Monday Morning Quarterback (Happy July 4, 2022)

Monday Morning Quarterback

(Monday, July 4, 2022)

Let me first establish my bona fides by acknowledging I’m fiscally conservative, but socially liberal. By this I mean I am pro-choice and believe in a woman’s right to an abortion. For God’s sake, it’s her body – not the government's. It’s her decision, not the government’s. As such, I was disappointed and disheartened by the Supreme Court’s decision last week in Dobbs vs. Jackson Women’s Health Organization.?Now that I’ve clearly stated my position, let me reluctantly admit that as an attorney, it was the right decision for the right reason. But before you start screaming, please allow me to explain. Let’s start by acknowledging that the United States Constitution is an amazing document. It was written in 1789, and yet, it still works today, over two hundred and thirty-three years later. In its simplest terms, it provides for certain “substantive rights,” such as life, liberty, happiness, privacy, due process, while also focusing on specific issues such as guns, voting, immigration, interstate commerce, and taxes. Why these issues? Because these issues were relevant in 1789. Abortion was not relevant in 1789. Nevertheless, the Constitution is flexible and provides in the 10th Amendment that any specific issues not addressed in the Constitution are left to the states (“Federalism”). And like it or not that is how our government is structured. (If you don’t like it, why didn’t you speak up in 1789?) Anyway, getting back to abortion, the court made a fundamental mistake in 1973 with Roe vs. Wade. Under social pressure, the court struggled to legalize abortion by incorrectly squeezing a square peg into a round hole, holding that abortion is a “substantive right” under the due process clause of our Constitution. But that was incorrect. Our founding fathers (unfortunately all men) never considered abortion in the Constitution (nor after). In fact, it is never mentioned in the Constitution. So it is not a substantive right. In truth, the court should have held that the “right to privacy” (which is in the Constitution) should apply to a woman’s right to chose. But they never addressed that rationale. So the ruling in Roe vs. Wade was the right result, but for the wrong reason. And remained wrong for the past 50 years! So what the court did last week was correct a Constitutional wrong. We certainly don’t like the end result, but all is not lost. Remember, our Constitution says any rights not established in the Constitution are to be decided by the states. So now, like so many issues in our hopelessly divided country (i.e. marijuana, voting rights), some states will allow abortion while others will deem it illegal. Going forward, our best response is to support the states that preserve a woman’s right to choose. But wait a minute. What is more disconcerting is Clarence Thomas’ concurring opinion. In it, Judge Thomas suggests that other rights (such as birth control and gay marriage) should also be re-visited by the Court (conveniently ignoring inter-racial marriage). Now that scares the hell out me because that indicates this court is not finished.

Housing Starts Declined in May.?The housing market is composed of three data points: housing starts, new home sales, and existing home sales.?Let’s look at all three this week, starting with housing starts. ?Housing starts posted the largest monthly decline since the early days of the pandemic in May as builders continued to navigate a challenging housing market characterized by the highest mortgage rates since 2008, labor shortages, and ongoing supply-chain issues.?That said, part of the 14.4% decline was the result of April's reading on construction being revised up to the highest level since 2006. Without that upward revision, May's decline would have been a more modest (though still significant) 10.2%. Looking at the details, both single-family and multi-unit construction contributed to the drop in May. It's clear developers are becoming more cautious about future demand for new projects with 30-year mortgage rates nearing 6%. However, it also makes sense to slow down the pace of starts given how many projects are currently sitting in the pipeline. The number of homes already under construction is at the highest level on record back to 1970.?Moreover, the gap between the number of units under construction and the number of completions of new homes remains at record high levels back to 1970s as well. These figures illustrate a slower construction process due to a lack of workers and other supply-chain difficulties.?In this context, it's not surprising to see new building permits fall 7.0% in May.?The backlog of projects that have been authorized but not yet started is currently sitting just below the record high since 1999. With plenty of future building activity waiting to get underway as other projects are finished, and given that residential investment is counted in GDP when units are completed, housing can continue to be a tailwind for economic growth even with a slowdown in the headline pace of housing starts given current conditions. Builders are still looking to boost the near record-low levels of inventory to satisfy buyers, and as Millennials continue to enter the housing market as the now largest living generation.

New Single-Family Home Sales Increased in May. So far, the widely predicted demise of the US housing market has been exaggerated.?Sales of new homes broke a four-month losing streak in May, posting a 10.7% gain to easily beat consensus expectations. Moreover, sales in prior months were revised up as well.?Using April's original reading of 0.591 million, this week's headline gain would have been 17.8%.?While it's too early to tell from just one month, the housing market may be beginning to find some footing amid declining affordability, with this increase marking the first gain so far in 2022.?While rapidly rising prices have been an issue in the housing market throughout the COVID-19 pandemic, 30-year mortgage rates now sit at around 6%, adding to the burden.?Assuming a 20% down payment, the rise in mortgage rates and home prices just since December amount to a 40% increase in monthly payments on a new 30-year mortgage for the median new home. That makes today's headline number even more impressive. Also keep in mind that new home sales are a very timely barometer of the housing market because they are counted when the contract is signed, rather than when the contract is closed, like with existing homes. That said, if the Federal Reserve is hoping to get housing inflation under control through higher interest rates, the progress has been slow. While median sales price growth has decelerated from a year-over-year peak of 24.2% in August, prices were still up 15.0% in the twelve months ending in May. The main problem is still that buyers are stuck dealing with very few options when it comes to completed homes, and demand remains high.?It's true that overall inventories have been rising recently and now sit at the highest level since 2008.?However, almost all of this inventory gain is from homes where construction has either not yet started or is still underway.?Doing a similar calculation with only completed homes on the market shows a months' supply of a meager 0.6 (near the lowest level on record back to 1999).?The good news is that builders have been ramping up construction activity to help meet demand, with the total number of single-family homes under construction at the highest levels since 2006.?In time, that added supply will facilitate more sales while continuing to slow the pace of new home price appreciation.?Ultimately, I think the market will to be able to weather the headwinds of higher mortgage rates in 2022, with sales of new homes only slightly down versus 2021.?

Existing Home Sales Declined in May. Existing home sales fell for the fourth month in a row in May, hitting the slowest pace since 2020.?Recent volatility shows that the housing market is struggling to find its footing so far in 2022, with falling affordability playing a major role.?The prime culprit recently has been 30-year mortgage rates, which have already risen more than 200 basis points since December and now sit above 6% for the first time since 2008.?Even more notable than the decline in sales in the report is that despite surging mortgage rates median prices are still climbing, posting a fourth consecutive monthly gain in May. Part of this is just seasonality (prices typically rise heading into the summer buying season), and median price growth in the past year has slowed to 14.8% from a peak of 25.2% in May 2021, but the "reverse wealth effect" the Fed has been looking for has yet to show up in the housing market. Assuming a 20% down payment, the rise in mortgage rates and home prices since December amount to a 45% increase in monthly payments on a new 30-year mortgage for the median existing home. No wonder sales have slowed down! Although the months' supply of existing homes for sale (how long it would take to sell today's inventory at the current sales pace) rose slightly to 2.6 months in May, inventories are still down 4.1% from a year ago.?What is really impressive is that despite the lack of options demand remains strong, with buyer urgency so high in May that 88% of existing homes sold were on the market for less than a month.?While sales are clearly under pressure, this is not a repeat of 2008/9.?I do not foresee a collapse in home sales even with higher mortgage rates, though it is likely that existing home sales wind up moderately lower in 2022 than 2021.?More inventory is becoming available, though more slowly than economists would like (for details see my report on housing starts above), which will eventually help price gains moderate further.?Also keep in mind that Millennials are now the largest living generation in the US and have begun to enter the housing market in force, which represents a demographic tailwind for sales for the foreseeable future.

Feds Seizes $63-million L.A. Mansion Linked to Corrupt Armenian Politician. First, let’s get the names straight because it’s going to get confusing, trust me.?Let’s start with Gagik Khachatryan, then Sedrak Arustamyan, and finally Gagik’s two adult sons, Gurgen Khachatryan and Artyon Khachatryan.?Ok, now that we have the players, let’s mention the house.?A luxurious French chateau in one of Los Angeles’ most exclusive neighborhoods, Holmby Hills, complete with 11 bedrooms, 27 bathrooms and an asking price of $63.5 million.?At 33,652 square feet, it is among the largest homes on the market in Southern California, but there are a few hitches. For one, the interior was never finished. The studs are still exposed and there is no plumbing or electrical, among other problems. Oh, one more minor detail. Last week, federal prosecutors in Los Angeles seized the estate, alleging that it is the “fruit of corruption” involving a powerful Armenian politician and his children.?The U.S. Department of Justice outlined in a court filing how the property on South Mapleton Drive (a few doors down from another notorious estate, the Playboy Mansion) was purchased in 2011 for $14.4 million with bribes to the family of Gagik Khachatryan, Armenia’s former Minister of Finance.?Khachatryan, 66, his two sons and the businessman are all now facing criminal charges back in Armenia.?The businessman, Sedrak Arustamyan, is accused of providing more than $20 million in bribes. The saga of the residence begins in 2008, when Khachatryan took over leadership of the State Revenue Committee, the government agency that assesses and collects taxes in Armenia. To secure favorable tax treatment, Arustamyan allegedly entered into two sham loan agreements with Khachatryan’s sons — the first loan in 2009 for $7 million and another in 2011 for $13.4 million. Both loans bore agreements specifying when payments were due and the terms of interest.?But according to court filings, Arustamyan never received any interest or principal payments on either “supposed loan.”?To make use of these purported loans, Khachatryan and his sons formed multiple entities “to receive, disguise and conceal illegal bribe payments” as well as purchase the Holmby Hills property. In fact, more than $13 million was wired by Arustamyan directly to West Coast Escrow’s Comerica Bank account.?But days before the sale closed, he affirmed he would not hold title and relinquished any claim to the money, according to court filings.?In 2016, when Khachatryan left office, the alleged bribery scheme came to light and authorities discovered millions of dollars in unpaid taxes owed by Arsutamyan’s companies, according to prosecutors. In 2019, Khachatryan was charged with abuse of power and embezzlement. His sons and Arusatamyan were charged in 2020. The sons, Gurgen and Artyon, have since fled Armenia, and their whereabouts are unknown.?But I would wager they’re not at the Holmby Hills home.??

Bribery Trial Offers Peek Into Alleged Shakedown Of Developers.?In more corruption news, the trial involving a downtown Los Angeles developer?accused of bribing a former Los Angeles City Council Member, Jose Huizar,?is offering a peek into how Huizar allegedly sought and got cash from real estate developers looking to move their projects quickly through the city's approvals process.?Huizar, previously the chairman of the city’s planning and land use management committee, exercised considerable influence?over when development projects were placed on the agenda for the committee. George Esparza (former aid to Huizar) told a jury that Huizar exercised that influence often, and had “assigned him to find the point person for each real estate developer who had business before Huizar, then hit them up for political donations, hotel stays, event tickets or other benefits,” the Los Angeles Times reports.?Esparza also told jurors that, in 2017, he was involved in two “money drops” for the council member in which he received hundreds of thousands of dollars in cash from a developer’s intermediary, hiding it in empty liquor boxes before delivering it to Huizar.?Esparza’s testimony was part of the ongoing federal bribery trial against downtown developer and property owner Dae Yong Lee, who is accused of paying Huizar $500,000 to lock in the council member’s support for a 20-story tower he wanted to build on Olympic Boulevard.?That support, federal prosecutors say, involved using his labor union connections to make an appeal against the project “go away.”?Lee has pleaded not guilty to bribery, wire fraud and obstruction of justice. His attorneys said that Lee’s real estate consultant lied to him about what the money was for. Lee believed that the money was for consulting work, his lawyers said.?Esparza pleaded guilty in 2020 to a racketeering conspiracy charge, part of the far-reaching federal corruption case involving the council member. This is the first of three trials that have come out of that investigation. Huizar?pleaded not guilty?in December 2020 to charges including bribery, money laundering, and wire and mail fraud. Updates to follow…

Foreclosure Activity Increases in May 2022.?Real estate data provider, ATTOM, released its May 2022 U.S. “Foreclosure Market Report,” which shows there were a total of 30,881 U.S. properties with foreclosure filings (i.e. default notices, scheduled auctions or bank repossessions) up one percent from a month ago, but up 185 percent from a year ago!?Nationwide one in every 4,549 housing units had a foreclosure filing in May 2022. States with the highest foreclosure rates were Illinois (one in every 2,000 housing units with a foreclosure filing); New Jersey (one in every 2,346 housing units); Delaware (one in every 2,426 housing units); Ohio (one in every 2,667 housing units); and Florida (one in every 2,788 housing units).?Among the 223 metropolitan statistical areas with a population of at least 200,000, those with the highest foreclosure rates in May 2022 were Jacksonville, NC (one in every 1,052 housing units with a foreclosure filing); Cleveland, OH (one in every 1,389 housing units); Chicago, IL (one in every 1,777 housing units); Fayetteville, NC (one in every 1,823 housing units); and Rockford, IL (one in every 1,861 housing units).?Those metropolitan areas with a population greater than 1 million, with the worst foreclosure rates in May 2022 including Cleveland, OH and Chicago, IL were: Jacksonville, FL (one in every 1,985 housing units); Orlando, FL (one in every 2,295 housing units); and Miami, FL (one in every 2,432 housing units). Lenders started the foreclosure process on 22,099 U.S. properties in May 2022, down 1 percent from last month but up 274 percent from a year ago.?States that had the greatest number of foreclosure starts in May 2022 included: Florida (2,483 foreclosure starts); California (2,238 foreclosure starts); Texas (2,019 foreclosure starts); Illinois (1,757 foreclosure starts); and Ohio (1,285 foreclosure starts).

Marijuana Entrepreneur Sells Wright’s Neo-Mayan Masterpiece.?Who says it doesn’t pay to get stoned??The John Sowden House — a dazzling neo-Mayan gem built by architect Lloyd Wright — has traded hands for $6.16 million in Los Feliz.?Built in 1927, the neo-Mayan-style showplace is made of concrete textile blocks. One of Southern California’s finest examples of neo-Mayan architecture, the singular, striking residence resembles a temple but has also drawn comparisons to a cave or the gaping mouth of a great white shark.?Records show the seller is Dan Goldfarb, a cannabis entrepreneur best known for founding Canna-Pet, which sells hemp products designed for animals. Yes, animals get stoned too.?Goldfarb bought the iconic estate for $4.7 million in 2018 with plans to turn it into a cultural hub for art and events. The buyer is Nate Daneshgar, whose family owns Grand Central Market in downtown Los Angeles. He becomes the latest in a long line of notable owners including its namesake, painter John Sowden, and George Hodel, an L.A. physician who was named a suspect in the Black Dahlia murder case. For this notorious tie, the property’s website?claims that the house “might hold the key” to the unsolved mystery. Wright (son of prolific architect Frank Lloyd Wright) built the home in 1927 using concrete textile blocks that showcase decorative Mayan themes. The house hovers above Franklin Avenue, entering through copper gates to a dramatic tomb-like staircase. The cave-like atmosphere continues inside, where stone fireplaces anchor living spaces lined with warm wood floors. Throughout the 5,600-square-foot space, walls of windows wrap around an interior courtyard with a swimming pool and spa surrounded by art installations.?For its distinct appearance, the residence has appeared in a handful of movies including “L.A. Confidential” and “The Aviator.” It also claims an honored spot on the National Register of Historic Places.

New “LARealEstateInvestors.com” Podcast.?We are so very excited to announce our new podcast, "LARealEstateInvestors.com" (named after our domain name) hosted by our very own Bill Gross. Bill has been a Realtor, broker and real estate investor since the Ice Age!?No one is more experienced in local Southern California real estate than Bill Gross. Plus he is an expert on probates and so many other strategies. Each week, Bill will interview real estate professionals sharing their insights and advice for our members and friends. (Of course, we will continue to support and promote "Rubbing Elbows" with Chuck Dorfman and Lior Yehuda, but now we will have TWO podcasts.) LARealEstateInvestors.com podcast will air weekly on Tuesdays and streaming thereafter anytime on YouTube, Facebook, and Google.

“An Evening with Merrill Chandler.”?As real estate investors, loans and leveraging are crucial to our success. As such, your credit score and your credit profile are crucial to your “Fundability” (your ability to get real estate loans).?And when it comes to credit, lending and credit, there is no better authority than Merrill Chandler. After years of begging him to come to Los Angeles and speak, Merrill will be our special guest on July 14th at our general meeting.?Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034 (Culver City adjacent).?FREE Admission.?Metered and free street parking. (And don’t come “fashionably late” or you’ll end up parking in Long Beach and taking an Uber!)?RSVP: www.LARealEstateInvestors.com.

Vendors Expo Returns!?Our carbon-neutral, bio-degradable, gluten-free, super-duper "Vendors Expo"?returns on Thursday night,?July 14, 2022. The Vendor Expo opens starting at 6:30 pm. We'll have 40+ of the finest vendors featuring real estate products and services you will want to utilize as a successful investor. Our Vendor Expo will be held at the Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, CA 90034 (Culver City adjacent).?FREE Admission.?Metered and free street parking. Please RSVP at www.LARealEstateInvestors.com.

This Week. Looking ahead, investors will continue to look for additional Fed guidance on the pace of future rate hikes and bond portfolio reduction. Beyond that, the key Employment report will be released on Friday, 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. The ISM national services sector index will come out on Wednesday.

Weekly Changes:

10-year Treasuries:????????????Fell????030 bps?????????

Dow Jones Average:??????????Rose??500 points

NASDAQ:???????????????????????????Rose??200 points

Calendar:

Wednesday (7/6):????????????????ISM Services???????????

Thursday (7/7):????????????????????Trade Deficit

Friday (7/8):??????????????????????????Employment?

For further information, comments, and questions:

Lloyd Segal

President

Los Angeles County Real Estate Investors Association, LLC

www.LARealEstateInvestors.com

[email protected]

310-409-8310