Economic Update (Monday, January 24, 2022)

Economic Update

(Monday, January 24, 2022)

Is the “California Dream” still alive??Fortunately, there are still parts of the Golden State that qualify as “affordable” according to a new study of the “Most Affordable Places to Live in California” by SmartAsset.?Sounds like an oxymoron, but it’s not.?The company crunched the numbers on taxes, homeowners’ insurance, and home costs relative to the local median income to come up with the ten most affordable places to buy a home in the Golden State. Not surprisingly, none of the ten cities in California are coastal or close to major metropolitan areas.?Though the Golden State has a reputation for being one of the least affordable states in the nation, there are apparently still pockets in our state where a person can own a home without spending a king’s ransom on housing. However, such places are vanishing rapidly. In 2021, a WalletHub study ranked California as the most expensive state in the country! ?Another study ranked the top 11 cities where residents spend the most on housing, and more than half of those cities are in California. Still, SmartAsset managed somehow to find ten smaller cities where the California Dream meets affordability. These are places where homeownership costs were lowest relative to the median income in each city. Not surprisingly, none of them are where you live (or want to live).?In fact, the further you get from the Bay Area and Los Angeles, the more affordable housing becomes. SmartAsset's list of affordable cities are largely in Southern California and the San Joaquin Valley. What are the ten most affordable cities in California??I thought you’d never ask.?You’ll have to read further into this week’s Economic Update for the answer.?How’s that for a tease…

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Existing-Home Sales Decline Amid Listings Shortage.?Existing-home sales decreased 4.6% between November and December, hitting a seasonally-adjusted, annual rate of 6.18 million, the National Association of Realtors said last Thursday. Compared to a year ago, sales were down more than 7%.?Overall in 2021, existing-home sales reached the highest level since 2006, a sign of the strong demand among buyers nationwide in light of the short supply of properties on the market.?With respect to inventory, the number of homes for sale fell to the lowest level on record!.?The total inventory of homes for sale dropped 18% between November and December.?Expressed in terms of the months-supply, there was only a 1.8-month supply of homes for sale in December. (A 6-month supply of homes is generally viewed as indicative of a balanced market.)?Further, the median price for an existing home was $358,000, up 15.8% from December 2020. Homes remained on the market for only 19 days on average, and 79% of the homes sold in December had been on the market for less than a month.?But the recent surge in mortgage rates threatens to knock some of the wind out of the housing market’s sails. With a backdrop of still-rising home prices, some buyers will face greater affordability challenges in the high-rate environment. Still, the other factors that have fueled the rise in home sales over the past two years remain, including the shift to remote work and the resounding emergence of millennial buyers. In the near term, the prospect of rising interest rates could cause some buyers to rush to lock in deals.

New-Home Construction Increases Amid Surge in Building Permits.?U.S. home builders started construction on homes at a seasonally-adjusted annual rate of roughly 1.7 million in December, representing a 1% increase from the previous month, the U.S. Census Bureau reported last Wednesday. Compared with December 2020, housing starts are up 2.5%.?Meanwhile, permits for new homes occurred at a seasonally-adjusted annual rate of 1.87 million, up 6.5% from a year ago.?Most of the boost in permitting activity stemmed from a swathe of authorizations for multi-family buildings and projects with between two and four housing units. Before seasonal adjustments, the number of multi-family permits issued in December was the highest for any month since 1985. Single-family permits only increased 2% between November and December.?Similarly, the number of single-family homes that builders started construction on actually dropped by roughly 2% on a monthly basis. So where were the increases? The increase in starts was driven by a nearly 14% gain in construction of multi-family projects.?For the full year, though, builders maintained a steady pace of construction on single-family properties. Before seasonal adjustments, the number of single-family homes completed in 2021 was the highest since 2007.?At the current level, the number of single-family homes under construction remains at a level last seen in 1973. For each single-family unit completed in December there were 9.5 single-family units under construction, the highest ratio in the life of the data.?Meanwhile, multi-family building, which lagged notably in the early stages of the pandemic, is now the dominant driver. This is undoubtedly a response to surging rents and ultra-low rental vacancy rates.

Builder Confidence Edges Lower on Inflation Concerns.?Growing inflation concerns and ongoing supply chain disruptions snapped a four-month rise in builder sentiment (even as consumer demand remains robust). Builder confidence in the market for newly built single-family homes moved one point lower to 83 in January, according to the National Association of Home Builders (“NAHB”)/Wells Fargo “Housing Market Index” (“Index”). The Index has hovered at the 83 or 84 level, the same rate as the spring of 2021, for the past three months.?Higher material costs and lack of availability are adding weeks to typical single-family construction times. NAHB analysis indicates the aggregate cost of residential construction materials has increased almost 19% since December 2020. The most pressing issue for the housing sector remains a lack of inventory. Building has increased but the industry faces constraints, namely cost/availability of materials, labor and lots. And while 2021 single-family starts are expected to end the year about 25% higher than the pre-Covid 2019 level, higher interest rates in 2022 will put a damper on housing affordability.?Derived from a monthly survey that NAHB has been conducting for 35 years, the NAHB/Wells Fargo Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.?As a result, the Index gauging current sales conditions held steady at 90, the gauge measuring sales expectations in the next six months fell two points to 83, and the component charting traffic of prospective buyers also posted a two-point decline to 69.

Mortgage Rates Rise to Pandemic-era High.?Holy moly!?Mortgage rates rose to levels last seen in March 2020 as markets continue to price in expectations of an upcoming interest-rate increase from the Federal Reserve.?The 30-year fixed-rate mortgage averaged 3.56% for the week ending Jan. 20, up 11 basis points from the previous week, Freddie Mac?reported last Thursday. (A year ago this time, the 30-year loan was averaging 2.77%.)?The 15-year fixed-rate mortgage, meanwhile, rose 17 basis points to an average of 2.79%. The 5-year Treasury-indexed adjustable-rate mortgage averaged 2.6%, up three basis points from the previous week.?To put these numbers in perspective, the last time the rate on the benchmark 30-year loan was this high there were only 15,200 total COVID-19 cases in the U.S. (according to data from the U.S. Centers for Disease Control and Prevention). Today, the total number of cases in the country has reached nearly 68.6 million, according to the New York Times.?Keep in mind, the Fed doesn’t control mortgage rates.?Mortgage rates roughly track the direction of long-term bond yields, including the 10-year Treasury,?which rose over the past week as data underscored the likelihood that the Federal Reserve will rollback its stimulus activities to curb high inflation.?This data supports market expectations that the Federal Reserve will begin to move early in 2022 to address inflation, and potentially accelerate asset purchase tapering and balance sheet runoff.?For investors, this means that the monthly mortgage bill will be significantly higher than it was a year ago.?According to an analysis from Realtor.com, at today’s rates you can expect to pay $238 more per month on your mortgage than you would have if you had bought property at this time in 2021. That adds up to nearly $3,000 more per year, on account of the higher interest rate.

Foreclosure Activity Drops to An All-Time Low In 2021. ATTOM database released its year-end 2021 “U.S. Foreclosure Market Report,” which shows foreclosure filings (i.e. default notices, scheduled auctions and bank repossessions) were reported on only 151,153 U.S. properties in 2021, down 29 percent from 2020 and the lowest level since tracking began in 2005. Those 151,153 properties with foreclosure filings in 2021 represent only 0.11 percent of all U.S. housing units, down from a peak of 2.23 percent in 2010.?Lenders repossessed 25,662 properties through foreclosure (REO) in 2021, down 98 percent from a peak of 1,050,500 in 2010, to the lowest level as far back as data is available (2006).?States that saw the greatest number of REOs in 2021 include Illinois (3,472 REOs); Florida (2,287 REOs); California (1,839 REOs); Pennsylvania (1,293 REOs); and Texas (1,236 REOs).?Those metropolitan statistical areas with a population greater than 1 million that saw the greatest number of REOs in 2021 included Chicago (1,733 REOs); St. Louis (1,255 REOs); New York (814 REOs); Baltimore; and Philadelphia (571 REOs).?Lenders started the foreclosure process on 92,346 properties in 2021, down 96 percent from a peak of 2,139,005 in 2009, to a new all-time low going back as far as foreclosure data is available (2006).?Counter to the national trend, 4 states saw an annual increase in foreclosure starts. They included South Dakota (up 20 percent); Vermont (up 36 percent); North Dakota (up 71 percent); and Nevada (up 85 percent).?Those metropolitan statistical areas with a population greater than 1 million that had at least 500 foreclosure starts in 2021 and saw the greatest declines in foreclosure starts from last year, included Philadelphia (down 56 percent); Washington, DC (down 52 percent); Charlotte (down 51 percent); Cleveland (down 42 percent); and Chicago (down 42 percent).

New and Converted Warehouses Provide Business Owners With More Options. In the last five years, more than 185 new warehouses sprung up in Los Angeles County, providing over 14.8 million square feet of additional storage space to the local logistic chain, according to data aggregated by Reonomy, a New York City-based analytics company specializing in commercial real estate.?The newcomers include Saltbox Inc., an Atlanta-based warehouse operator that opened its sixth location on Jan. 3 in Torrance and has set its sights on Duarte for its seventh. Saltbox converted the 38,160-square-foot former Torrance Technology Center into 100 flexible warehouse spaces. It’s targeting small and medium-sized businesses, which are often “operating out of basements and garages and spare bedrooms and self-storage facilities or the backs of their retail stores,” because they’re overlooked by brokers of large warehouses, according to Saltbox co-founder Tyler Scriven.?Overall, our county is home to more than 12,300 warehouses, providing more than 490 million square feet of space, according to Reonomy. That compares to only 2,111 warehouses in Orange County; 3,020 in San Bernardino County; and 196 in Ventura County.?The biggest warehouse in Los Angeles County is located at 19200 S. Western Ave., in Torrance (see photo below). The massive 3.58-million-square-foot, five-building complex was built in 1998 and is owned by San Diego-based Sunshine Distribution. The second-largest warehouse is on Avenue H in Lancaster. It’s a two-building property that occupies 2.92 million square feet and has Rite Aid Corp. and Lancaster-based Still Waters Catering as tenants. The third-largest warehouse is in downtown on Mission Road, comprising 2.19 million square feet for its five buildings. New York-based Blackstone Inc. is listed as the property owner while F21 OpCo. (which does business as Forever 21), is the tenant.?The city in Los Angeles County that has the most warehouses is Santa Fe Springs with 702. Santa Fe Springs, which occupies just under 9 square miles, added 16 new warehouses since 2017. I propose nicknaming it the “warehouse city.”?Downtown is the runner up with 642 warehouses, followed by City of Industry with 575. For the record, Malibu and Rolling Hills Estates have none.

Can LA Turn Empty Offices into Housing? You would think that with empty offices throughout the city (because of Covid), and California’s mounting housing crisis, we could adapt some of these office buildings into housing.?You would think, right? After all, many Californians have been working from home throughout the COVID-19 pandemic, and some companies plan to let their workers stay fully remote.?So what happens to all those empty offices??With Los Angeles in the midst of a severe housing crisis, some clever investors see promise in turning dormant office buildings into apartments through “adaptive reuse.”?Unfortunately, converting commercial spaces into housing is often easier said than done. And some naysayers say the potential gains may not be enough to significantly address the region’s housing needs.?Still, L.A.’s track record shows the city already has a leg-up on other parts of California when it comes to transforming commercial properties into homes. And with so many office buildings facing an uncertain future, those conversions could become more common.?In 1999, the L.A. City Council passed an ordinance?to streamline adaptive reuse projects in distressed downtown buildings.?By the 2000s, residents lured by new housing options, walkable neighborhoods, and proximity to transit started pouring back into L.A.’s urban core.?A recent paper?from UC Berkeley’s Terner Center for Housing Innovation found that from 2014 to 2019, Los Angeles created 28,000 housing units on commercially-zoned land, far more than any other metro area in California.?Earlier this year, the Central City Association (a downtown business advocacy group) released a paper?estimating that by converting a mere 10% of L.A.’s existing office space into housing, the city could create about 16,000 new homes.?The report said even more homes could result if conversions expand to under-used retail spaces, industrial properties, hotels and parking lots.?So let’s get going!?In March, the city council voted to begin exploring a plan that would expand L.A.'s 1999 adaptive reuse ordinance citywide.?And those old office buildings in Downtown L.A. are great candidates for reuse, because they were built relatively narrow.?Why narrow??Because they went up before air conditioning existed, so each room needed plenty of windows to bring in fresh air and natural light.?As a result, they are ideal for conversion to living spaces.?But after the rise of air conditioning, L.A.’s office buildings got fatter, with lots of windowless, climate-controlled interior space.?So with those “fat” buildings the costs of those fixes can add up and may not make conversion viable.?But with some creativity, many office buildings, strip malls, and even churches?can be turned into housing (especially as demand for those spaces dries up).?

L.A. Just Ended the Biggest Free-Transit Experiment in U.S. History.?In March 2020, Los Angeles’ public-transit agency, Metro, stopped collecting fares on its buses as a COVID-19 safety precaution. For the next 22 months, Metro waived fares for anyone who wanted to keep riding its buses, anywhere they wanted to go (as long as they wore a mask, of course). And people did keep riding. Outside of the initial stay-at-home order in the spring of 2020, Metro’s ridership never dipped below 50 percent of before-times ridership, with buses eventually recovering to within 10 to 15 percent of pre-pandemic numbers. Metro estimates current ridership is averaging over 515,415 per day.?But, in truth, Metro doesn’t know exactly how many people were riding fare-free buses during the pandemic (because fare collection is one of the ways to track ridership).?A Metro spokesperson says that from April 2020 to December 2021, it’s safe to estimate Metro’s buses provided about 281 million fare-free boardings. This means the agency has inadvertently been conducting the biggest free-transit experiment in U.S. history. Unfortunately, fare collection restarted last week after two unprecedented years in which transit agencies learned a lot about how people moved (or didn’t) around our county, and now Metro is using some of this information to game out improvements and pilot other free and reduced-fare programs.?The unofficial pilot program has helped Metro take some baby steps toward a universal fare-less future?for L.A., something advocates have demanded for decades. L.A.’s Metro is unique among large U.S. transit agencies in that its budget doesn’t rely on fares, which made the decision to temporarily waive fares a bit easier in the first place. For example, a ride costs only $1.75, and the total fares collected make up only 6 percent of total revenue — about a third of which goes right back into fare enforcement (although that doesn’t include contracts with law-enforcement agencies). Endowing Metro’s relatively comfortable financial situation is a local sales tax, Measure M, which was approved by voters in 2016 to generate $120 billion for the system over 40 years. So the heck with fares!?But keeping buses free is good for other reasons as well.?For example, ridership is overwhelmingly low-income, making $18,000 a year or less, for half of the riders on the buses. So free rides would help these workers the most.?Plus, universal fare-less transit would also have an outsize climate impact. According to a Metro report that surveyed which regional transportation investments can most reduce vehicle miles traveled (a priority of the agency), waiving fares would result in both fewer miles driven on freeways and surface streets, and thus, fewer greenhouse-gas emissions, more than any other intervention (including congestion pricing or charging drivers a mileage-based fee). And that alone makes a very good case for keeping buses free.

Ten Most Affordable Cities in California.?The consumer financial data company SmartAsset concludes that California City, appropriately enough, is the most affordable place to own a home in all of California. California City came in as the Golden State’s most affordable place to live thanks to the low average annual mortgage payment of just over $5,000 per year (i.e. $417 per month). With a median income of $49,000, the average California City resident could easily afford to buy a home.?But who wants to live there??According to SmartAsset, the other most affordable cities in California are:

2. Madera Acres

3. Imperial

4. Ridgecrest

5. Coalinga

6. Barstow

7. Homeland

8. Spring Valley Lake

9. Orosi

10. Taft.?

“Very Peri” Named Pantone 2022 Color of the Year.?2022 marks the first time a color has been custom created for the Pantone Color of the Year program.?According to Pantone’s press release, PANTONE?17-3938 (called “Very Peri”) blends “the faithfulness and constancy of blue with the energy and excitement of red to introduce an empowering mix of newness to apparel, beauty, home furnishings, product design, and packaging.”?But doesn’t every color do that??They further rhapsodize that PANTONE 17-3938 is a “warm and friendly blue hue with a carefree confidence and joyful attitude, emboldens uninhibited expression and experimentation.” Sounds like my ex-girlfriend.?“Futuristic in feeling,” Pantone insists that Very Peri “takes on distinct appearances through application to different materials, finishes, and textures, from shimmery metallics, lustrous sheens, and high-tech materials, to hand-crafted looks and natural fibers.”?And who are we to argue??Apparently, Very Peri is suited to an array of different materials, textures, and finishes, providing a pop of color whether introduced through a painted wall, statement furniture or home décor, or acting as an intriguing and eye-catching accent in a pattern.?But don’t get on your hands because it is impossible to get out!?Somehow, their press release forgot to mention that.

Vendors Expo Returns!?Our world-famous super-duper "Real Estate Vendors Expo"?returns on Thursday night,?February 10, 2022. The Vendor Expo will be open starting at 6:30 pm. We'll have a collection of 40+ of the finest vendors featuring real estate products and services you will need to become 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, 90034 (Culver City adjacent).?FREE Admission.?FREE parking on the Iman parking lot and metered street parking. Please RSVP at www.LAREIC.com.

“An Evening with HGTV’s Amy Mahjoory.”?Our monthly LAREIC meeting will be held on Thursday night, February 10, 2022.?And we have a very special guest to celebrate the New Year.?Amy Mahjoory, star of HGTV’s hit show “House Hunters” will be visiting us from Austin, Texas.?Besides being one of the most popular hosts on HGTV, Amy is a fantastic investor, and an expert on raising capital for real estate deals.?If you’re worried about raising funds for your next deal (without borrowing from your friends and family), don’t miss Amy’s presentation.?Our meeting will be held at our new home, the Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034 (it’s really Culver City, but don’t tell anyone).?FREE Admission. FREE parking on the Iman parking lot and metered street parking. Please RSVP at www.LAREIC.com.?

Basic Training Boot Camp.?On Saturday, February 26, 2022, 9:00 am to 6:00 pm, is our semi-annual Real Estate Basic Training Boot Camp.?Everything you ever wanted to know about real estate investing, but were afraid to ask.?The best news of all is that this Boot Camp will be LIVE and In-Person!?No Zoom!?The cost of the Boot Camp is $149.00 per person if paid before February 19th.?After February 19th, the price jumps to one million dollars!?So register now!?Gold Members (and former Boot Campers) can attend for FREE.?You can register at LAREIC.com.

Weekly “Rubbing Elbows” Podcast.?LAREIC proudly hosts a weekly podcast, “Rubbing Elbows” staring our Director of Acquisitions, Chuck Dorfman, and his co-host, Lior Yehuda.?Every Thursday live at 8:00 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 unorthodox, 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.

This Week. Looking ahead, investors will closely follow news on the omicron variant. The big event will be the Federal Open Market Committee’s meeting on Wednesday (1/26), and investors will look for additional guidance on the timing for future rate hikes and balance sheet reductions. Beyond that, this will be a busy week for the United States Bureau of Economic Analysis.?On Thursday (1/27), the Bureau releases its fourth quarter Gross Domestic Product (GDP), the broadest measure of economic activity. Then, on Friday (1/28), the Bureau releases its “Core Personal Consumption Expenditures Price Index,” the inflation indicator favored by the Fed. ?BTW, it is referred to as “core” because the index excludes volatile food and energy prices.?

Weekly Changes:

10-year Treasuries:????????????Fell???002 bps

Dow Jones Avg:??????????????????Fell 1,200 points

NASDAQ:?????????????????????????????Fell???800 points

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Calendar:

Wednesday (1/26):??????????????Fed Meeting

Thursday (1/27):??????????????????Gross Domestic Product

Friday (1/28):????????????????????????Core PCE

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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