Economic Update (Monday, September 20, 2021)

Economic Update

(Monday, September 20, 2021)

The Case-Shiller Index posted an 18.6% year-on-year gain this summer. Home prices are now 41% higher than their last peak in 2006 (during the housing bubble).?These numbers are insane!?And it's not because Case-Shiller is a "big-city" index. For starters, the broader 20-city composite was also up 19%, outperforming the core 10-city index. What's more, the separate FHFA home price survey, which covers much more of the country, is showing similar gains--it is up 18% year-on-year.?Of course, higher prices mean more equity for existing homeowners and investors.?But is this new-found housing wealth (i.e. equity) a good thing? Well, unlike the stock market, home prices never plunged during the Pandemic. These are simply gains...building on gains. Some cities are seeing truly eye-popping appreciation. Prices in Phoenix are up 29% from the previous year, per Case-Shiller. Prices in San Diego, up 27%. In Seattle, up 25%. ?The obvious thing to say here is?this is wildly out of whack, it can't be sustained, it's all going to collapse, etc. But...that's not quite the message I’m getting. We already know the Pandemic unleashed a "Great Rotation" of the U.S. population, with people pouring out of urban areas into x-urban homes, or relocating from one (often higher-cost) city to another lower-cost city (and driving up prices for locals). Which is to say--these price gains are driven by "real" demand, not psychological anticipation of profits (as happened in '05-'06).?So the continued rise in housing wealth is a good thing. After all, the average employee in the U.S. does not work for a company that is publicly traded or own stock.?But housing is something that average people do own. So as housing out-performs the stock market (like it did in the inflationary '70s), home equity as a percentage of total net worth will go to higher highs than we have ever seen!?So let’s celebrate our new-found wealth by cracking open the champagne, getting vaccinated (if you haven’t already), putting on our facemasks (yes, you!), social distancing (remember that), and checking out the latest real estate and economic news of the week…

Retail Sales Surge in August.?Consumer spending accounts for two-thirds of U.S. economic activity, so retail sales is a key indicator of growth. Retail sales increased 0.7% last month, the U.S. Census Bureau reports, a sign that Americans continue to spend gobs of money despite the spread of delta.?Though high inflation likely accounts for some of that increase.?Still, sales advanced in almost every major retail category in August and they rose a much stronger 1.8% if autos are excluded.?Why??Because a widespread shortage of new cars and trucks has depressed sales at auto dealers.?Overall, retail sales are 15% higher compared to one year ago. What’s more, broader measures of consumer spending have also remained fairly healthy even as the delta strain of the coronavirus metastasized through our country.?Americans are not spending as much as they were in the spring, but they are still spending plenty of money. More than enough, economists say, to keep the U.S. recovery from petering out.?But what’s changed is what they are spending their money on. For example, people bought a lot of goods early in the pandemic when they were cooped up at home. Things like groceries, computers, cell phones, furniture and the like.?Now they are spending more on services they shunned during the pandemic: Dining out, hotel rentals, theater tickets, and airfare, to cite some examples.?Unfortunately, the surge in delta cases has caused demand for these services to slow recently.?Sales at restaurants, for example, were flat in August. Yet economists predict spending will bounce back once the latest Delta wave recedes. The biggest decline in sales last month took place at car dealers, where receipts sank 3.6%.?Automakers can’t produce enough new cars and trucks to sate the appetite of buyers because of a global shortage of computer chips.?This is important because auto purchases account for about one-fifth of all retail sales.?Sales also fell at big-box electronics retailers and stores that sell hobby items and sports equipment.

Consumer Price Index Increased in August.?Consumer prices continued to increase in August but at the slowest pace since January, climbing only 0.3% for the month. However, even with that slower increase, consumer prices are up a startling 5.3% versus a year ago, well above the Federal Reserve's 2.0% long-term target.?Although some analysts may think the August data is a "win" for the "transitory" camp, overall consumer prices were still up at a 3.3% annual rate in August, which is also well above the Fed's inflation target. ?Energy led the gains, rising 2.0% for the month, with food prices rising 0.4%.?"Core" prices (which exclude food and energy), rose only 0.1% in August.?These prices were held down by an unusually wide array of price declines, including airfares (-9.1%), used cars and trucks (-1.5%), motor vehicle insurance (-2.8%), and hotels & motels (-3.3%).?Combined, those four factors reduced both the gains in the CPI as well as core CPI growth by 0.2 percentage points.?Yes, used car and truck prices may continue to decline in the months ahead (after a large run-up in the past year), but airfares and motor vehicle insurance remain below pre-COVID trends.?In the months ahead, you can anticipate a faster pace of core inflation.?Housing rents (both from actual tenants as well as the imputed rent of owner-occupants) which make up almost 40% of the core CPI, have been accelerating lately, and should accelerate more due to the end of the national moratorium on tenant evictions.?Moreover, with the national Case-Shiller Home Price Index up 18.6% in the last year, some would-be homeowners may shift toward renting, putting further upward pressure on rents.?

Census Incorrectly Reports Declining Population on Eastside.?If you know anything about Los Angeles, you know our city has grown in the past ten years (including the eastside).?Yet, over the last two years, politicians, civic leaders and community activists across Los Angeles worried that Latinos would not be properly counted?as part of the U.S. Census Bureau’s once-in-a-decade population survey. Sure enough, LA.’s numbers have finally come out and City Hall officials are disappointed with the results.?Highland Park, a neighborhood on the city’s northeast end, recorded an improbable decline in population of more than 3,900 people between 2010 and 2020, according to census figures. Likewise, the Eastside neighborhood of Boyle Heights fell by 3,300. Worse, Cypress Park showed a decrease of about 1,250, or 13% — the largest of any L.A. neighborhood.?That disparity (declining population numbers on the Eastside and yet major increases in the West San Fernando Valley), will present challenges for the redistricting panel, which will devote the next two months to creating new maps?for the City Council’s 15 districts. Changes to district boundary lines could cause some neighborhoods to wind up with a different council member. And if one council district is redrawn, the domino effect would ensure that the boundaries of nearby districts are reworked as well.?Under the law, each district must have about 260,000 residents or hew relatively close to that figure.?The UCLA Luskin School of Public Affairs reports the undercount in Los Angeles County affects not just Latinos but also Asian and Black Americans.?It also affects renters and low-income households. ?In other words, an undercount was most likely in neighborhoods that have a high percentage of people living in poverty and a large share of Latinos who are not citizens.?Overall, L.A. experienced a 2.8% population growth over the last decade, bringing its total to 3,898,725, according to the?census. Playa Vista, the mega-development on the Westside (now a full-fledged neighborhood), saw the biggest increase — 90% — as it took on an additional 7,200 people.

Prices for Home Construction Materials Dip for First Time in 2021. Prices for a broad range of construction materials dropped in August for the first time this year. The Bureau of Labor Statistics’ Producers Price Index dropped approximately one percent last month for goods used in residential construction (excluding energy costs). Driven primarily by a steep fall in the price of softwood lumber, it marked the second consecutive month where price growth for these goods either slowed substantially or declined.?The price swings have made life difficult for builders as they work to meet high demand for new homes, according to the National Association of Home Builders. ?But the overall price drops for construction materials offered little relief for builders. Prices remained 14 percent higher than they were at the end of 2020.?Since that time, builders have dealt with extremely high demand, supply chain issues and other factors that drove prices through the roof for goods such as lumber, brick and concrete. While lumber prices have since plummeted from their previous highs, the costs of other essential building materials continues to climb, the government’s data shows.?Prices for steel-mill products have been on a particularly aggressive rise. The cost of steel products rose by 5 percent from July to August, and were double their levels from the same period last year.?Ready-mix concrete prices were up by less than 2 percent in August over the previous month. Drywall prices, which had been skyrocketing since the spring, remained virtually unchanged last month.?But the bulk of the drop in the government’s Construction Goods Index was driven by a dramatic fall in the prices of wood products used in residential construction, including softwood lumber.

Berggruen Buys Hearst Estate at Bankruptcy Auction.?One of our favorite real estate investors, Nicolas Berggruen, is in the news again.?First the property.?Like William Randolph Hearst’s other home (you know, that castle in San Simeon)?the Beverly Hills Hearst estate’s reputation precedes it. In addition to being tied to the newspaper magnate, it was the honeymoon spot for President John F. Kennedy and Jacqueline Kennedy in the 1950s. Its myriad film credits include “The Godfather” (remember the horse’s head discovered in the bed) and “The Bodyguard.” Built in 1926, the salmon-colored showplace was designed by Gordon Kaufmann, the prolific architect behind the Hoover Dam, Greystone Mansion and the Hollywood Palladium. Spanning 29,000 square feet, the Mediterranean mansion captures the spirit of Old Hollywood glitz and glamour with 22-foot-high hand-painted ceilings, a two-story paneled library, two screening rooms and an Art Deco night club. Elsewhere are nine bedrooms, 15 bathrooms and grand public spaces with room for 1,000 guests. The 3.5-acre compound also includes two guest guesthouses, a pool house, tennis pavilion and a five-bedroom gatehouse set among terraces, lawns, waterfalls and an Olympic-size pool lighted by vintage lampposts.?Now the man. Born in France, Berggruen founded his private investment company Berggruen Holdings in 1984 and also created the independent think tank Berggruen Institute in 2010. Berggruen earned the moniker “homeless billionaire” through his jet-setting lifestyle and lack of a permanent address.?Forbes puts his net worth at $1.7 billion.?With that wealth, Berrggruen can probably afford to shell out $63.1 million cash for the Hearst estate, winning the prized property in a bankruptcy auction that was more competitive than expected.?Berggruen beat out five other bidders at the Edward R. Roybal Federal Courthouse in downtown Los Angeles last Tuesday in a heated auction that lasted over 45 minutes.?Twenty-four people (the bidders along with attorneys and agents), crowded into the courtroom, while the overflow crowds ?watched the action on a monitor in an adjoining room.?The bidding began at $48 million — $1 million more than Berggruen’s original offer, which was accepted by the seller, attorney Leonard Ross, in August. The accepted offer triggered a Chapter 7 bankruptcy auction, the proceeds of which will go toward paying off the roughly $50-million debt Ross has accumulated on the property (after years of failing to sell the estate).?BTW, Berggruen’s winning bid of $63.1 million is the most ever paid for a home at an auction. Congratulations Nick!

Hadid’s Bel-Air Mega-Mansion Set for Auction.?Speaking of auctions, let’s not forget Mohamed Hadid.?Hadid (father to models Bella and Gigi Hadid and star of the reality shows “The Real Housewives of Beverly Hills” and “Shahs of Sunset), is no stranger to lavish real estate projects.?But his Strada Vecchia mansion might be his most outlandish to date.?He built the mammoth home both bigger and taller than city rules allow and crammed it onto a steep hillside lot of just over an acre, leaving neighbors below worried that it would slide down the hill and crush their homes. Dubbed “the Starship Enterprise” by disgruntled neighbors, the dramatic mansion towers over the neighboring homes with a striking, curved exterior. They sued Hadid in 2018, citing construction violations. In December 2019, Los Angeles County Superior Court Judge Craig D. Karlan declared the massive, unfinished structure a “danger to the public” and ordered it torn down. In court, Hadid’s attorneys said the cost of the tear-down would be $5 million.?The auction is the latest, and perhaps final, chapter in a saga that stretches back years filled with criminal charges, government investigations and heated courtroom battles.?After years of court battles that saw Hadid plead no contest to criminal misdemeanor charges and sentenced to community service and fines, the doomed home hit the market this year for $8.5 million, with proceeds of the sale going toward its destruction.??After the property languished on the market, state-appointed receiver Douglas Wilson Cos. ordered it to be auctioned off. Bids are due by September 27, and the court will confirm the sale on October 1. The receiver estimates the complete tear-down will take four months.?Essentially, the buyer will be getting a piece of dirt in one of the most prestigious markets on the Westside, but nothing more.?According to Redfin, there are currently 18 pieces of raw land on the market in Bel-Air. The largest is a massive 264-acre spread listed at $70 million, and the smallest is a 2,500-square-foot lot near Stone Canyon Reservoir listed at $18,500.?So $8.5 million doesn’t sound like a good deal to me…

Apartment Vacancies Drop as Rents Rise.?Early in the pandemic, some renters left densely populated cities in favor of the suburbs. Others packed up their apartments and moved in with family members.?But 18 months have passed since Covid-19 first spread into Los Angeles, and apartments that sat empty after tenants vacated are starting to fill up again.?In a sign of progress, L.A. County’s vacancy rate now sits at 4%, down from 4.8% in the second quarter of last year. Net absorption of apartment units, along with asking rents, have increased every quarter since the third quarter of 2020 and are now higher than pre-pandemic levels, according to a report from CBRE.?All Southern California counties are back to having 5% or less vacancy and 95% occupancy, which means rents are on the rise again.?Vacancy rates and asking rents vary, though, by submarket. For example, in areas like Santa Monica, rents remain high while neighborhoods like downtown (where the vacancy rate was 9.4% in the second quarter), are still struggling to recover.?Rental rates may be increasing, but they are doing so at a slower pace than before the pandemic. That change may be due to at least one factor unrelated to Covid-19.??The slower rental rate increase is partially due to the 11,000 new apartment units that have come online in the past 12 months in the greater Los Angeles region.?Some of the buildings having the most trouble with lease-ups now are the newer properties in dense urban markets like downtown where a lot of supply has become available.?Landlords offering larger concessions are still reacting to a time in the pandemic when it was harder to get tenants and are scared to lose tenants.?Looking forward though, experts expect a strong rest of the year.?Rents are going to continue to rise as we come out of this pandemic. I think the big news is that they have risen faster than we thought, and coupled with a low-interest-rate environment, it is making apartment buildings an attractive investment right now. So, we are seeing a lot of competition for these apartment buildings, and the pricing getting pushed higher.?As a consequence, the cap rates are running lower than we saw pre-Covid.

Snoop Dogg is Now Selling His Own Rosé.?When it comes to alcohol, you probably associate Calvin Cordozar Broadus Jr. (better known to the world as the rapper, actor and notorious real estate investor Snoop Dogg) with the combination of gin and juice. But now, Snoop has a new sip — a California-made rosé wine, to be exact.?Snoop is the “face” of a whole new wine label, 19 Crimes, which is the creation of Treasury Wine Estates, a global company with such established brands as Penfolds and Beringer. Through a licensing deal, Treasury brought Snoop aboard. A 19 Crimes Snoop red wine, called (what else?) “Snoop Cali Red,” was the inaugural bottle with the rapper, released in 2020. The Cali Rosé followed this year.?It should be no surprise to see Snoop going the blush-wine route. Rosé sales have grown of late (consider the buzz phrase, “Rosé all day,” from a few years ago) and are expected to reach $3.2 billion by 2022.?It also doesn’t hurt that he’s become something of a “foodie” of late, particularly through his collaboration with Martha Stewart. But Snoop’s overall wine philosophy remains straightforward: “I enjoy wines that get the party going and set the appropriate mood.” As for his new rosé, he says “it’s packed with flavors from berry to cherry, and easy to drink. I love it.”?Sounds like a rap song to me.?If you like your rosé to have a dry finish and a certain finesse (in other words, the classic French style from Provence), this is certainly not the bottle for you.?As Snoop says, it’s about keeping things fruity and simple. In other words, the wine is sweet (think cherry Jolly Rancher candies), but in a way that indeed suggests “good times and easy drinking.” In other words, an end-of-summer alternative to gin and juice.?How to enjoy it??Snoop suggests “a little chicken or fish” with his rosé.

Vendors Expo Returns!?Our world-famous super-duper "Real Estate Vendors Expo"?returns after 19 months on Thursday night,?October 14, 2021. The Vendor Expo will be open from 6:30 to 7:30 pm (before the beginning of our general meeting), and 9:30 to 10:30 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) at the Ackerman Union, UCLA, 308 Westwood Plaza.?Please RSVP at www.LAREIC.com.

October General Meeting.?Our first “live in-person” meeting in 19 months will be held on Thursday night, October 14, 2021 (6:30 to 9:30 pm).?And we have a very special guest to celebrate.?There aren’t many celebrities in the real estate world, but there is one very special individual who stands out.?When CNN or Bloomberg need a real estate expert, there is only one person they interview.?When CBS or NBC News need analysis of a difficult real estate issue, there is only person they call.?When CNBC or ABC News need a real estate authority on a breaking story, there is only one person they turn to.??When NPR or the Wall Street Journal need a quote from a real estate expert, there is only one person they ask.?Probably no one in the real estate industry has appeared on TV, radio, online, or in print more frequently than this guy!?That celebrity is Rick Sharga, the number #1 authority on real estate economics, and we have him exclusively at our October 14th meeting.?Our meeting will be held in the Grand Ballroom (2nd floor), Ackerman Union, UCLA, 308 Westwood Plaza.?Please RSVP at www.LAREIC.com.?

Annual Los Angeles Real Estate Grand Expo.?Our Grand Expo returns on Sunday, October 31, 2021 (Halloween day), 9:00 am to 6:00 pm, a the beautiful Skirball Cultural Center. ?We’ve taken it over – it’s all ours!?The theme of this year’s Grand Expo is “How to Invest in a Post-Pandemic World.”?The Grand Expo is presented by the Los Angeles Real Estate Investors Club, Sam’s Real Estate Club, Ventura County Real Estate Investors Association, and Realty 411.?There will be twelve national speakers in breakout sessions, and over 70 vendors (in an area the size of a football field)!?Keynote speaker will be Amy Mahjoory, star of HGTV’s “House Hunter.”?Best of all, the Grand Expo will be FREE and parking is also FREE. You can RSVP and see a partial list of speakers and vendors at www.LAGrandExpo.com.

Life Mentoring Forum.?Join Sam Sadat (President of Sam’s Real Estate Club) for his Life Mentoring Forum, tomorrow (Tuesday, September 21), 7:30 pm to 8:30 pm.?This month’s topic is “Wisdom of the Ages.”?Enhance your awareness and raise your confidence.?Registration is FREE for the online forum, at: https://samsrealestateclub.com/event/inspiration-2021-sept/.

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, this is a busy week for real estate news. The U.S. Department of Housing and Urban Development will release “Housing Starts” tomorrow (9/21).?On Wednesday (/22), the National Association of Realtors will release the latest “Existing Home Sales.” ?On Friday (9/24), the U.S. Census Bureau will release “New Home Sales.” ?In addition, the next Fed meeting of their open market committee will take place on Wednesday (9/22), and investors will be looking for guidance about the timing for changes in monetary policy (i.e. bond purchases and interest rates).?

Weekly Changes:

10-year Treasuries:????????????Rose?? 005 bps

Dow Jones Average:??????????Fell???? 100 points???

NASDAQ:?????????????????????????????Fell???? 050 points

?Calendar:

Tuesday (9/21):???????Housing Starts?????????

Wednesday (9/22):??Existing Home Sales??????????

Friday (9/24):??????????New Home Sales

For further information, comments, and questions:

Lloyd Segal

President

Los Angeles Real Estate Investors Club

www.LAREIC.com

[email protected]

310-409-8310