Economic Update (Monday, Nov 2, 2020)
Economic Update
(Monday, November 2, 2020)
Today is Monday, November 2, 2020. Tomorrow is Election Day. So I start this week’s Economic Update by asking you to vote. In fact, I plead with you to vote. If you’ve already mailed in your ballot, thank you. For those who haven’t voted yet, the polls are open, please go VOTE. I know every four years candidates warn you that the election is the most important in your lifetime. But this time, I think it really is. Really! This IS undoubtedly the most important election in your lifetime. If you have a pen or pencil, go vote. If you can walk or crawl, go vote. If you drive a Rolls Royce or a Pinto, go vote. And it doesn’t matter whether you’re a Republican, Democrat, independent, or an elephant trainer in Madagascar, you need to vote. I really don’t care who you vote for (no, actually I do care, but that’s not the point), vote as if your life depends on it, because it does. And those of you who think your vote doesn’t matter, please remember only 537 votes in Florida ultimately decided the 2000 presidential election between George Bush and Al Gore. In other words, every vote counts, especially YOUR’S! Oh, and one more thing; did I mention that you need to V-O-T-E.
Gross Domestic Product. Everybody knows by now that last Thursday the Bureau of Economic Analysis released its Gross Domestic Product (the annualized rate of growth) for the third quarter (July, August & September) at 33.1%. Yes, that’s an historic high figure! But don’t get too excited just yet. That’s not the real story. Here’s why. First, the headline number of 33.1% is intrinsically misleading — it’s an annualized rate, meaning that it’s how fast the economy would grow if the actual third-quarter figures were extended out to a whole year. In truth, our economy grew by only 7.4% in the third quarter. Second, it must be considered in the context of previous changes in the size of our economy. In the second quarter (which ended June 30), the U.S. economy was reported to have shrunk by a historic 9.46% (or 31.4% on an annualized basis). So Thursday’s 7.4% still doesn’t bring us back to where GDP was before the pandemic struck. All told, our economy is still -3.5% smaller than it was at the end of 2019. To recover the entire economic shrinkage of the disastrous first half of 2020, annualized third-quarter growth would have had to been 53.3%, which obviously didn’t happen. Third, there is a mathematical wrinkle to the GDP which is mindboggling: The Bureau of Economic Analysis’ quarterly figures don’t exactly measure economic growth during only the quarter. They’re actually the product of a complicated formula that takes into account economic growth over five months (not three), starting with the final two months of the previous quarter. Yes, you read that right. And, as you already know, our economy has slowed down in August and September, compared to June and July. As a result, if one takes Thursday’s GDP statistic as a snapshot of the economy, it’s a snapshot that has already faded based on the slowdown in consumer spending and the escalation of COVID-19 infections in August and September.
Consumer Confidence. The Consumer Confidence Index slipped to 100.3 this month from 101.3 in September, the Conference Board reports. Consumer confidence waned in October, reflecting somewhat less optimism about the jobs market and the U.S. economy in the next six months amid another outbreak of coronavirus cases. The latest survey was largely compiled before the sharp upturn in coronavirus cases this month, suggesting confidence could suffer an even bigger swoon in November. Confidence is still far below pre-pandemic levels. (The index stood at 132.6 before the viral outbreak in February.) Another gauge that assesses how Americans view the next six months—the so-called “Future Expectations Index,” declined to 98.4 from 102.9 in September. Apparently, fewer consumers now (compared to a month ago) think the economy will be better in six months. And slightly more said they think it will get worse. Consumer confidence has waxed and waned during the pandemic based on the number of coronavirus cases. Infections in the U.S. have risen to new highs in October (just like in much of Europe), a disturbing trend that could lead to more restrictions or people avoiding public spaces where crowds tend to gather. If the outbreak does gets worse, our economy could suffer another lapse, especially in the absence of more federal aid. All in all, there is little to suggest that consumers foresee our economy gaining momentum in the final months of 2020, especially with COVID-19 cases on the rise and unemployment still high.
New Home Sales. New home sales occurred at a seasonally-adjusted, annual rate of 959,000, the U.S. Census Bureau reports. That represents a 3.5% drop from August. But compared with last year, new home sales are up 32%! The decline in September aside, year-to-date new home sales are running nearly 17% ahead of the pace set this time last year. The national median sales price in July was $326,800, up from August’s median price. The inventory of new homes was 284,000, representing a 3.6-month supply at the current pace of sales. (A 6-month supply is considered the benchmark for a balanced market.) Beyond the headline figures, the non-seasonally adjusted sales numbers sharply declined in September, falling roughly 8.5% on a monthly basis. An analysis of past sales data found that since the government began tracking this data in 1963, non-seasonally adjusted new home sales have only increased between August and September on four occasions. Nevertheless, the significant decline in not-seasonally-adjusted sales was unusual, given the strength of other housing market data that has been released in recent weeks. The number of homes sold but not yet started was up in September from the previous month, a sign that builders are struggling to keep pace with the demand for new homes. The monthly decline aside, low mortgage rates continue to fuel demand among buyers. And with the inventory of existing homes for sale dropping to record lows, many buyers will be forced to turn to newly-constructed properties. Looking ahead, builders are already delivering homes featuring today’s top desirable amenities: more space, new kitchens, home offices and gyms, as well as outdoor access. The only challenge for builders is navigating the rising costs of land and building expenses. Especially lumber costs, which are through the roof!
Home Prices Rise. The S&P CoreLogic Case-Shiller “20-City Price Index” posted a 5.2% year-over-year gain in August, up from revised 4.1% in the previous month. The separate national index released with the report noted a 5.7% increase in home prices across the U.S. over the past year. This is the fastest pace in more than two years. The strength was consistent nationally. All of the 19 large cities tracked by Case-Shiller posted increases in housing prices in August. Phoenix once again led all other markets nationwide with a 9.9% annual price gain in August, followed by Seattle with an 8.5% increase and San Diego with a 7.6% increase. Phoenix has been the strongest housing market for 15 months. While the rest of our economy struggles, the housing sector continues showing strength across the board resulting from a combination of low mortgage rates, rising demand, and shift in consumer preferences to the suburbs as a result of the pandemic. Economists expect some moderation in home price growth in the fourth quarter as the pace of home sales cools in the face of a resurging pandemic, a faltering recovery, and low inventory.
Luxury Homes. The luxury housing market in Los Angeles has built up a strong resistance to the impact of the pandemic. High-end properties are in heavy demand in L.A. Ten homes on the market have recently sold for $33 million or more, according to Redfin. And a number of off-market home sales in the past six months have topped $100 million. Former Dreamworks Chief Executive Jeffrey Katzenberg recently sold his custom-built home in Beverly Hills for $125 million (probably to pay off his losses on Quibi). And Amazon founder Jeff Bezos made headlines this summer when he purchased the Warner Estate from David Geffen for $165 million. Before that, the record for highest priced home sale in our area was set late last year when the Beverly Hillbillies Mansion sold for $150 million to Fox Chairman Lachlan Murdoch. $25 million used to be considered a huge sale, but now people are easily willing to spend closer to $100 million. Part of the surge, agents say, is that the L.A. market is attracting more buyers from other U.S. cities. Unlike the international buyer push of years past, many buyers today are local or coming from areas like New York and Florida. Most agents agree on two things: Sellers are being more realistic on price, and buyers want land. Many buyers still want views, but land is now a higher priority — they want land, pools, offices and privacy. People are spending much more time at home and working frequently from home. They also want to have privacy. As a result, gated properties are very much in demand. Some of this shift happened after this summer’s protests which drove buyers to seek extra safety measures. Home offices and “Zoom rooms” also top wish lists for luxury buyers, along with wellness features like gyms. For the bigger sales, the buyers tend to want something off-market so they can keep it confidential, but it seems the word always gets out. The strength in the high-end market is expected to continue through the end of 2020 and into 2021.
Landlords Sue To Halt Eviction Ban. Earlier this year, the city passed emergency orders banning evictions if renters were unable to pay because of hardship related to the coronavirus pandemic. In late August, Gov. Gavin Newsom signed a California state law known as the Tenant Relief Act of 2020. Under the new law, no tenant can be evicted before Feb. 1, 2021 because of rent owed due to COVID-19 hardship. In response, the Apartment Association of Greater Los Angeles (“AAGLA”) filed a federal lawsuit against the City, alleging L.A.'s "unconstitutional and overreaching abuse of power" has forced landlords to absorb the financial losses suffered by their tenants during the coronavirus pandemic. Last month, lawyers for the apartment association filed a motion for an emergency order halting the city’s moratorium. After two hours of testimony Monday from AAGLA’s lawyers and representatives from the Los Angeles City Attorney’s Office, Federal Judge Pregerson expressed disappointment over the standoff. “It’s a tragedy that the lack of an economic solution has caused essentially what we’re dealing with, which is economic warfare,” Pregerson said. “It’s a tragedy that fine people on both sides of this lawsuit have to be pitted against each other.” A ruling on AAGLA’s motion is upcoming. By the way, a recent UCLA study found that approximately 365,000 households in L.A. County are at high risk of eviction because of the economic recession triggered by COVID-19.
Foreclosures. ATTOM Data Solutions released its Q3 2020 “U.S. Foreclosure Market Report,” which shows there were a total of 27,016 U.S. properties with foreclosure filings — default notices, scheduled auctions or bank repossessions — in the third quarter, down 12 percent from the previous quarter and down 81 percent from a year ago to the lowest level since ATTOM began tracking quarterly filings, 2008. Foreclosure activity has ground to a halt due to moratoriums by federal, state and local governments and the mortgage forbearance program initiated by the CARES Act. However, the numbers we’re seeing today are artificially low because the number of seriously delinquent loans continues to increase. Most likely, we’ll see a significant, and probably quite sudden, burst of foreclosure activity once these various government moratoriums expire. Lenders started the foreclosure process on 15,129 properties in the third quarter — the 21st consecutive quarter with a year-over-year decrease in foreclosures. Lenders repossessed 6,076 properties through foreclosure (“REO”) in Q3 2020, down 82 percent from a year ago. You will certainly see more repossessions by lenders once the foreclosure moratoriums have ended, but maybe not as many as people might expect. Why? Because given the record amount of homeowner equity (over $6.5 trillion), many homeowners in financial distress will likely take advantage of strong demand among buyers and sell their property (rather than risk losing it at a foreclosure auction). States with the highest foreclosure rates include South Carolina (one in every 6,430 housing units with a foreclosure filing); Florida (one in every 7,797 housing units); Illinois (one in every 7,875 housing units); Alabama (one in every 8,016 housing units); and Maine (one in every 9,013 housing units). So, if you’re looking for out-of-state deals, maybe you should focus on South Carolina, Florida, Illinois, Alabama, and Maine.
Net Lease Properties. With net lease commercial properties, tenants still sign a lease. But unlike traditional leases where owners handle associated costs and property issues, net lease tenants cover costs and maintenance. With Covid-related uncertainty top of mind for many investors, net lease properties have become one of the most in-demand real estate asset types in Los Angeles County. Offering an appealing combination of steady income and hands-free management, net lease properties accounted for 20.2% of total commercial sales in the third quarter, compared with 13.3% the previous quarter, according to research from CBRE Group. In fact, the L.A. market ranked No. 3 in the nation for total net lease investment volume during the third quarter. Driving that gain was the industrial sector, which saw net lease investment increase 48%, while activity in the office and retail sectors dramatically decreased. When you’re looking at all the commercial asset classes for investors to select from — whether it’s multi-residential, hospitality, retail, office, industrial — the net lease sector has been the investment class of choice. Single-tenant properties with triple-net leases have increased in popularity due to the risk-adjusted returns compared with other asset types. Net lease properties are also attractive to investors because they have been more reliable at a time when bond market yields are low and the stock market has been unpredictable. People are especially interested in properties housing essential businesses, but not office buildings (that have not done well during the pandemic). There are several reasons industrial is setting the pace with net lease properties. But the biggest reason is stability. After all, once an owner of an industrial warehouse locks a quality tenant (like Amazon or Walmart) into a long-term triple net lease with no management obligations, it is the very definition of stability. And while shopping centers are struggling, other types of retail real estate assets are in high demand, especially grocery stores, drug stores and properties with drive-through capabilities (i.e. Taco Bell, KFC & McDonalds).
Communal Living. Paulette Moses — who maintains 49 rental beds in six homes, mostly in the San Fernando Valley — is part of an unofficial community of nonprofits, small businesses, and investors, that provide low-cost communal living for people who would likely be homeless without it. Variously called “independent living,” “transitional housing,” “shared housing” or “sober living,” the homes serve many populations: the aged, disabled, mentally ill and recovering alcoholics. They typically place six to more than a dozen tenants in single-family home. But it’s a business model that puts them in the crosshairs of neighborhood opposition. Homeowner groups, which argue the facilities are operating illegally and bringing dangerous and unwholesome people into their neighborhoods, have called for stricter controls. These groups argue that it is unlawful to have more than six unrelated adults in a single-family home. However, that limit, was ruled unconstitutional in the 1980 California Supreme Court decision in “City of Santa Barbara vs. Adamson,” which found that unrelated adults living in a home were functionally a “family.” The Los Angeles Department of Building and Safety, which responds to complaints of un-permitted residential use, seldom finds violations under the municipal code’s broad definition of family as “one or more persons living together in a dwelling unit with common access to all living, kitchen and eating areas.” But the Fire Department follows its own interpretation of local and state laws. The LAFD has jurisdiction to enforce safety and occupancy laws when a home has six or more tenants and provides services such as meals or personal care. Fire department inspectors are always looking for violations. In their defense, operators of these homes argue that a conditional-use permit involves a City Council review in the face of certain community opposition and that reducing the number of tenants is not financially feasible. Early one morning in September, two investigators with the California Department of Justice served a search warrant at a three-bedroom house on a residential street in Winnetka (owned by Paulette Moses). They came with armed Los Angeles Police Department backup, an L.A. County social worker, two state licensing inspectors, and an investigator with the Los Angeles Fire Department. The warrant said elder abuse was suspected. They interviewed six residents, but after three hours, having found no abuse, left quietly. Nevertheless, nine days later, the L.A. City Attorney filed four misdemeanor complaints against Moses. Fire officials charged Moses with violations of the Los Angeles municipal code related to occupancy and egress. Her case is now scheduled for a December 2nd court hearing. Stay tuned…
White House Rehab. Real estate investors know that every house sooner or later needs a rehab, even the White House. (And I’m not referring to removal of the current occupant.) The “White House Reconstruction,” also known as the “Truman Reconstruction,” was a comprehensive dismantling and rebuilding of the interior of the White House between 1949-1952. A century-and-a-half of wartime destruction and rebuilding, hurried renovations, additions of new services, technologies, an added third floor, and inadequate foundation brought the White House to near-imminent collapse. Government agencies expressed alarm about the condition of the building, including a 1941 report from the Army Corps of Engineers warning of failing wood structure, crumbling masonry, and major fire hazards. In October, the ceiling of the East Room began collapsing and required wood supports. The structure under the Main Stair was found to be crumbling. Meanwhile, the president's bathtub was slowly sinking into the floor. On January 30, 1948, President Truman received an urgent confidential report from the commissioner of public buildings warning of the "imminent collapse" of the Second Floor of the mansion. In the autumn of 1949, Congress finally authorized funding of $5.4 million ($57.5 million in 2020 dollars) to reconstruct the White House while keeping the exterior walls in place. Upon returning to the White House the day after winning the election, Truman was informed that the Federal Works Agency was about to do what his political opponents could not: remove him from the White House. Furniture, staff, and the First Family were furiously rushed into the guest house across Pennsylvania Avenue. For over three years, the White House was gutted, expanded, and rebuilt. In addition to simply replacing the interior, the mansion was modernized, walls and floors reconstructed, the third floor expanded, two basement levels added, and a major expansion of underground spaces for centralized air-conditioning and other services. The scope, costs, and historical authenticity of the work were controversial, with the reconstruction called either “structurally essential” or “a disaster,” depending on whether you were a Democrat or Republican (some things never change). The First Family finally returned to the White House on the evening of March 27, 1952. To bring the White House's history closer to the people, President Truman conducted the first television tour of the White House on April 22, 1952 and opened the mansion to public tours. Probably the most significant effect of the rehab on the lives of its occupants and on the operations of the presidency was due to air-conditioning. Now the White House staff could operate year-round without regard for summer heat.
Weekly “Robbing Elbows” Podcast. LAREIC is proud to announce our new weekly podcasts, “Rubbing Elbows” staring our Director of Acquisitions, Chuck Dorfman, and his co-host, Lior Yehuda. Every Thursday live at 2:00 pm (and streaming thereafter) Chuck and Lior interview real estate professionals ready to share their insights and advice. Its real estate uncensored and unfiltered. These guys may be wild, but they know what they’re talking about. You can watch “Rubbing Elbows” on whatever app you use to find podcasts (i.e. YouTube, Facebook, Google, Apple) and at LAREIC.com/RubbingElbows.
LAREIC’s November Virtual Meeting. Our November general membership meeting will take place virtually on Thursday night, November 12, 2020, 7:30 to 9:30 pm. Our special guest speaker will be Jimmy Reed visiting us virtually from Fort Worth, Texas. Jimmy is an expert on marketing for distressed properties and structuring wholesale deals. The title of Jimmy’s presentation is “How to Find Wholesale Deals Others Don’t See.” So if you’re interested in wholesaling, don’t miss Jimmy’s presentation. You can RSVP at: https://www.accelevents.com/e/NovemberMeeting. But hurry because we only have limited capacity on the Zoom broadcast. (As you know, we were sold out the last two months and had over 100 people on our waiting list.)
This Week. Looking ahead, it's almost hard to imagine a bigger week for potentially market moving news. Of course, by far the most significant event will be tomorrow's election (please go vote), and it's not clear when the final results will be known. So it looks like we’ll be holding our breath all week. Before that, the ISM national manufacturing index will come out today (11/02). In addition, the next Fed meeting will take place on Thursday (11/05). For economic data, the key monthly Employment Report will be released on Friday (11/06). Investors also will remain laser focused on medical advances to fight the coronavirus and the alarming escalation of infections around the country.
Calendar:
Monday, 11/02: ISM Manufacturing
Thursday, 11/05: Fed Meeting
Friday, 11/06: Employment
Weekly Changes:
10-year Treasury: Flat 0.00
Dow Jones: Fell 200 points
NASDAQ: Fell 600 points
For further information, comments, and questions:
Lloyd Segal
President
Los Angeles Real Estate Investors Club, LLC
310-409-8310
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