Economic Update (Monday, November 15, 2021

Economic Update

(Monday, November 15, 2021)

We need to rethink the suburbs.?California’s future as a place of aspiration is fading for all but the wealthiest residents, with that promise nearly out of reach for young people and new immigrants.?This state has become a place marked both by spectacular successes and by not-so-welcome failures. According to the Los Angeles Times, the rise of the tech giants, engines of wealth creation, coexists with the nation’s highest cost-adjusted poverty rate, the second-lowest rate of homeownership among the states, and the greatest concentration of overcrowded housing in the nation.?Unfortunately, against this backdrop, California’s leaders have adopted?state and local policies?that further reduce the prospect of homeownership for most Californians (read SB 9 and SB10).?These policies largely cut off new development on the urban fringe and steer most new housing into the high-cost, congested coastal areas.?In a drive to promote density and transit use (read SB 35), the state has also disfavored the kind of housing, especially the single-family variety, that many aspire to own, particularly in the pandemic. Worse, this trend works against upward mobility for the working class, because homeownership remains the predominant means by which the non-rich build assets.?Urban planners are right to say that the solution lies in more housing production. But the kind of housing they favor — generally expensive, small and densely packed in the cities — does not necessarily reduce prices. In other words, rather than push more people into the least affordable areas, perhaps it’s time to revisit suburban and even exurban housing. The appeal of the suburbs historically is “affordability,” especially for first-time homeowners. Critics argue that allowing more suburban growth is environmentally unsustainable. But future developments need not be heavily auto-dependent, especially if employment patterns continue to change. New exurban developments will, of course, face regulatory hurdles and challenges if the past is any guide. And the increased dangers from wildfires will also be an issue.?But making it possible for families to live and work outside the most expensive urban areas will be key to upward mobility for a new generation of Californians. So this week, let’s wash our hands, vaccinate (if you haven’t already), wear our masks (where required), and dig into the details…

Zillow Terminates ibuyer Operation.?Clearly, Zillow executives never attended LAREIC monthly meetings, LAREIC University classes, or any of our numerous workshops. Because, if they had, they would have known that the fundamental principal of real estate investing is “buy low and sell high.” Apparently Zillow’s algorithms guided them to “buy high and sell even higher.” Not a good strategy for the short term, let alone long term. The other principal Zillow executives would have learned at our seminars is that real estate is “local,” not national. Every state, every city, every neighborhood, heck every street is unique. You can’t apply national algorithms to individual houses. Well, you can, but like Zillow you will lose millions in a very short period of time. Look at the numbers…they are staggering.?Zillow lost more than $550 million on homes purchased in the second half of this year for which the company admits it paid too much.?Duh!?As a result, Zillow will shutdown the business and lay off a quarter of its overall staff.?The real-estate giant blamed a faulty algorithmic model for ditching its iBuying business.?An analyst said two-thirds of the homes Zillow bought are underwater.?Zillow Group?co-founder and Chief Executive Rich Barton disclosed that it wrote down $304 million in losses due to houses purchased for too high a price in the third quarter, and expects losses of $265 million in the fourth quarter for the same reason.?During the third quarter, Zillow said it bought 9,680 homes, but only sold 3,032 of them. Zillow shares plunged as much as 11% to $76.22 on the news.?The business hit a major snag in recent months as the company’s algorithms caused it to overpay for houses just as the heated U.S. market began to cool, forcing it to list properties at a loss. In 2018, Barton, one of the company’s founders, reclaimed the role of CEO and pivoted into the high-tech home-flipping business, called ibuying short for “instant buying.”?But maybe more accurately it should be short for “instant losses.”?In the new business, Zillow used pricing algorithms to buy homes from their owners, make light repairs and put them back on the market. Earlier this year, the company borrowed more than $1 billion through?two bond offerings, making it the first ibuyer to tap the securitization market. It has also lined up $500 million in credit facilities with Credit Suisse, Goldman Sachs and Citigroup.?Bottom line: Zillow now has over 7,000 houses it needs to unload sooner than later, either as a group or one-by-one.?In a formal statement to the media, CEO Barton promised “I’ve learned my lesson!?I’ll never miss another LAREIC monthly meeting.?From now on, I’m registering for every workshop, seminar, and boot camp LAREIC offers!”?[Just kidding.]

Inflation! The cost of living rose sharply again in October as Americans paid more for staples such as gas and groceries, pushing the rate of inflation to a 31-year high and adding financial pressure on U.S. households.?The Consumer Price Index jumped 0.9% last month, the government reports. The pace of inflation marched to 6.2% in October from 5.4% in the prior month. That’s triple the Federal Reserve’s 2% target and is the highest rate since November 1990!?This latest in a string of high inflation readings is likely to put more pressure on the Fed and could hasten its plans to phase out stimulus for our economy. As you know, the central bank has taken unprecedented steps to keep interest rates ultra-low.?Another closely watched measure of inflation that omits volatile food and energy costs rose 0.6% last month. This so-called “Core Rate” is closely followed by economists as a more accurate measure of underlying inflation.?But the 12-month increase in the core rate climbed to 4.6% from 4% and hit a 30-year peak.?High inflation is set to persist into early 2022 because of ongoing shortages of labor and supplies that are unlikely to easy anytime soon.?The surge in prices for rent, gas, groceries, cars and many other goods and services has put a big dent in consumer confidence and could even threaten our economic recovery unless inflation relents. The cost of gasoline rose 6.1% in October. Americans are paying a lot more to fill up than they did a year ago.?Similarly, the cost of food climbed almost 1% last month. Grocery prices have climbed 5.3% in the past year, making it harder for families to prepare dinner or afford to go out to eat.?The cost of rent shot up 0.4%. The increases in the past two months mark the biggest back-to-back gains since 1987. Shelter is the largest expense for most families.?Prices also rose sharply for new and used vehicles, medical care, transportation and electricity, among other things.?The few categories to show a decline in prices last month were alcoholic beverages and airline fares, which can only mean that people are flying less and drinking less when they fly.

Mortgage Rates Fall Below 3% Again.?Investors and homebuyers are seeing a break from rising mortgage rates as the bond market finds its equilibrium (but that doesn’t mean we’ll save money when we purchase properties).?The 30-year fixed-rate mortgage averaged 2.98% for the week ending Nov. 10, down 11 basis points from the previous week, Freddie Mac?reports. (A year ago, the 30-year fixed-rate mortgage was averaging 2.84%.)?The 15-year fixed-rate mortgage, meanwhile, sank eight basis points to an average of 2.27%. The 5-year Treasury-indexed adjustable-rate mortgage averaged 2.53%, down one basis point from the previous week.?“Despite the re-acceleration of economic growth, the recent bond rally drove mortgage rates down for the second consecutive week,” Freddie Mac chief economist Sam Khater said in the report. “These low mortgage rates, combined with the tailwind of first-time homebuyers entering the market, means that purchase demand will remain strong into next year.”?Nationwide, the average monthly mortgage payment for a 30-year loan on an existing single-family home that was financed with a 20% down payment was $1,214, up more than $150 from last year.?For the third quarter, and for 2021 as a whole, home affordability declined for many potential buyers. While the higher prices made it extremely difficult for typical families to afford a home, in some cases the historically-low mortgage rates helped offset the asking price.?Many real-estate economists expect mortgage rates will rise in the coming months and beyond. Higher rates, combined with a potential increase in the number of homes on the market, should slow the pace of home-price growth.

Metropolitan Water District Declares “Drought Emergency.”?Southern California’s largest urban water district declared a “drought emergency” on Tuesday and called for local water suppliers to immediately cut the use of water from the State Water Project.?The resolution passed by the Metropolitan Water District of Southern California (“MWD”) calls on people across our region to step up conservation efforts, but also focuses especially on six water agencies that rely heavily or entirely on the water-starved State Water Project. As you may know, the MWD imports water from the State Water Project and the Colorado River, supplying 19 million people across six counties. The challenge is that both sources are facing severe shortages.?The water agencies, which supply cities in Los Angeles, Ventura and San Bernardino counties, have been instructed to activate additional conservation measures and reduce their usage of water from the State Water Project (which is in an acute shortage after one of the state’s driest years on record).?California’s last two water years, which ended Sept. 30, were the driest two-year period in more than a century of records based on precipitation. And the dryness has been intensified by extreme heat unleashed by global warming.?Although storms in October brought heavy rains across Northern California and helped to raise the levels of reservoirs, the supplies of the State Water Project remain depleted.?This year, with the state’s major reservoirs at their lowest levels ever, water agencies received just 5% of their full allocations from the State Water Project. Next month, state water officials are expected to announce an initial zero-percent allocation for 2022.?The State Water Project delivers water from the Sacramento-San Joaquin River Delta to farmland and cities to the south. Built in the 1960s and early 70s, the project includes intricate canals, pipelines, reservoirs and pumping facilities.?For now, MWD officials say drought conditions are especially severe on the State Water Project and require immediate action.?Areas that depend on the State Water Project are supplied by six agencies: Los Angeles Department of Water and Power, Calleguas Municipal Water District, Las Virgenes Municipal Water District, Upper San Gabriel Valley Municipal Water District, Three Valleys Municipal Water District and Inland Empire Utilities Agency.?MWD acts as a water wholesaler, supplying water to 26 member cities and agencies. Officials of each local water supplier will decide how to respond to MWD’s drought declaration.?MWD said in a statement that this year it has taken “extraordinary actions” to preserve supplies from the State Water Project by delivering Colorado River water to as much of the region as possible. That has required upgrading a pump station to allow moving Colorado River farther west, into the San Fernando Valley and southern Ventura County.

Shaq Finally Sells Florida Mega-Mansion for $11 Million.?Basketball legend Shaquille O’Neal had more relists (five) for his Florida home than NBA championships (four), but the big man finally sold his mega-mansion for $11 million. That’s a discount of roughly 60% compared with his original price of $28 million. The 31,000-square-foot mansion includes 12 bedrooms, 13 bathrooms, a movie theater, recording studio, indoor basketball court and 95-foot swimming pool. Records show he bought the property for $3.95 million in 1993.?So still a slam dunk.?The mammoth deal ends a three-year saga that saw him tap five different agents to try to sell the place.?The Shaq-sized estate overlooks Lake Butler in the gated golf community of Isleworth outside Orlando, and the amenity list is as extensive as any in the country. There’s a 6,000-square-foot Miami Heat-themed basketball court, 17-car showroom, cigar room, wine cellar, custom theater, safe room, recording studio, aquarium adorned with hieroglyphics and a 95-foot-long swimming pool dubbed “Shaq-apulco.”?The Shaq references don’t stop there. A Superman logo hangs from the mirrored walls of the auto showroom, and in the living room, a massive mural depicts the former MVP driving a semi-truck.?The 44-foot-long office and primary suite with cheetah-print carpet both take in views of the water.?The four-acre grounds also include a tiki-style cabana and 700 feet of lakefront with a private dock. Gates and a 10-foot privacy wall guard the property, and for extra security, there are 15 cameras inside and 18 outside.?O’Neal, 49, played for six teams during his storied career, winning three NBA championships with our Lakers and one with the Heat [never heard of them]. ?In 2011, he joined TNT’s “Inside the NBA” program as an analyst and was inducted into the Basketball Hall of Fame five years later.

$650 Million Zoo Rehab Sparks Backlash From Environmentalists. Every property needs a rehab sooner or later, even our very own Zoo.?So when officials at the Los Angeles Zoo “hatched” a plan to overhaul the modest menagerie to make it more competitive with flashier tourist attractions like Universal Studios, Disneyland and even the morally questionable Seaworld?by 2040, environmentalists roared. The zoo’s “20-Year Vision Plan” includes a 60-foot canyon where guests can climb rocks, as well as a Yosemite lodge-style “California Center” where zoo-goers can gaze upon a 25,000-square-foot vineyard. Supporters believe such attractions will draw 3 million visitors a year within the next two decades—a boost of roughly 72 percent, according to an environmental impact report.?The rehab would also consume 23 acres of native woodlands, including 120 coast live oaks, 60 toyons, 22 California black walnut trees and stands of federally and state-listed endangered shrubs.?Zoo director and chief executive Denise Verret tells the?Los Angeles Times?that the plan is aimed at “placing the L.A. Zoo at the top of the best-zoos-in-the-nation lists,” adding, “We are not going to build in a vacuum with no regard for the undeveloped acreage in our zoo.”?Which is precisely what conservationists are afraid of. Environmentalists are rejecting the $650 million rehab because it would require removing almost all the remaining native woodlands from the area.?Further, they are questioning why L.A. could possibly need another amusement park in the first place.?Critics are pushing for a smaller makeover that will spare the woodlands (which biologists say are home to hawks and owls, as well as the Southern California legless lizard).?Aside from the plan setting aside only 35 percent of the undeveloped area for animal care, environmentalists believe it doesn’t make financial sense, either. Owned and operated by the City of Los Angeles, the zoo needed $11.6 million from L.A.’s general fund to meet its $25 million 2021-2022 budget.?Some expert zoo aficionados, however, say there’s nothing unusual about the rehab proposal. The controversial proposal is expected to go before the City Council’s Arts, Parks, Health, Education, and Neighborhoods Committee within weeks.?

Whatever Happened to Neverland Ranch??The curious transactional history of the Neverland Ranch started in 1988, when Michael Jackson purchased the 2,698-acre Santa Inez property (originally known as Sycamore Valley Ranch), from the property’s developer William Bone.?Sources indicate $19.5 million?was the sales price, while others suggest it was closer to $30 million.?It was Jackson's home as well as his private amusement park, with artistic garden statues, three trains, amusement rides, and a?petting zoo.?In 2003, Neverland Ranch was searched extensively by police officers in connection with the People vs. Jackson?trial after he was charged with multiple counts of molesting minors. Jackson was acquitted of all charges. However, after the trial, Jackson stated he would never live at the ranch again as he no longer considered it his home (“never” returning to Neverland).??In 2006, the facilities were closed and the staff dismissed. On February 25, 2008, Jackson received notice from Financial Title Company, the trustee, that unless he paid off $24,525,906.61 by March 19, a?foreclosure auction?would go forward of the land, buildings, and other items such as the rides, trains, and art.?But on May 12, 2008, the foreclosure was canceled when?Colony Capital (an investment company run by billionaire Tom Barrack, Jackson’s friend), purchased the foreclosing loan for $22.5 million.?On November 10, 2008, Jackson transferred the title to Sycamore Valley Ranch Company, LLC, a?joint venture?between Jackson and Colony, with Colony as the majority owner. Jackson died from an overdose on June 25, 2009. In May 2015, it was announced that Neverland Ranch (now returned to its original name, Sycamore Valley Ranch), would be put up for sale with an initial price tag of $100 million. By that time, Colony had completed extensive renovations to the property.?In May of 2016, the ranch (jointly owned by the Jackson estate and Colony),?was officially listed for sale by Sotheby’s International Realty?with an asking price of $100 million.?The price included the 12,598 square foot six bedroom Normandy-style mansion, the four-acre lake with waterfall, a pool house, three guest houses, a tennis court, and a 5,500-square-foot movie theater and stage. But due to lack of interest, the asking price was reduced to $67 million in February 2017.??In February 2019, the asking price was reduced again to $31 million.?The listing agent for the ranch said nothing had changed except the price. The structures and landscaping were still being maintained. In December 2020, billionaire Ron Burkle, a former family friend of Jackson, finally purchased the property for only $22 million (in what he called an incredible “land banking opportunity”).

Vendors Expo Returns!?Our world-famous super-duper "Real Estate Vendors Expo"?returns on Thursday night,?December 2, 2021 (one week earlier because of the holidays). 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 in the Grand Ballroom (2nd floor) in the Ackerman Union, UCLA, 308 Westwood Plaza.?FREE Admission.?Self-parking across the street at the Luskin Conference Center ($10).?Please RSVP at www.LAREIC.com.

December General Meeting.?Our December holiday meeting will be held on Thursday night, December 2, 2021 (one week earlier because of the holidays).?And we have a very special guest to celebrate.?Jason Porter will be visiting us from Las Vegas, Nevada. ?Jason is an author, investor, and the nation’s leading authority on tax deeds. If you want to buy properties cheaply and quickly, forget wholesaling.?You want to invest in tax deeds.?Don’t miss Jason’s presentation to learn how.?Our meeting will be held in the Grand Ballroom (2nd floor), Ackerman Union, UCLA, 308 Westwood Plaza.?FREE Admission. Self-parking across the street at the Luskin Conference Center ($10). Please RSVP at www.LAREIC.com.?

This Week. Looking ahead, investors will be seeking hints from Fed officials about the timing for future rate hikes and will closely watch Covid case counts around the world. Beyond that, Retail Sales will be released by the Census Bureau on Tuesday (11/16). Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of growth. The Census Bureau’s Housing Starts (i.e. new residential construction date) will be reported on Wednesday (11/17).?Finally, the Conference Board’s “Leading Economic Indicators” for October will be released on Thursday (11/18).

?Weekly Changes:

10-year Treasuries:????????????Rose ??010 bps

Dow Jones:??????????????????????????Fell?????400 points

NASDAQ:?????????????????????????????Fell?????200 points

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Calendar:

Tuesday (11/16):?????????????????Retail Sales??????????????

Tuesday (11/16):?????????????????Import Prices???????????

Wednesday (11/17):???????????Housing Starts?????????????????????????????????

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For further information, comments, and questions:

Lloyd Segal

President

Los Angeles Real Estate Investors Club

www.LAREIC.com

[email protected]

310-409-8310

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