Economic Update (Monday, July 26, 2021)
Economic Update
(Monday, July 26, 2021)
Last Tuesday, Amazon’s Jeff Bezos became the?second?billionaire to go to space. The whole affair took less than 10 minutes. It came only nine days after Richard Branson, the British billionaire traveled into space.??The “Billionaire Space Race” is great entertainment for investors but little more.?After all, billionaires have the right to waste their money however they please.?But big spending even on commercial projects like space tourism can have long-term benefits for a much broader swath of humanity than just the people who can afford to drop hundreds of thousands of dollars for a ticket. ?It’s really much bigger than simply sending tourists into space to enjoy the view and a few minutes of weightlessness. ?What commercial space race has done is make traveling to the stars cheaper than it’s ever been. Remember, the Space Shuttle originally cost $450 million a mission (according to NASA’s numbers), while the “orbiter”(the spacecraft on the back of the rockets, the actual shuttle) cost another $1.7 billion. ?Ultimately, a generation of government investing in space shuttle technology left America with little more than movies like Space Jam, U.S. taxpayers with more debt, and the lack of astronaut-carrying domestic space launch capabilities for a decade.?That’s changed now, but it has little to do with Bezos or Branson. Instead, space lovers should thank their lucky stars for SpaceX CEO Elon Musk.?Musk isn’t going into space on a tourist flight. ?No, not our Elon.?He’s too busy bringing launch capabilities back to America by pioneering the use of “reusable rockets.” ?Those reusable rockets are now ferrying NASA astronauts to the International Space Station.?Musk is also busy launching hundreds of small satellites that offer space-based Wi-Fi to clients around the globe. ?As a result of those astute decisions, SpaceX is worth an estimated $74 billion in private markets.?Compare that to Virgin Galactic, which is worth only $7 billion after creating “Disney for the 1% of the 1%.”?(Too bad for investors that SpaceX remains in private hands.) ?And unfortunately, space flight for the masses still seems a long way off too.?So, while we wait in line for our ride on Virgin Galactic, let’s wash our hands, put on our face masks (yes again!), fasten our seat belts, and pop open the hood…
Existing Home Sales Increased in June. ?Existing home sales increased 1.4% in June to a 5.860 million annual rate, up 22.9% versus a year ago, according to the National Association of Realtors.?In fact, sales broke a losing streak, rising for the first time in five months due to modest gains in the supply of homes for sale and very strong demand.?The best news is that there are reasons to believe the worst of the inventory crunch is behind us.?New home construction remains strong, and now that the pandemic may be ending and vaccines are widely available, it's likely that more sellers will feel comfortable listing their homes.?Both of these factors probably contributed to the 3.3% increase in inventories, which was also the fourth consecutive month of gains.?Though inventories are still down 18.8% from a year ago the year-to-year rate of decline is slowing. The months' supply (how long it would take to sell today's inventory at the current sales pace) of existing homes for sale rose to 2.6 in June from May's reading of 2.5, though these readings still remain near record lows.?Despite the ongoing shortage of listings, it looks like there is still significant pent-up demand from the pandemic, with buyer urgency so strong in June that 89% of the existing homes sold were on the market for less than a month!?Economists expect sales in 2021 to ultimately post the best year since 2006.?Why??First, more listings (as the pandemic subsides) should help alleviate the worst of the supply crunch and help keep a lid on price growth.?Moreover, a trend toward work-from-home is likely to remain in place even as pandemic-related measures are eased around the country.?That means people who were previously tied to specific locations (typically in urban areas), will have more flexibility, making more space in the suburbs an attractive proposition.?Finally, there are significant demographic tailwinds coming together for home sales for the foreseeable future.?Specifically, Census Bureau projections show that the key homebuying population of those 30-49 years old is set to grow significantly through 2039.?
Home Builders Still Struggling with Lack of Labor and Materials.?When we look at new housing construction, we look at two sign-posts: (1) starts and (2) permits.?With respect to starts, U.S. home builders started construction on homes at a seasonally-adjusted annual rate of 1.64 million in June, representing a 6.3% increase from the previous month’s downwardly-revised figure, the U.S. Census Bureau reports.?But compared with June 2020, housing starts are up 29%, though the year-over-year comparison is skewed somewhat by the effects of the COVID-19.?On the other hand, The pace of permits for new housing units dipped again in June. Permitting for new homes occurred at a seasonally-adjusted annual rate of nearly 1.6 million, down 5% from May but 23% up from a year ago.?Construction companies broke ground on a higher number of both single-family homes and multifamily buildings in June compared with the previous month.?The most recent sentiment data from home builders signaled growing uncertainty regarding the strength of the market for new homes. The construction industry continues to face serious shortages of labor and materials, driving the costs of building higher — though the cost of lumber has stabilized after months of resting at or near record highs.?But the factors that have propelled home construction haven’t vanished. The nation still lacks an adequate supply of housing to meet demand, pushing people into the market for new homes. However, rising prices and the general stress caused by home-shopping right now (i.e. “bidding wars”) could be weighing on some buyers, who may ultimately decide to forgo their plans to purchase a home for the time being. That growing lack of interest on the part of buyers has been reflected in mortgage applications data in recent weeks.?Housing rebounded strongly during the pandemic, lifted by shifting consumer demand, especially for single-family homes. But an inventory shortage and high input costs are boosting prices, a constraint for both builders and buyers.
Lumber Prices Are Down—but Don’t Expect New Houses to Cost Less.?After rising to shockingly expensive levels this spring, lumber prices have fallen so far that they are starting to look cheap to some buyers.?Prices for two-by-fours surged in May to more than twice their previous record, set three years ago when there were about 15% fewer homes being built. But wood prices have since plunged back to levels resembling those before lockdowns cut supplies short and boosted demand, according to the Wall Street Journal.?July futures ended Wednesday at $521.40 per thousand board feet, down nearly 70% from the high of $1,711.20 hit in May, when wood-product supply lines were still being unknotted after the lockdown?and before Americans began to shift spending from home improvement projects to vacations and dining out.?The decline is benefiting builders and do-it-yourselfers and helping to allay fears of runaway inflation?hamstringing the economic recovery. Still, buyers of new homes shouldn’t expect discounts.?Home builders say they expect to collect higher profit margins rather than drop asking prices. That is typical following periods of rising commodities costs, when the broad economic growth that normally accompanies higher raw-materials prices enables companies to?pass along more expenses.?It is a different story at Home Depot,?where cooped-up Americans flocked to during the pandemic. The retailer has lowered its lumber prices in recent weeks. Eight-foot studs that were offered in stores for $7.48 on June 21 were priced at $6.25 over the weekend.?Dealers, traders and price forecasters say sticker shock and the reopening economy have hurt retail lumber sales this summer.?The bursts of demand from restaurants and bars building patios for outdoor seating are also in the rearview mirror. But the lower prices are beginning to beckon buyers, especially developers of big projects, like apartment buildings, which shelved construction plans when prices reached unprecedented levels.
Who Watches the HOAs? With the collapse of the surfside Florida condominium building, there is renewed scrutiny of homeowner associations (“HOA”) around the country.?Do you realize there is no governmental agency supervising competency or compliance of HOAs or their directors.?I am continually amazed by the lack of training or even basic knowledge that is required of HOA directors. You would think just the basic understanding by directors of employee rights, real estate laws, construction methods and procedures, insurance, and relations?between condo owners, would be minimally required.?Yet, the Davis-Stirling Act requirements relating to how a board should interact with employees, owners, contractors, management companies, and themselves has just one requirement.?Yes, one requirement!?That requirement is that the only statewide mandatory qualification to serve as a director in one’s HOA: One must be a member.?In other words, someone can participate in making HOA board decisions involving hundreds of thousands of dollars with no training or experience whatsoever, as long as they own at least one unit in the building.?Worse, there is no agency supervising compliance by HOAs or their directors with the Davis-Stirling Act. Certain law enforcement agencies enforce crimes or Fair Housing law violations, for example, but no state agency is charged with general oversight of HOA operations or governance.?The Community Associations Institute proposed a bill 13 years ago to require just three hours of low-cost HOA orientation for directors.?But the bill was watered down during the legislative process so much that it ultimately was vetoed by then-Gov. Arnold Schwarzenegger. There has been no push since then for requiring a minimum level of education or training for HOA directors.?Investors often ask me whether suing the HOA is advisable to force it back on track. The answer is generally no. Because when suing the HOA board, you often trigger the HOA’s directors and officers insurance, so the HOA’s attorney fees are paid by insurance (which you ultimately pay through increased premiums), while you pay your attorney out of pocket.
SoCal Home Prices Hit All-time High. June’s median home price of $680,000 tops the previous record of $667,000?set in May, according to DQNews. It represents a 22.5% increase from June 2020 (when the market in the six-county region slowed significantly as sellers pulled homes off the market because of COVID-19 stay-at-home orders). Since then, a dramatic rebound has seen 11 straight months of double-digit median home price rises.?Economists credit multiple factors: (1) fast-expanding buyer markets such as millennials, (2) more demand for space as more people work from home, and (3) ultra-low mortgage rates, which are attracting wealthy investors who compete with the middle class for limited housing stock.?As L.A. pulls out of the pandemic-induced recession, the pent-up demand should make for a hot Southern California market through the rest of the year and beyond.?Sales are also on the rise, signaling a possible easing of the inventory shortage that has caused?bidding wars?and seen properties sell for?hundreds of thousands over the asking price.?In June, 27,012 homes traded hands, a sizable jump from the 17,743 that sold in June 2020.
Drought So Dire a Utah Town Pulled the Plug on Growth.?When the mountain springs dwindled to a trickle in this year’s scorching drought, officials in the old cowboy town of Oakley, Utah, took drastic action to preserve their water: They stopped building! During the coronavirus pandemic, the real estate market in their 1,750-person city boomed as remote workers flocked in from the West Coast and second homeowners staked weekend ranches. But those newcomers need water — water that is vanishing as a mega-drought dries up reservoirs and rivers across the West.?So this spring, according to the New York Times, Oakley (about an hour’s drive east of Salt Lake City), imposed a construction moratorium?on all new homes that would connect to the town’s water system. One project that would build 36 new homes on a tree-covered pasture near the town’s ice cream parlor is now on hold.?Oakley is one of the first towns in the United States to purposely stall growth for lack of water in this new era of mega-droughts. But it could be a harbinger of things to come in a hotter, drier West.?Across the Western United States, a summer of record-breaking drought, heat waves and megafires exacerbated by climate change is forcing millions of people to confront an inescapable string of disasters that challenge the future of growth.?For example, 99.9 percent of Utah?is locked in severe drought conditions and reservoirs are less than half full.?Yet cheap housing is even scarcer than water in Utah, whose population swelled by 18 percent from 2010 to 2020, making Utah the fastest-growing state in the Union. Cities across the West worry that cutting off development to conserve water will only worsen an affordability crisis that stretches from Colorado to California.?Farmers and ranchers — who use 70 to 80 percent of all water — are letting their fields go brown or selling off cows and sheep they can no longer graze. Gov. Spencer Cox of Utah said all but one of the fields on his family’s farm has dried up.?Oakley, and the nearby farming town of Henefer, are vowing not to grow until they can secure new, reliable sources of water through drilling or pumping — an expensive and uncertain prospect.?Utah law allowed Oakley’s City Council to pass only a six-month moratorium on building, but the city is hoping it can tap into a new water source before deciding whether to re-up the moratorium or let it expire.?Oakley is planning to spend as much as $2 million drilling a water well 2,000 feet deep to reach what officials hope is an untapped aquifer.
Foreclosure Filings Hit All-Time Low. ?Last week, ATTOM Data Services released its mid-year 2021 U.S. “Foreclosure Market Report,” which shows there were a total of 65,082 U.S. properties with foreclosure filings (i.e. default notices, scheduled auctions or bank repossessions) in the first six months of 2021. That figure is down 61 percent from the same time period a year ago and down 78 percent from the same time period two years ago.?“The government’s foreclosure moratorium and mortgage forbearance program have created an unprecedented situation – historically high numbers of seriously delinquent loans and historically low levels of foreclosure activity,” said Rick Sharga, executive Vice President of RealtyTrac (LAREIC’s up-coming special guest speaker). “With the moratorium scheduled to end on July 31, and half of the remaining borrowers in forbearance scheduled to exit that program over the next six months, we should start to get a more accurate read on the level of financial distress the pandemic has caused for homeowners across the country.”?Nationwide 0.05 percent of all housing units (one in every 2,112) had a foreclosure filing in the first half of 2021.?States with the highest foreclosure rates in the first half of 2021 were Delaware (0.10 percent of housing units with a foreclosure filing); Illinois (0.09 percent); Florida (0.08 percent); Ohio (0.08 percent); and Indiana (0.08 percent).?Among 220 metropolitan statistical areas with a population of at least 200,000, those with the highest foreclosure rates in the first half of 2021 were Lake Havasu, Arizona (0.25 percent of housing units with foreclosure filings); Cleveland, Ohio (0.15 percent); Macon, Georgia (0.13 percent); Peoria, Illinois (0.12 percent); and Florence, South Carolina (0.12 percent).?
One Million Homeowners Facing Foreclosure When Moratoriums End.?At the current rate, it’s likely there will still be a shocking one million homeowners who are at risk of foreclosure?as forbearance moratoriums start expiring in September.?That’s according to a sneak peak at mortgage performance statistics released by data aggregator Black Knight, which showed the national delinquency rate falling to 4.37 percent in June (the lowest level since the pandemic began).?Of another 2.32 million homeowners who are at least one payment behind but not yet in foreclosure, Black Knight estimates 1.5 million haven’t made a payment in 90 days or more.?This is important because a rule taking effect August 31?will phase out borrower moratoriums put in place during the pandemic, giving lenders leeway to initiate foreclosure proceedings against homeowners who are 120 days behind on their mortgage payments.?The Consumer Financial Protection Bureau says lenders must first give borrowers the chance to apply for assistance, but can initiate foreclosure proceeding if (1) the homeowners don’t qualify, (2) a home has been abandoned, or (3) the borrower can’t be reached.?Further, borrowers with mortgages backed by Fannie Mae, Freddie Mac, FHA, VA and USDA are eligible for up to 18 months of COVID forbearance, but many borrowers are scheduled to hit their 18-month eligibility limit at the end of September.?Depending on the type of loan they have, distressed homeowners may be able to enter into a repayment plan, apply for a loan modification, or defer repayment until they sell their home.?Record home price appreciation could help many distressed homeowners avoid foreclosure by selling their homes and using the proceeds to pay off their mortgage and cover their closing costs.
Grocery Prices Are Rising. Probably the only thing more important to me (and probably you) than real estate is food.?So in this week’s real estate Economic Update, let’s take a little break from real estate and discuss food.?The pandemic has had a far-reaching effect — and it's showing up in the prices of some of our favorite summer foods.?According to NBC News, consumers saw price hikes for the third straight month in June, jumping 5.4 percent year-over-year as demand outweighs supply. From the prices in the grocery store, there's no way around the fact that as the world reopens, we'll be paying more to get our usual goods including that morning cup of jo.?Food prices, across the board (at home and away from home), are up 2.4% in June 2021 relative to June 2020. Compared to last summer, prices of food eaten away from home are up 4.2% — substantially higher than the typical rates of annual increases.?Based on latest data from the U.S. Bureau of Labor Statistics, there are five foods that will definitely be pricier this summer based on increases from June 2020 to June 2021.
1.???Bacon?— up 15.6%.
2.???Whole milk?— up 11.2%.
3.???Eggs?— up 5.7%.
4.???Ground coffee?— up 1.9%.
5.???Bananas?— up 1.2%.
But there is good news: grocery items such as flour and potatoes have seen a price drop since last summer.?Food manufacturing wage increases can also affect food prices. And as more people get vaccinated and return to restaurants, the demand on our favorite eateries increases, driving up the overall cost of food.?As for pork, there are a couple of factors at play. Feed prices (corn and soybeans) are higher and China has increased imports of U.S. pork. In addition, the hog herd is smaller, partially as a result of the fact that we are still working through supply chain disruptions from last year. So expect bacon and related pork products to cause you “sticker shock” the next time you visit your local market.
领英推荐
LAREIC’s August Meeting.?Our August general meeting will take virtually on Thursday night, August 12, 2021, 7:30 pm to 9:30 pm.?Our meeting will feature Max Keller, visiting us virtually from Dallas, Texas.?The title of Max’s presentation is “How to Survive the Real Estate Disruption.”?Don’t miss Max’s presentation.?Free admission, free parking (in your garage), and free refreshments (whatever is in your refrigerator).?You can RSVP at www.LAREIC.com to receive your Zoom Meeting ID and passcode.
Vendors Expo Returns!?In an abundance of pandemic caution, we’ve postponed our world-famous "Real Estate Vendors Expo"?until Thursday night,?October 14, 2021 (6:30 pm to 8:00 pm). The Vendor Expo will be open from 6:30 to 8:00 pm (before the beginning of our general meeting at 7:30 pm). We'll have a collection of over 40 of the finest vendors with all of the real estate services you will need to become a successful investor.
Weekly “Rubbing Elbows” Podcast.?LAREIC proudly hosts a weekly podcasts, “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 .??
?LAREIC University.?For our Summer Semester, we have assembled an incredible schedule of real estate classes and workshops that are available for you virtually.?If you’re serious about furthering your investing education, you need to register for these classes.?You can register at LAREIC.com/LAREICUniversity .?Th remaining classes for July include:
July 27:??“The Power of Incorporation”
July 31:??“Fix and Flip Houses”?
This Week. Looking ahead, investors will closely watch Covid case counts around the world and the increasing Delta variant.?Beyond that, New Home Sales will be released today (7/26). ?The Federal Reserve meets?on July 27 and 28. Economists are watching to see if the meeting reveals any clues about the anticipated winddown of the central bank’s bond-buying program. They also want to know how the Fed views the potential economic risks from the rapidly spreading Delta variant.?Investors should also look for hints from Fed officials about the timing for changes in monetary policy with respect to interest rates. ?On Thursday, the Bureau of Economic Analysis publishes its first official estimate of second quarter Gross Domestic Product (GDP), the broadest measure of economic activity, will come out on Thursday (7/29). The Core PCE price index, the inflation indicator favored by the Fed, will be released on Friday (7/30).
?Weekly Changes:
10-year Treasuries:????????????Flat????000 bps
Dow Jones Avg:??????????????????Rose??400 points
NASDAQ:?????????????????????????????Rose??300 points
?Calendar:
Monday, 7/26:??????????????????????New Home Sales
Thursday, 7/29:???????????????????GDP
Friday, 7/30:?????????????????????????Core PCE
For further information, comments, and questions:
Lloyd Segal
President
Los Angeles Real Estate Investors Club
310-409-8310
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