Economic Update (Monday, January 31, 2022)
Economic Update
(Monday, January 31, 2022)
Well the Fed finally admitted what everyone else already knew; they need to raise interest rates to fight inflation. Last Wednesday the Federal Open Market Committee announced they will be raising interest rates.?Surprise, surprise. “With inflation well above 2% and a strong labor market, the FOMC expects it will soon be appropriate to raise the target range for the federal funds rate,” the Fed said in its policy statement.?Although there was no firm commitment as to when exactly, economists believe the Fed will increase the discount rate and Fed funds rate at least .25% at its next meeting in mid-March.?With consumer inflation now at a 7% annual rate, the Fed needs to move away from its easy policy stance. As you know, to battle the pandemic, the Fed has kept rates at zero and bought trillion of dollars of securities to support our economy and financial markets since early 2020.?But now the Fed has finally decided to discontinue the asset purchases so that they will likely end in March.?The Fed released guidelines for how it will shrink its $9 trillion balance sheet, but did not say when that process would get underway.?The Fed stressed that the labor market is strong – pointing to solid job gains and a sharp drop in the unemployment rate.?The Fed blamed supply and demand imbalances related to the pandemic and the reopening of our economy for the elevated levels on inflation.?Markets expect four rate hikes from the Fed this year. Many market commentators think the Fed won’t raise rates much higher than 2% as in the last cycle in 2015-2019. With interest rates on our mind, let’s get vaccinated (and boosted), put on our facemasks, and get under the hood…
PCE Shows U.S. Inflation Hitting 40-Year High.?As further evidence that inflation is not “transitory,” the Personal Consumption Expenditure Price Index (“PCE”), a measure of U.S. inflation preferred by the Federal Reserve, leaped 5.8% in 2021.?This further underscores why the central bank is finally moving to raise interest rates (for the first time in four years).?The cost of goods and services advanced 0.4% in December, based on the PCE Index.?The increase capped off the biggest spike in inflation in decades. The PCE index rose in 2021 at the fastest pace since 1981.?(The better-known Consumer Price Index jumped by an even higher 7% in 2021. That’s the largest move since 1982.)?A narrower measure of inflation that omits volatile food and energy costs, known as the “Core PCE,” rose by 0.5% in December. The increase in the core rate in 2021 totaled 4.9%, compared to a mild 1.5% gain in the prior year. That’s the highest annual level since 1982.?The Fed views the PCE Index (the core rate in particular) as the most accurate measure of U.S. inflation. It’s more comprehensive and takes into account when consumers substitute cheaper goods for more expensive ones, among other things.
GDP Grew 6.9% in Fourth Quarter.?Our economy sped up toward the end of 2021 before a late omicron surge, expanding at an annual 6.9% pace for the quarter as consumers spent more and businesses stocked back up. Gross Domestic Product (“GDP”) got a big lift at the end of last year from frantic efforts by businesses to restock barren shelves and warehouses hit by disruptions during the pandemic and in time for the holiday season. The economy grew a lot more slowly if the inventory buildup is set aside.?Aided by massive government stimulus spending, GDP increased by 5.7% for the full year. That’s the biggest gain since 1984.?Before the pandemic, oureconomy was growing around 2.3% a year.?Our economy, harried first by the delta variant of coronavirus and then by omicron, has grown in fits in starts since last summer.?Yet Americans have plenty of savings and businesses say demand is as high as ever. Economists predict the U.S. will grow strongly again — around 4% or so — in 2022 despite the end of government stimulus, especially if the coronavirus is kept at bay.?The chief obstacles? Good question!?Ongoing shortages of labor and supplies that have boosted inflation to a nearly 40-year high. The Federal Reserve is also on the cusp of raising interest rates?for the first time in four years to combat the spike in prices.?Consumer spending, the main engine of our economy, rose a healthy 3.3% in the fourth quarter. Outlays had risen a smaller 2% in the third quarter.?The value of inventories soared by $240 billion (one of the biggest increases in decades), as companies ramped up production to try to meet demand.?Spending on inventories is a boost to GDP, and was an especially big boost in the fourth quarter.?The rate of inflation was 6.5% annual rate in the fourth quarter. Prices rose in 2021 at the fastest clip since 1982.
New-Home Sales Surge as Supply Shrinks.?U.S. new-home sales increased 12% to an annual rate of 811,000 in December, the U.S. Census Bureau said last Wednesday. That figure represents the number of homes that would be sold over a yearlong period of time if the same number of properties were bought each month based on the rate of sales in December. Compared to a year earlier, sales were down 14%.?For all of 2021, new-home sales totaled 762,000, according to the latest report. That’s down from 822,000 sales in 2020.?The new-home sales report (unlike the existing-home sales report from the National Association of Realtors), reflects sales where the contract is signed but the transaction has not yet closed. Additionally, the report’s small sample size also means that it can be quite volatile and prone to large revisions.?The median sales price of new houses sold last month was $377,700, down significantly from November but higher than the median price of homes a year earlier. The supply of new homes for sale fell by more than 9% between November and December, equating to a 6-month supply.?The surge in new-home sales reinforced the report on new-home construction released earlier this month, suggesting that home builders have a captive audience of buyers eager to scoop up their properties. Nevertheless, builders face continued headwinds in the form of volatile material costs and labor shortages, will probably drive the price of new homes higher. That will strain affordability for some buyers at a time when mortgage rates are on the up.
Ten “Hidden Gem” Markets Poised for Major Growth in 2022.?Investors pay close attention. The National Association of Realtors conducted a survey?of more than 20 economic and housing experts to gauge their expectations of home-price growth, inflation and interest-rate movements in the year ahead. The group predicted that median home prices will rise by 5.7% in 2022, compared with a 4% rate of inflation overall.?Meanwhile, these experts projected that the Federal Reserve would opt to hike interest rates twice by 0.25%. (Last Wednesday, the Central Bank said it was projecting three interest-rate hikes next year, as well as three in 2023 and two in 2024.)?Depending on whether the Fed’s current projection holds true, the rate of home-price growth could be even lower next year.?Amid this backdrop, the National Association of Realtors expect some housing markets to see bumper price growth. The NAR’s economists came up with a list of 10 “hidden gem” markets where price appreciation will outpace the national average. These markets include, in alphabetical order:
·?Dallas-Fort Worth, Texas
·?Daphne-Fairhope-Farley, Ala.
·?Fayetteville-Springdale-Rogers, Ark.-Mo.
·?Huntsville, Ala.
·?Knoxville, Tenn.
·?Palm Bay-Melbourne-Titusville, Fla.
·?Pensacola-Ferry Pass-Brent, Fla.
·?San Antonio-New Braunfels, Texas
·?Spartanburg, S.C.
·?Tucson, Ariz.
Aside from location (all 10 markets are in the South or Sun Belt regions), these markets share other similarities. The markets are considered to be undervalued, meaning that the ratio of median home price to median household income was at the lower end of the spectrum for the 400 markets the organization studied.?Economists also factored in considerations such as population growth, domestic migration and broadband service in identifying these undervalued markets.
With 20,000 New Rooms, LA Leads U.S. Hotel Construction.?Hotels in Los Angeles are still working to recover from the pandemic, but developers appear to be bullish on the sector's future.??I say this because LA?is leading the?nation in new hotel room construction, reports New Hampshire-based Lodging Econometrics (“LE”).?At the end of 2021,?Los Angeles had 19,815 rooms across 120 projects in?the works,?Lodging Econometrics found.?LE estimates that 3,630 of those rooms are under construction now, with another 6,278 rooms scheduled to begin construction?within the next 12 months.?An additional 9,900 rooms are in the early planning stages,?according to LE, which?tracks?construction pipelines for the top 50 markets in the U.S.?The firm also forecasts that the Los Angeles market will rank fourth in the nation for new hotel openings this year, with over 3,000 rooms in 19 different projects slated to open.?Nevertheless, the city's hotel sector continues to be impacted by the pandemic. Hotel occupancy in LA averaged just under 64% last year. But gosh, that was a vast improvement over 2020's average of about 49% (yet still a significant drop from 2019's bountiful 79.3% occupancy average).?In late 2021, hotel bookings in LA reached 100% of their pre-pandemic levels, in large part due to leisure travelers, the Los Angeles Times reports.?This weekend, in a show of confidence in LA's hotel market, AEG announced?it was looking to sell part ownership in its L.A. Live hotels, the J.W. Marriott and The Ritz-Carlton. It's planning to use the money to help fund a new 800-room expansion of the hotel complex on a neighboring site.
Newsom’s Latest Housing Fix: More Californians Living Downtown.?Gov. Gavin Newsom wants to shift home construction in California away from rural, wildfire-prone areas and toward urban cores as part of his $286 billion budget plan?that aims to align the state’s housing strategy with its climate goals.?But is that what we really want??The budget blueprint Newsom detailed last week includes $2 billion in grants and tax credits to incentivize housing development closer to city centers in an effort to cut long car commutes and keep people near their “daily destinations.”?Newsom’s budget is focused on moving away from the wildland-urban interface, moving development away from rural areas outside the periphery of most California cities and where fires routinely burn. The proposal would build on the $10.3 billion state officials allotted last year to bolster mixed- and low-income housing in California, but marks an evolution in the governor’s approach to solving the state’s multimillion-unit shortage. Though previous budgets have allocated significant money to affordable development, Newsom’s new plan would specifically steer funding toward housing projects in urban areas with existing resources, loosely defined as “downtowns” and “main streets.”?The governor’s goal is to push local governments to plan for and permit millions of new units in areas already ripe for development and use to their advantage current laws that speed up the process. That way, state officials believe, cities can meet regional housing goals and avoid so-called urban sprawl, which could push people into areas at high risk for fire and put more polluting cars on the road during rush hour.?Newsom also wants to direct hundreds of millions of dollars toward using excess state-owned land for affordable development?and easing the cost burden of converting existing structures into residential spaces in downtown areas.?Newsom’s vision also complements city planning goals in Los Angeles, including for Central City and Central City North, which encompass 70,927 of the city’s 2019 population of more than 3.9 million. The city’s Downtown Community Plan?could add up to 175,000 residents and 100,000 housing units by 2040 in an effort to revitalize Los Angeles’ “commercial, entertainment, cultural, and civic heart.”?Newsom’s proposal reflects the challenges ahead in solving California’s housing affordability crisis.?The ripple effect is evident throughout the state, as more low- and middle-income Californians flee their more expensive communities?in search of cheaper costs of living, a trend that deepens inequities and exacerbates long commutes.?But is that really what we want??More congestion and higher density in our urban already over-populated cities rather than building out in less-congested suburban-rural wildlands interface? I wish I had the answer…
L.A. Won’t Allow Rent Hikes for Most Tenants Until 2023.?Landlords, are you sitting down??I have some bad news.?As the U.S. nears the beginning of the third year combating COVID-19, tenants in L.A. are receiving a benefit few other cities have: Landlords are prohibited from raising the cost of more than 650,000 rent-stabilized units citywide, which represents nearly three-quarters of L.A.’s apartment stock.?Under the rules, landlords are not allowed to increase rents for an entire year after the expiration of the emergency order signed by Mayor Eric Garcetti in March 2020, when the policy went into effect.?As of now, no rent hikes will be allowed for most L.A. tenants until 2023. And possibly beyond.?Of course, what is celebrated by tenants and their advocates is lamented by landlords, who say the freeze puts them in an untenable situation.?Landlords in L.A. say costs have risen sharply, including labor and materials for building repairs as well as city fees for trash pickup.?At the beginning of the pandemic, many local governments added protections against rent increases, but across the country, those measures have gone (except L.A.).?Richard Green, director of the USC Lusk Center for Real Estate, said so far it doesn’t appear L.A.'s rent hike ban is dramatically affecting the housing market. But he said he worries that the longer it continues, the less likely it is for upwardly mobile tenants to leave their existing apartments, keeping what would be lower-cost units unavailable for others.?The restrictions are perhaps benefitting tenants more now than at the beginning of the pandemic, when rent prices plummeted in Los Angeles and cities nationwide. L.A. median rent for recently leased apartments have rebounded to $1,947 a month in December, according to the real estate firm Apartment List — up nearly 15% from the low in January 2021 and eclipsing pre-pandemic levels.?Even with the rent freeze, many tenants in L.A. have suffered significantly. Although white-collar workers able to do their jobs from home may have weathered the pandemic with little economic disruption, the same is not true for lower-income workers — especially those in the leisure and hospitality industries.
Kitchen United Tests Open Kitchen Concept at Ralphs Supermarket.?“Ghost kitchens” is the latest trend in restaurants.?Remember, you heard it here first.?A leader in this field, Kitchen United’s cooking sites are usually tucked away from the public eye with the pickup window serving as the sole point of contact with customers and delivery drivers.?But its newest location, inside a Ralphs Grocery store in Westwood, provides a view of the ghost kitchens occupied by chefs from Westchester-based Fresh Brothers, SAJJ Mediterranean in Belmont, Pasadena-based Dog Haus and other restaurants.?They even have a conveyor belt where customers can see their food after its prepared and packaged make its way to the front-of-house pickup center.”?Kitchen United, founded in 2017 in Pasadena, operates nine other ghost kitchens in Santa Monica; San Jose; Chicago; Austin, Texas; New York City; and Scottsdale, Ariz. Each location houses chefs from about a dozen restaurants and provides them with necessary equipment and amenities such as receiving supplies in the morning, cleaning, and staffing the pickup counter.?Kitchen United’s proprietary MIX ordering platform facilitates orders at each location and integrates with popular delivery apps to schedule pickups and synchronize cook times so orders from multiple menus can be served up at the same time and paid with one bill.?The company’s facilities follow a number of formats. Some of them are traditional ghost kitchens where all the food is prepared in the back and then transported either by person or conveyor to the pickup counter, and the consumer cannot see the food being cooked. Other locations — including its space on the Third Street Promenade in Santa Monica — operate like food halls where there are multiple restaurant stalls, but consumers order and pick up food from a centralized location.?Kitchen United crossed paths with Kroger, Ralphs’ parent company, a couple of years ago and found the Ohio-based grocer that operates some 2,800 stores to be “a very forward-thinking company that was open to experimentation with the kinds of business models.” Kitchen United’s Ralphs location is about 2,000 square feet of space near the store’s entrance and will house six restaurants.?For restaurants, the appeal to join Kitchen United’s roster of eateries includes a much lower startup cost than opening a traditional restaurant location. For example, the Fresh Brothers pizza chain opened a ghost kitchen site at Kitchen United’s Pasadena location in May 2020 for under $30,000, where a brick-and-mortar pizzeria would cost around $400,000. The location brings in about $500,000 in annual sales, which is about a third of the revenue that a full-service restaurant generates.
In-N-Out Heiress Lynsi Snyder sells Bradbury Mega-Mansion. The city of Bradbury just saw its priciest sale in years when Lynsi Snyder, owner and heiress of the In-N-Out Burger chain, sold her Mediterranean mansion for $16.25 million. That’s a lot of double-doubles!?It chalks up as empty calories for Snyder, who bought the 19,000-square-foot home from former Dodgers star Adrián Beltré for $17.21 million in 2012. She first offered it for sale for $19.8 million in 2017, before dropping the price to $16.8 million earlier this year, records show.?The lavish estate spans more than four acres in Bradbury Estates, a guard-gated community just a few miles north of Baldwin Park, where Snyder’s grandparents founded the first In-N-Out in 1948.?Situated near the foothills of the San Gabriel Mountains, the mansion is a study in luxury and excess. Every space is palatial, from the grand portico entry to the chandelier-topped foyer with dual staircases.?Elsewhere are 11 bedrooms, 13 bathrooms, a chef’s kitchen with two islands, game room, movie theater, gym and 3,400-square-foot recreation room. The main house includes a six-car garage, and the three-bedroom guesthouse adds a garage for two.?Manicured gardens and rolling lawns fill out the scenic exterior, which keeps the amenities coming with a swimming pool, tennis court, basketball court and two-hole golf course complete with a sand trap. I’ll have fries with that.?A native of Glendora, Snyder serves as the president and owner of In-N-Out Burger, which has 358 locations across California and the Southwest. Forbes puts her net worth at $4.2 billion, not counting the pink lemonade.
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!?Location: Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034 (it’s really Culver City, but don’t tell anyone).?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.
This Week. Looking ahead, investors will closely follow news on the omicron variant and will look for additional Fed guidance on the pace of future rate hikes and balance sheet reduction. The Institute for Supply Management’s National Manufacturing Index will come out tomorrow (2/1) and the ISM’s National Service Index on Thursday (2/3). The next European Central Bank meeting will also take place on Thursday (2/3), although there is unlikely to be any changes in their target interest rate.?Beyond that, the key Employment report will be released by the Labor Department on Friday (2/4), 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?005 bps
Dow Jones Avg:??????????????????Fell????100 points
NASDAQ:?????????????????????????????Fell????200 points
?Calendar:
Tuesday (2/1):??????????????????????ISM Manufacturing Index
Thursday (2/3):????????????????????European Central Bank Meeting
Friday (2/4):??????????????????????????Employment
For further information, comments, and questions:
Lloyd Segal
President
Los Angeles Real Estate Investors Club
310-409-8310
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