Monday Morning Quarterback (Monday, July 11, 2022)

Monday Morning Quarterback

(Monday, July 11, 2022)

The U.S. is not in a recession…yet.?Friday’s job report shows that our economy added 372,000 jobs last month (see below), bringing the total for the first six months of the year to a whopping 2.74 million. During the same period, the unemployment rate dropped from 4% to 3.6%. So it does not really matter that "real" GDP declined in the first quarter, and may have declined in the second quarter.?A recession, technically speaking, is the end of a business cycle. There are no numeric rules that define it, like the "two declining quarters of GDP" people use as a casual reference point. Recession simply refers to the period from when broad activity peaks to when it bottoms out. And this is captured using a range of economic indicators that all have to tell the same story.?According to the committee that officially dates recessions (the "NBER"), these indicators include "real personal income less transfers, nonfarm payroll employment, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, employment as measured by the household survey, and industrial production." (Note that real GDP isn't even mentioned as a criterium.)?Obviously, the labor market data shows an economy that is still expanding, not recessing, in the first half of this year. What about from here? If the half-dozen indicators mentioned above all are lower in December versus their levels this month, then yes, we’re in a recession. Heck, if they are obviously sharply lower by this September than they are now, we're likely in recession!?Regardless, everyone seems to think that just because our economy is slowing, real spending has been flattish, and consumer sentiment is weak, it's just a matter of time until we officially enter recession. But I'd argue that's too fatalistic. The erosion of consumer spending and sentiment has been caused by inflation, and an overheating economy. In response, the Fed has a chance to prolong the expansion by arresting inflation, and it has moved aggressively in that direction.?But the Fed is walking a tight rope. They could just as easily overshoot and slow the economy too much, but doing nothing is just going to land us in “stag-flationary” purgatory.?Pay close attention to the retail sales data this Friday for further evidence of where this economy is going.

U.S. Created 372,000 jobs in June With Strong Labor Market.?The U.S. created a robust 372,000 new jobs in June, confounding predictions of a big slowdown in hiring and signaling our economy has some zip left despite growing talk of recession.?The unemployment rate was unchanged at 3.6%, the Department of Labor reports (just a tick above the pre-pandemic low).?The strong gains in employment this year are unlikely to last, however.?For one thing, the biggest shortage of labor in decades is unlikely to ease soon, making it hard for companies that still want to hire to do so. The labor crunch has boosted worker pay by the largest amount since the 1980s and helped families cope with rising prices, but it will be harder for the Fed to bring down inflation if rapid wage gains persist.?Hourly pay rose a solid 0.3% in June to $32.08, but wage growth is slowing. The increase in pay over the past year slipped again to 5.1% from 5.3% in the prior month and 5.6% in the early spring.?The share of the working-age population 16 or older who either have jobs (or are looking for one) slipped to 62.2% from 62.3%, leaving it well below the pre-pandemic peak. Consumers are spending enough money to keep the wheels of our economy turning and businesses are still hiring and investing. The increase in hiring in June was broad based.?Professional employment rose by 74,000 to lead the way. Some tech companies are holding the line on new hires, but other white-collar firms are still adding jobs.?Bars, restaurants, hotels and other companies in the hospitality business created 67,000 new jobs, reflecting pent-up demand among consumers to go out again as the pandemic loses its grip on the routines of daily life.?Employment also rose by 57,000 in health care, 36,000 in warehousing and transportation and 29,000 in manufacturing. The private sector has now recovered all 21 million jobs it lost in the first two months of the pandemic.?

Home Flipping Spikes in First Quarter of 2022 But Profits Drop.?The first quarter 2022 U.S. “Home Flipping Report” (released by ATTOM) shows that 114,706 single-family houses and condominiums in the United States were flipped in the first quarter. Those transactions represented 9.6 percent of all home sales in the first quarter of 2022, or one in 10 transactions – the highest level since at least 2000. The latest total was up from 6.9 percent, or one in every 14 home sales in the nation during the fourth quarter of 2021, and from 4.9 percent, or one in 20 sales, in the first quarter of last year. The jump in the home-flipping rate during the first quarter of this year marked the fifth straight quarterly increase. It also represents the largest quarterly and annual percentage-point gains since 2000.?But the report also shows that as home sales by investors spiked, typical profits on those deals remained below where they were a year ago, and in a more striking trend, profit margins dipped to their lowest point since 2009.?Among all flips nationwide, the gross profit on typical transactions (the difference between the median purchase price paid by investors and the median resale price) stood at $67,000 in the first quarter of 2022. While that was up 5.5 percent from $63,500 in the fourth quarter of 2021, and represents the first increase since late 2020, it was 4.3 percent less than the $70,000 level recorded in the first quarter of 2021. Profit margins, meanwhile, fell for the sixth quarter in a row, as the typical gross-flipping profit of $67,000 in the first quarter of 2022 translates into just a 25.8 percent return on investment compared to the original acquisition price. The national gross-flipping ROI was down from 27.3 percent in the fourth quarter of 2021 and from 38.9 percent a year earlier. In fact, it sits at the lowest point since the first quarter of 2009, when the housing market was slumping from the effects of the Great Recession in the late 2000s.

New Jersey, Illinois and California Have Highest Concentration of Vulnerable Housing Markets.?A “Special Housing Risk Report” was released last week spotlighting county-level housing markets around the United States that are more or less vulnerable to declines, based on home affordability, unemployment and other measures. The report shows that New Jersey, Illinois, and our very own inland California counties had the highest concentrations of the most at-risk markets in the first quarter of 2022 – with the biggest clusters in the New York City and Chicago areas. Most southern states were less exposed.?The first-quarter 2022 patterns – based on home affordability, underwater mortgages, foreclosures and unemployment – revealed that New Jersey, Illinois and California had 34 of the 50 counties most vulnerable to the potential declines. The 50 most at-risk included eight counties in the Chicago metropolitan area, six near New York City and 10 sprinkled throughout northern, central and southern California.?Counties were considered more or less at risk based on the percentage of homes facing possible foreclosure, the portion with mortgage balances that exceeded estimated property values, the percentage of average local wages required to pay for major home ownership expenses on median-priced single-family homes, and local unemployment rates. The wide disparities in risks come at a time when the U.S. housing market remains relatively strong but shows signs that a decade-long boom may be easing.?Home prices have climbed more than 15 percent in most of the country over the past year, with new highs hit in about half the nation, boosting homeowner equity to record levels.?But as interest rates on 30-year mortgages rates have climbed to 6 percent (worsening affordability for prospective homebuyers), home sales have declined every month in 2022, and home price appreciation is showing signs of retreating rapidly. California had 10 counties in the top 50 list: Butte County (Chico), San Joaquin County (Stockton), Shasta County (Redding) and Solano County (outside Sacramento) in the northern part of the state; Fresno County, Kings County (outside Fresno), Madera County (outside Fresno), Merced County (outside Modesto) and Stanislaus County (Modesto) in central California, and only Kern County (Bakersfield) in the southern part of the state.

The American Dream Mall Is In Default.?The second-largest mall in the United States is in trouble.?Big trouble!?After Triple Five, the developer and third owner of East Rutherford, New Jersey’s “American Dream Mall,”?failed to make a payment on an $800 million bond?for the property last week. As of June 16, the 3 million-square-foot megamall in the parking lot of MetLife Stadium (with its indoor ski slope, water park, and skating rink), is officially in default, with a hefty bailout needed to save it. This is only the latest in a trail of horrible financial decisions as long as the walk from Saks to the Nickelodeon roller coaster. In 2019, the mall made its grand debut?over a decade late?with a vision similar to the Mall of America in Minneapolis. The idea was to make it just as gloriously over the top. (“A one‐of‐a‐kind property that will reshape the way people think about entertainment, theme parks, and shopping,” the press release read at the time.) But the ribbon had?barely been cut?on the first phase of its opening when the mall was temporarily shuttered by the pandemic. Nevertheless, boosters touted the mall’s size as ideal for COVID-era shopping. “Because we’re three million square feet, everyone is naturally socially distant,” CEO Mark Ghermezian?told CNBC?in November 2020. But that kind of turnout never materialized, as Bloomberg?reported?in February. Ghermezian said that American Dream would have a 95 percent occupancy rate by the end of 2021, but photos from early 2022 showed?entire corridors of papered-over storefronts. It lost $60 million last year, and making payments on its massive construction debt left it with only $820 in a reserve account last year. Yes, you read that right, only $820.00!??But American Dream’s demise is more than bad timing. The collapse of the mall as an institution may be part of a bigger post-COVID trend, notes Alexandra Lange,?who visits this mall in the opening of her new book?Meet Me by the Fountain: An Inside History of the Mall. As she wrote this week in the New York?Times,?forecasters predict that a quarter of the country’s 1,000 malls will close within five years. But the developer’s choice to remake one mall into the American Dream mall (without adding a better connection to the outdoors, carving out a more permeable perimeter, or redeveloping the acres of parking lots), was misguided in 2019 and downright irresponsible in 2022. Inspiration might be found in the name of the original never-completed mall American Dream replaced: Meadowlands Xanadu.

Homes With High Fire Risk Sell For Nearly $120,000 More. You would think the opposite, but the median sale price of homes with high fire risk was $550,500 in June, compared with $431,300 for homes with low fire risk, according to Redfin.?In other words, the typical home with high fire risk sold for $119,200 (27.6%) more than the typical home with low fire risk—the largest premium in dollar terms since at least 2017. But why? It turns out fire-prone homes have historically fetched higher prices, likely because they tend to be larger and/or located in pricey West Coast metros. The typical high-fire-risk home purchased in April was 2,000 square feet, while the typical low-risk home was just 1,706 square feet. But also the price premium for high-risk homes has surged during the pandemic. That’s because scores of Americans moved out of cities and into suburbs and rural areas, where homes are more likely to face fire risk due to the proximity to flammable vegetation. The median sale price of high-risk homes was up 51.7% in June from two years earlier, while the median sale price of low-risk homes was up 40.9%. Pandemic buyers also hunted for deals due to surging home prices, and while fire-prone homes aren’t cheaper on average, buyers may feel they’re getting more bang for their buck because they’re getting more space. And for some pandemic buyers, the fire-prone home they bought in suburbia?was?actually cheaper than their last home because they were relocating from somewhere like San Francisco, Seattle, or Los Angeles.?While research has shown that many house hunters are concerned about climate risks when deciding where to live, oftentimes, it’s not a dealbreaker. For some, that’s because factors like relative affordability, home size and proximity to family take precedence. For others, it’s because they’re not aware of the climate risks in the area they’re moving to.?Fire-prone homes not only sell for more; they also get snatched up faster—another indication that evolving homebuyer preferences during the pandemic made high-risk areas seem more attractive to many house hunters. The typical high-risk home sold in 16 days in June, compared with 20 days for the typical low-risk home. That marks a shift from before the pandemic, when low-risk homes typically sold faster.

Mortgage Rates See Largest Drop Since December 2008. Wo says mortgage rates only go up??The 30-year fixed-rate mortgage?averaged 5.3% for the week ending July 7, according to?Freddie Mac. That’s down 40 basis points from the previous week (one basis point is equal to one hundredth of a percentage point, or 1% of 1%). The average rate on the 15-year fixed-rate mortgage dropped 38 basis points?over the past week to 4.45%. The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 4.19%, down 31 basis points from the prior week.?Sam Khater, chief economist at Freddie Mac said in a press release that “while the drop provides minor relief to buyers, the housing market will continue to normalize if home price growth materially slows due to the combination of low housing affordability and an expected economic slowdown.” The drop in interest rates, alongside a 5.4% drop in mortgage applications for the week ending July 1, reveals a broader cooling in the housing market.?The mortgage applications data is reported by the Mortgage Bankers Association on a weekly basis. Mortgage rates decreased for the second week in a row, as growing concerns over an economic slowdown and increased recessionary risks kept Treasury yields lower.?Still, rates are much higher than they were a year ago. For example, the 30-year averaged at 2.9% same time last year.?The yield on the 10-year Treasury note?rose above 2.95% on Friday.

Hearst Heiress Sells Lautner’s Famous “Wolff House” for $11 million. ?Nicolas Ghesquière, the creative director for French fashion house Louis Vuitton, just bought one of the most stylish estates in L.A. The designer has quietly paid $11 million for John Lautner’s iconic Wolff House in an off-market deal, the L.A. Times reports. The sellers are Amanda Hearst (great-granddaughter of publishing magnate William Randolph Hearst), and her husband, director Joachim R?nning. They made a hefty profit on the property after buying it only two years ago for $5.9 million.?The Midcentury gem was built in 1961 by Lautner, a prolific architect whose bold, dramatic creations regularly star in the silver screen. His myriad works include the legendary Bob Hope house?in Palm Springs and the Silvertop estate?in Silver Lake.?The Wolff House is one of Lautner’s best, as the striking Modernist marvel hovers above the city on an ultra-steep lot in Hollywood Hills. A confluence of natural materials and sleek modern features, the house wraps around a mammoth Eucalyptus tree that cuts through the center of the space. Scenic living spaces combine stone, copper and glass, as 16-foot windows take in the leafy grounds and city below. Another highlight comes in the spiral staircase, where warm wood steps wind within a curved wall of stone. Four bedrooms and 3.5 bathrooms complete the main house, and a guesthouse commissioned in 1970 adds three bedrooms and two bathrooms. The primary suite expands to a private terrace, and the lower level opens outside, where a cantilevered swimming pool is perched at the edge of the property.?In 2006, the famous estate was a designated a Los Angeles Historic-Cultural Monument. Ghesquière worked at Balenciaga, where he was named one of Time magazine’s 100 Most Influential People in 2006, before joining Louis Vuitton in 2013.?Hearst and R?nning were married last year?at Hearst Castle in San Simeon. Hearst formerly served as an editor at the fashion magazine Marie Claire. R?nning, a native of Norway, has been directing films for two decades with credits including “Pirates of the Caribbean: Dead Men Tell No Tales” and “Maleficent: Mistress of Evil.”

Missing Sriracha? Time for alternatives.?You’ll be happy to know that I crowdsourced alternatives to get you through the “hot sauce apocalypse." With the devastating news of the Huy Fong Sriracha shortage, I asked local foodies what they were using instead to spice up their meals. I?know nothing replaces that particular taste of Sriracha for diehards, but these foodies suggested a wide array of alternative tongue-tinglers. I also roped in some local food mavens who have strong opinions on the subject. For example, Tyler Ryan Shaputis from Pasadena said,?“Now’s the time to try real THAI sriracha. No shortage of that, and way better and true to its origin. My go-to brand is “Shark.” Now know that Shark will have little resemblance to the thick paste of the non-traditional stuff like Huy Fong. Brianna Lee, Engagement Producer at LAist,?“I once attended a PowerPoint presentation by former KPCC/LAist audio producer Quincy Surasmith?on the difference between Huy Fong Sriracha and Thai (Shark brand) sriracha.?My life has never been the same since I started buying the Shark brand.” Also, a friend (who will remain nameless) says he saves all the Sriracha packets he gets from whenever he orders pho takeout, and now he has a little collection.?There you have it.?Be the first to storm your local Asian market and buy the entire stock of Shark.?You’ll be glad you did.?(Just another public service from the Condiment Department at Monday Morning Quarterback.)?

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. 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 at the website: 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 interest rate hikes and bond portfolio reduction. Beyond that, the Consumer Price Index (“CPI”) will be released by the Bureau of Labor Statistics on Wednesday (7/13), and the Producers Price Index on Wednesday. CPI is a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services. Retail Sales will come out on Friday (7/15). Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of the health of our economy.?

?Weekly Changes:

10-year Treasuries:???????????Rose??015 bps

Dow Jones Average:??????????Rose??300 points

NASDAQ:??????????????????????????Rose??400 points

?Calendar:

Wednesday (7/13):??????????????Consumer Price Index

Friday (7/15):????????????????????????Import Prices

Friday (7/15):????????????????????????Retail Sales?

??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