustainable, Urban Future. City leaders, developers, investors, and planners around the world are facing some tough challenges in 2022. How can cities address climate change? How can real estate address inequality and social deprivation? How can cities deal with homelessness??And how can global leaders tackle the population growth?that is increasingly causing infrastructures to creak under the pressure, bridges that collapse, and an ever-expanding housing crisis??These?questions are being tackled by the IE School of Architecture and Design’s?“Global Master’s Degree in Real Estate Development.”?The master’s course is aimed at those already?immersed in the global real estate industry. Generally, students have at least eight years of professional experience, which means the classes bring together the views of people with a wide range of experiences and backgrounds. Students currently enrolled in the class come from countries that include Fiji, the Philippines, Dubai, the U.S., Spain, Latin America and Lebanon.?In 2020, IE School of Architecture and Design became the first university to partner with the global C40?network’s global competition “Reinventing Cities,” which aims to find “innovative,?zero carbon?and resilient urban projects,” backed by city leaders including Michael Bloomberg. This partnership gives students the opportunity to work at the competition’s winning projects around the world, such as in Montreal, Reykjavik, Singapore, Milan, Houston or Madrid, where directors from IE School are involved.?While students spend two weeks at the beginning and end of the 15-month program on campus in Madrid, a week in the middle is spent in Mexico and the rest is delivered virtually through video conferences and forums. This allows students to participate from around the world.?A second key appeal of the Masters Program is how it addresses sustainability by working it into all elements of real estate, from planning and design to finance. Reinventing Cities looks to transform under-utilized sites through sustainable and community-focused projects, which involves many CRE project stakeholders and perspectives. The?UN predicts?that 68% of the world’s population is projected to live in urban areas by 2050.?Investors and developers have been too worried about returns and profit, not necessarily worrying about environmental, social and governance matters.

Vacant Zombie Properties Decrease as Foreclosures Rise. ATTOM released its first-quarter 2022 “Zombie & Foreclosure Report” showing that 1.4 million (1,354,579) residential properties in the United States sit vacant. That represents 1.4 percent, or one in 73 homes, across the nation.?The report also reveals that 229,864 residential properties in the U.S. are in the process of foreclosure in the first quarter of this year, up 31 percent from the first quarter of 2021. This increase marks the second straight quarter that the count of pre-foreclosure properties has gone up since a nationwide moratorium on most lender takeovers of delinquent mortgages was lifted at the end of July.?Among those pre-foreclosure properties, 7,363 sit vacant in the first quarter of 2022, up annually by 10.3 percent.?Despite the year-over-year increase, zombie foreclosures continue to represent only a miniscule portion of the nation’s total stock of 98.8 million residential properties. In other words, just one of every 13,424 homes in the first quarter of 2022 are both vacant and in foreclosure.?The first-quarter zombie foreclosure trend remains among a host of measures showing how the decade-long surge in the U.S. housing market continues both in spite and because of the ongoing Coronavirus pandemic that damaged the U.S. economy starting in 2020. Home prices in much of the country have soared more than 10 percent over the past year. Seller profits commonly exceed 40 percent. And a tour of most neighborhoods would NOT turn up a single home in the foreclosure process sitting vacant and exposed to vandalism or decay.?That has happened because a glut of home buyers has flooded the market, largely driven by historically low mortgages rates and a desire by many to flee congested virus-prone areas for the relative safety and larger spaces offered by houses or condominiums. Prices continue to soar as buyers chase a very limited supply of homes for sale, including those in foreclosure. Overall vacancy rates have decreased in 38 states from the first quarter of 2021 to the first quarter of 2022.

Investor Interest in Retail Real Estate Soars.?Despite the pandemic, a number of large retail sales were completed in L.A. (second half of 2021).?Over the last three quarters, we’ve seen a significant increase in investor demand for retail properties now that financing has opened up and interest rates are still historically extremely low.?The overall sentiment on the investor side (from both the private client side and the intuitional side) is still a demand for daily needs retail shopping centers as an investment class to be allocated toward their portfolio. “Investor interest is high in L.A. There is a lot of 1031 trade money and there are owner users such as LVMH and locals that want to own more, there are people from New York and big cities that own a lot of real estate around the country that want to buy here,” investors report. Take Baldwin Hills Crenshaw Plaza, for example. The center, at 3650 W. Martin Luther King Jr. Blvd., was purchased by Century City-based Harridge Development Group. The bulk of the center sold for $110 million, while the Macy’s Inc. store sold in a separate $30 million deal.?Beyond redevelopment sites, other high-demand retail types include net-leased properties, drive-thrus, and grocery-anchored centers. Because so many people moved to the suburbs or started spending more time there during the pandemic, there is also more interest in suburban shopping centers.?And going forward, experts expect to see continued demand for retail properties “with the asterisk that we’ve got some turbulence on the horizon.”?“That is an interest rate increase by the Fed in March of this year and future continual rate increases ... (which) will hit the breaks on inflation (and could) affect the overall values and curb demand for retail shopping centers.”?Retail is going to be strong in 2022 and ‘23 and a bright horizon just with less development happening and more fixing the existing retail. That’s a healthier place for the retail sector as a whole.

Behold The Most Overvalued Housing Markets in America.?A new report?from researchers at Florida Atlantic University examines which housing markets nationwide are most overvalued. In other words, using third-party data, the researchers calculated the average property price in each of the 100 largest housing markets nationwide, and compare the fluctuations in prices with what would be expected based on their historic growth. Based on that comparison, they determine how over- or undervalued a market is. As expected, Boise, Idaho, ranked as the MOST overvalued housing market nationwide, with buyers paying a 76% premium to purchase a home there. Boise has experienced a dramatic rollercoaster ride over the past few years. Before the pandemic, it was hailed as one of the hottest housing markets in the country?as it began to attract transplants from pricey West Coast markets like San Francisco and Seattle. Those buyers were attracted to the cheap home prices, stunning scenery and close proximity to those tech hubs.?But over time, Boise’s competitive advantage has ebbed as home prices surged with this bumper demand. A similar story has played out in the No. 2 most-overvalued city on the ranking: Austin, Texas, where buyers are paying a 62% premium. Here are the top 10 overvalued housing markets, according to FAU’s report:

Boise, Idaho 76.4%

Austin, Texas 62.3%

Ogden, Utah 59.2%

Las Vegas 53.7%

Atlanta 52.3%

Provo, Utah 52.2%

Phoenix 52.0%

Spokane, Wash. 51.4%

Salt Lake City 49.7%

Detroit 48.3%

While there was no market nationwide that was undervalued based on these metrics, the places where home buyers will pay the smallest premium to lock up a property are Honolulu (0.5%), Baltimore (0.7%) and New York (1.7%).?Given how overvalued the nation’s housing stock is, the researchers wisely advised buyers to exercise caution.

Berkeley Alum Says No More Students in His Backyard.?This week, thousands of students who are waiting for acceptance letters from University of California, Berkeley, are getting a lousy surprise in their inboxes instead: a letter warning that there may not be enough spots for them on campus. Why??Because the school lost its final appeal last week in a years-long court case over an enrollment freeze and is now required to?cut 3,050 seats from its incoming class, or about a third of the students it had expected to enroll next semester. The reason? Having too many students on one urban campus, a lawsuit argues, is bad for the environment.?After years of lawsuits brought against the university, Berkeley’s Not-In-My-Backyard (“NIMBYs”) have hit the absolute zenith of town-gown conflict by cleverly fighting not against mega-dorms or sports stadiums but rather the very presence of students themselves.?According to the claim, UC Berkeley has “over-enrolled” its school by up to 30 percent over the last decade without first seeking approvals from its neighbors, which the judge ruled should have happened under the California Environmental Quality Act (“CEQA”). The lawsuit says that the environment — their environment? — is being ruined by the presence of too many students, who are overcrowding apartments, burdening local emergency services, and creating too much noise and trash. Since the claim was first filed, the?university has agreed to pay more for municipal services and released a?15-year long-range plan?for “responsible, flexible, and sustainable development” to address its growing enrollment — including 11,700 new beds over the next two decades. But the court ruling puts that vision on hold and, like the enrollment freeze, will require an?intervention from the California Supreme Court?to overturn it.?The suit was brought by?Save Berkeley’s Neighborhoods, a group of neighbors with a long history of litigation against the university that’s headed by Berkeley resident Phil Bokovoy, a lawyer who is also closely affiliated with three other homeowners associations.

Foreclosure Auction of Paul Manafort’s Brownstone. The foreclosure sale of Paul Manafort’s Brooklyn brownstone wasn’t so much an auction as a handshake, one of the thousands of nearly identical events that take place every year. Just a few enterprising buyers were in attendance last week; almost all of them wore wraparound sunglasses and were uninterested in, as one put it, “being in the news.”?Many Brooklyn foreclosure sales are?scheduled in bulk?and take place on the steps of the nearby Kings County Supreme Court every week. This one happened in front of the glass federal building in which the Chicago-based Federal Savings Bank had sued Manafort and his wife over what it?said was $8.3 million owed. The knot of people standing in the February sunshine could have been a group of lawyers having a brief coffee-break chat: The event began at 11 in the morning and was over by 11:02. Manafort’s house was bought back by the bank to which the buyer owed a debt.?The four-story townhouse at 377 Union Street was said to be a wedding gift for Manafort’s daughter Jessica, an odd favor considering the couple was already living in a Soho loft that the lobbyist had purchased a year prior and since (according to leaked text messages). The house was purchased for around $3 million in 2012, one of five properties worth a collective $22 million that Trump’s former campaign manager owned.?A plea deal with federal prosecutors in 2018 required Manafort and his wife to put the house on the market, a?plan ultimately abandoned when the lobbyist was pardoned by Donald Trump. But last year, the couple’s creditor, the Federal Savings Bank, began suing over unpaid mortgage loans, a legal action rendered somewhat absurd when the bank’s CEO went to prison this month. According to the Department of Justice, Stephen Calk?issued millions of dollars of high-risk loans to Manafort?in exchange for political access: He wanted to become the undersecretary of the Army.?But even all that fraudulent lending wasn’t enough to get him the job. Nonetheless, as of late last year, the bank expected $3.6 million in profits from foreclosing on Manafort’s properties. It recovered $9.3 million when it sold the lobbyist’s ten-bedroom Hamptons estate, the one with?the putting green and the moat.?

Now You Can Get a Mortgage in the Metaverse.?OK, time to press the “absurd” button (unless, of course, you’re a millennial). Over the last year, it has become increasingly hard to afford real estate not only in the real world, but also in the virtual one, where large parcels of imaginary land in imaginary realms like Decentraland and the Sandbox now?trade for millions of dollars. It was only a matter of time before someone started offering financing for virtual real-estate purchases. And now someone has: TerraZero, a metaverse developer, says it has issued one of the first mortgages in the metaverse for a $45,000 parcel of ersatz land in an entertainment district of Decentraland. A sign, surely, of things to come. There’s already?a metaverse REIT?and, for more than a year now, people have been taking out?loans against NFTs. Young people can’t own properties in the real world right now, but they can certainly own properties in the metaverse,” where houses are (somewhat) less expensive (at least for now), possibly because you can’t actually live in them.?As a traditional lender would when issuing a mortgage, Reitzik’s company vetted the buyer’s creditworthiness and required a significant down payment (he declined to disclose its precise amount or the interest rate, citing the fact that the company is in talks with “several large financial institutions” and didn’t want to publicize terms that may change in the future). Unlike the real world, where 30- or 40-year mortgages are common, the length of this loan is just two years. Also unlike the real world, where mortgages (residential ones, at least) are heavily regulated, these are not.?Much like crypto (or land in Manhattan), property in metaverses is finite, which has attracted investors and developers.

Reservations for Virgin Galactic Space Tourist Flights Open Wednesday.?Space tourism?pioneer Virgin Galactic?is getting closer to commercial operations. The company said Tuesday that ticket sales for its space flight will open to the general public on Wednesday. The announcement should excite aspiring astronauts and thrill investors.?For the astronauts, booking a passage to space is as simple as going to VirginGalactic dot com?and starting the application process when the reservation window opens. But they better be ready to put down some serious cash to book their spot, however.?The stock is jumping because the start of commercial operations has been a long time coming. Delays?due to spacecraft testing sent shares plummeting shortly after they soared around the time the company sent founder Sir Richard Branson into space. Coming into Tuesday trading, shares have dropped more than 80% from their 52-week high in June 2021 of $57.51 a share. That high was hit a few weeks before Branson’s flight.?Tuesday’s announcement is a relief for investors. Management is upbeat about progress made.?“At Virgin Galactic, we believe that space is transformational,” said CEO Michael Colglazier in the company’s news release. “We plan to have our first 1,000 customers on board at the start of commercial service later this year, providing an incredibly strong foundation as we begin regular operations and scale our fleet.”?But space flight isn’t going to be cheap. The ticket price listed is $450,000 with a $150,000 deposit. That means 1,000 customers could generate about $450 million in sales. “On board” in this instance isn’t literal and refers to sign-ups. (Wall Street projects the company will generate about $8 million in sales during 2022.) Taking that many people into space will require hundreds of flights and take many months.?Still, investors will be pleased if the company can get its backlog to that level. And deposits will also generate about $150 million in working capital for the company.?How fast reservations fill up will be a good test for the fledgling space tourism industry and for Virgin Galactic’s product offering.

Vendors Expo Returns!?Our world-famous super-duper "Real Estate Vendors Expo"?returns on Thursday night,?March 10, 2022. The Vendor Expo will be open starting at 6:30 pm. We'll have a collection of 35+ of the finest vendors featuring real estate products and services you will need as a successful investor. Our Vendor Expo will be held at our new home, the Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, CA 90034 (Culver City adjacent).?FREE Admission.?FREE parking on the Iman parking lot and metered street parking. Please RSVP at www.LAREIC.com.

Accessory Dwelling Units.?Our monthly general meeting will be held on Thursday night, March 10, 2022, 6:30 to 9:30 pm.?Our very special guest will be Seth Phillips, California’s leading authority on “Accessory Dwelling Units” and the new laws regarding 2-3-4 units on a single-family zoned lot. If you want to build more units and increase your rental income, you must attend Seth’s presentation.?Our meeting will be held at the Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, CA 90034 (Culver City adjacent). FREE Admission. FREE parking on the Iman parking lot and metered street parking.?Please RSVP at www.LAREIC.com.?

This Week. Looking ahead, investors will closely follow news on Ukraine and will look for additional Fed guidance on the pace of future rate hikes and balance sheet reduction. Beyond that, the Institute of Supply Management (“ISM”) National Manufacturing Index will come out on Tuesday (3/01) and the ISM National Service Index on Thursday (3/03).?The key Employment report will be released on Friday (3/04), and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month.?

Weekly Changes:

10-year treasuries:??????????????Rose??002 bps

Dow Jones Avg:??????????????????Fell????500 points

NASDAQ:?????????????????????????????Fell????100 points

?Calendar:

Tuesday (3/01):???????????????????ISM Manufacturing Index

Thursday (3/03):??????????????????ISM Services Index

Friday (3/04):????????????????????????Employment

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For further information, comments, and questions:

Lloyd Segal

President

Los Angeles Real Estate Investors Club

www.LAREIC.com

[email protected]

310-409-8310

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