Monday Morning Quarterback
Monday Morning Quarterback
(Monday, August 1, 2022)
The house-buying craze in Los Angeles has lost momentum, in some cases forcing sellers to lower list prices, forget about bidding wars and multiple offers, and in certain scenarios, heaven forbid, cut commissions. Shouldered by the pandemic, the housing market was seeing homes sold at record prices, sometimes tens of thousands of dollars over the original asking price, and within days. But no more! Today, the market is looking very different for sellers. A study by RE/MAX found that nationwide the number of home sales in May 2022 dropped by 8.5% compared to May 2021, and June is expected to be worse. In Los Angeles, the number of houses sold declined by nearly 25%.?The shift may mean a return to normal following the “flurry” of home-buying and selling between the beginning of the year to May. The main causes of the slowdown are the twin-killers of inflation and rising interest rates, which have put a damper on consumers’ willingness to spend. Of course, the housing market itself is not directly affected by the Fed increasing short-term interest rates, but rather by investors’ expectations of inflation and recession in the long run. What we’ve seen is that 30-year fixed mortgage rates have increased from lows in the 2% to 3% range to approaching 7%. As a result, the demand for buying a new home, especially for a first-time home buyer, has fallen because they simply can’t qualify for a home at as high a price as they would have been able to a year ago when mortgage rates were near historic lows. The only question now for investors is when and how much prices will fall. But the hit to home prices will ultimately be predicated upon how high interest rates go and how long they stay there.?So with inflation, mortgage rates, and recession on our mind, let’s get under the hood…
GDP Shows Economy Shrinks in The Second Quarter. The U.S. economy shrank at a annual 0.9% pace in the second quarter to mark the second decline in a row, intensifying a debate over whether the U.S has already sunk into a recession. Gross Domestic Product (“GDP”), the scorecard of sorts for our economy, had shrunk at a 1.6% pace in the first three months of the year. The back-to-back declines in GDP were the first since the 2007-2009 Great Recession. A sharp drop in business investment and declining inventory levels largely accounted for the negative GDP. Government spending also fell sharply. The lone bright spot: Consumer spending, the main engine of our economy, rose at a 1% annual clip. (But that was the smallest increase since a recovery from the pandemic got underway.) While two straight quarters of declining GDP has been commonly viewed as a recession, the group of prominent economists responsible for declaring official recessions takes a broader view that suggests the old rule of thumb does not always apply. Yes, our economy is slowing. Of that there’s no doubt. The Federal Reserve has jacked up a key interest rate by 2.5 percentage points since March?trying to combat the biggest surge in inflation in almost 41 years. The cost of living rose 9.1% in the 12 months ended in June. Higher rates tend to slow the economy by making it more costly for businesses and consumers to borrow. Yet few economists think the U.S. is actually in a recession. While many believe a downturn is inevitable, they say a real recession probably won’t start until the end of 2022 or sometime in 2023. They say this because consumer spending rose at a 1% rate in the second quarter, compared to 2.3% average in the 10 years prior to the pandemic. Household purchases account for about 70% of U.S. economic activity. Another drop in?GDP?will certainly renew declarations that we’re in a recession, but a broader look at the data shows that’s unlikely.?Hiring and spending are strong, and more Americans are earning paychecks and getting raises given the tight labor market. So while two consecutive quarters of negative growth is technically a recession, other timelier economic data are not consistent with recession.?So there!?
Fed Jacks Up Interest Rates Again to Combat Inflation.?Last week, the Federal Reserve raised its benchmark short-term rate by another 0.75 percentage point. With inflation running at the fastest pace in four decades, the Fed said further rate increase “will be appropriate.” Fed officials voted unanimously Wednesday to raise the federal funds rate to a range of 2.25% and 2.5%.?This is the fastest pace of tightening since 1981. The increase is the fourth of the year after the Fed kept rates close to zero to cushion the shock to our economy from the pandemic. The level of rates now matches the peak in the 2016-2018 tightening cycle. It brings the benchmark rate into territory the Fed considers neutral (neither boosting nor slowing the economy). One key question for economists is how far the Fed will eventually have to raise its benchmark rate into “restrictive” territory in order to bring inflation down to the central bank’s 2% target. In a statement, the Fed said it remains strongly committed to reducing inflation to that 2% target. On the other hand, many economists think the Fed might have to raise its benchmark rate to 5%, or higher, to quell inflation. At the same time, the central bank is also allowing its balance sheet to roll off, known as “quantitative tightening.” The Fed is allowing $47.5 billion a month to roll off, divided as $30 billion of Treasuries and $17.5 trillion of mortgage-backed securities. The pace is set to double in September.
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Housing Starts Fall in June for Second Straight Month. Construction starts on new U.S. homes fell a seasonally adjusted 2% in June to 1.56 million, the Commerce Department reports. The annual rate of total housing starts fell 6.3% from the previous year. Construction on homes is at the lowest level since last September. Meanwhile, building permits for new homes fell 0.6% to 1.69 million in June. Interestingly, the construction pace for single-family homes fell 8.1% in June, while apartment starts jumped 15%. Permits for single-family homes fell 8% in June, while permits in buildings with at least five units rose 13.1%.?Even though demand for homes in the U.S. is cooling, builders will remain busy for some time working down backlogs of unfilled orders, even allowing for rising cancellations. But the drop in housing starts, which follows weak sentiment?expressed by homebuilders in July, hints at further gloominess in the housing sector. Single-family starts, which contribute more to GDP on a per-unit basis, will remain under pressure ahead. That means that the slowing pace of housing starts in Q2, on top of weaker home sales, suggest that residential investment was a drag on growth over the quarter.
New Single-Family Home Sales Decline in June. New single-family home sales declined 8.1% in June to a 0.590 million annualized rate, down 17.4% from a year ago.?In fact, sales dropped to the slowest pace in more than two years, signaling that declining affordability continues to dissuade buyers.?While rapidly rising prices have been an issue in the housing market throughout the COVID-19 pandemic, 30-year mortgage rates now sit at 6%, adding to the burden. Assuming a 20% down payment, the rise in mortgage rates and home prices just since December amount to a 32% increase in monthly payments on a new 30-year mortgage for the median new home. No wonder sales have slowed down! That said, it looks like buyers are beginning to get some relief on prices, which have fallen two months in a row and are now the lowest since June 2021. The big problem with median prices over the past few years has been a shortage of completed options for buyers. I know you’re going to argue with me that inventories have been rising and currently sit at the highest levels since 2008.?However, until recently, almost all this inventory gain had come from homes where construction has either not yet started or is still underway. But now a combination of more single-family homes being completed and rising cancellation rates on purchases (due to higher monthly payments), has resulted in notable improvement in the inventory of completed homes. As a result, the combination of more completed supply on the market and less demand (due to higher mortgage rates) has helped bring year-over-year median price growth down from a peak 24.2% in August 2021 to only 7.4% in June. Evidence of a slowdown in median price growth is also beginning to show up in other national home price data.?For example, the national Case-Shiller Index increased 1.0% in May and is up 19.7% from a year ago, a deceleration from its peak of 20.6% in April.?The median price of new homes sold was $402,400 in June, up 7.4% from a year ago.?
Existing Home Sales Declined in June. Existing home sales declined 5.4% in June to a 5.120 million annualized rate, down 14.2% versus a year ago.?Sales fell for the fifth month in a row in June, posting the longest streak of declines since 2013.?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 are now hovering just at 6%, the highest level since 2008. Even more notable than the decline in sales is that despite surging mortgage rates median prices are still climbing, posting a fifth consecutive monthly gain in June. Part of this is just seasonality (prices typically rise heading into the summer buying season).?But median price growth in the past year has slowed to 13.4% from a peak of 25.2% in May 2021. Assuming a 20% down payment, the rise in mortgage rates and home prices since December amount to a 56% increase in monthly payments on a new 30-year mortgage for the median existing home. No wonder sales have slowed down!?One piece of good news in the report is that the inventory of existing homes on the market has begun to rise relatively rapidly, and is now up 2.4% from a year ago. Notably, this is the first annual increase we have seen in housing inventory since May of 2019. Meanwhile the months’ supply of existing homes for sale (how long it would take to sell today’s inventory at the current sales pace) rose to 3.0 months in June, the highest level in nearly two years.?While this represents much needed progress, it’s important to note that inventory still remains low from a historical perspective.
Mortgage Demand Drops to 22-Year Low.?As you know, surging inflation and rising interest rates are hammering American consumers and weighing on the housing market. For example, mortgage demand fell last week, hitting the lowest point since 2000. Mortgage demand fell more than 6% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Applications for a mortgage to purchase a home dropped 7% for the week and were 19% lower than the same week in 2021. Buyers have been contending with high prices all year, but with rates almost double what they were in January, they’ve lost considerable purchasing power (aka “affordability”). I write this because sadly the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 5.82% from 5.74%, with points increasing to 0.65 from 0.59 (including origination fees) for loans with a 20% down payment. That rate was 3.11% the same week one year ago. Demand for refinances (which are highly rate sensitive), fell 4% for the week and were 80% lower than the same week last year. Those applications are also at a 22-year low.?But the drop in demand from homebuyers caused the refinance share of mortgage activity to increase to 31.4% of total applications from 30.8% the previous week.
LA Is Out of Warehouse Space!?The Greater Los Angeles industrial market is “literally out of warehouse space to lease,” according to a new report.?Demand is so far ahead of supply (with leasing velocity hitting an all-time high) that any space returning to the market typically has a waiting list of tenants before it has a chance to hit the market. Subsequently, asking rents rose for the eighth consecutive quarter to an all-time high of $1.35 per square foot per month in the second quarter. Leasing activity, driven by renewals, also increased 9 percent quarter over quarter to 6.3 million square feet, with e-commerce, retailers and packaging firms making up the bulk of the action.?There is a tremendous amount of competition from developers and investors vying for land and for stabilized assets, leading to the spike in values.?Stakeholders want to build more space to meet demand, but straining economic conditions (including increased interest rates, record inflation and supply-demand imbalances) have led to market choppiness and overall uncertainty, and an even costlier development environment. Worse, construction delays and increased costs have enhanced barriers to entry and completion for new projects, which compounds the lack of available supply. “We’re finding that construction costs are escalating somewhere at the rate of 2 to 3 percent per month,” said one builder friend who specializes in industrial warehouses.
With Low Pay and High Injuries, Medieval Times Actors Attempt Union. Way back when I had finished law school, and was waiting for my bar results, I thought I would use my equestrian talents and tryout as a knight jousting at Medieval Times in Buena Park, Orange County. But I had second thoughts after I rode the horses, saw the working conditions, and talked to the staff.?Much to my horror, I observed humiliations of staff, depravations of horses, heavy outdated costumes, and even heavier weapons of steel, and you begin to comprehend the world of the Medieval Times actor. But this troupe of courageous Orange County performers are fighting back. They are finally exercising their right to organize as its members continue the beloved American medieval tradition, while demanding that wages and protection for workers advance at least as far as the 19th Century. The actors and staff feel they can no longer wait for their bosses at the Dallas-based corp. to offer them the kind of protections afforded their colleagues in other skilled, live performance situations (like Disneyland and Knotts Berry Farm), so they’re finally taking action. Bravo! Last Friday, the venue’s 50 knights, queens, squires, horsemen and stable hands submitted a petition for a union election to the National Labor Relations Board that calls for a vote on whether to join the American Guild of Variety Artists (“AGVA”), the?Orange County Register reports. Los Angeles resident Erin Zapcic, 39, who plays a queen at the Buena Park “castle,” told the paper that employees gathered signatures, with a supermajority in favor of unionizing. The performers notified management of their intention to unionize but received no response, so they filed the petition. Consider this: these people perform 16 shows a week under grueling conditions! Which means neither the knights nor the horses have time to properly rest. Worse, they are short on stable hands which means they don’t have time to do all of the safety checks that are needed, like ensuring that the saddles are tight and don’t fall off in the midst of a joust. In other words, this place is a disaster waiting to happen! And of course, there’s the money. Why do Medieval actors only receive $21.00 an hour while Disneyland and Knotts actors receive $33.00 an hour? Medieval Times operates a total of 10 dinner theaters in the U.S., with additional locations in Dallas, Atlanta, Baltimore, Chicago, Myrtle Beach, Orlando, Scottsdale and Toronto, all with similar deplorable conditions.
Tinder’s Sean Rad Pays $35 Million for a Hollywood Estate.?Maybe it does pay to swipe left (or right).?I say this because tucked away in the middle of the Bel-Air Country Club golf course, is an estate spanning 1.5 acres, with two fairytale homes. Records show it has a new owner, Tinder co-founder Sean Rad, who paid $35 million for the fanciful estate.?Rad, an L.A. native who founded the Tinder dating app in 2012. His new place is huge, combining two homes and two lots for a total of 1.5 acres and roughly 15,000 square feet.?The colorful Bel-Air compound (a bohemian bouquet of art and architecture) surfaced for sale at $49.5 million after Yvette Mimieux, star of the 1960 film “The Time Machine,” among many other movies, died at 80 in January.?The compound is tucked on an “island” of sorts in Bel-Air, where the Bel-Air Country Club golf course wraps around a coveted collection of luxury homes, creating a private haven shielded from the city. It has been dubbed “Il Sogno” — Italian for “the dream.”?Both houses shirk modern style in favor of extravagant, over-the-top Old Hollywood style. The larger of the two is a Tuscan-style villa with hand-painted ceilings, skylights, antique plaster walls, stone-carved fireplaces and crystal chandeliers. Highlights include a sky-lit library, custom brick wine cellar and a fairytale-style primary suite under a dome. The smaller home is a Balinese-style cottage loaded with bold colors, leafy lounges and indoor-outdoor spaces. A wraparound terrace overlooks the grounds, replete with gardens, statues, a cabana, lanai and multiple swimming pools.?Mimieux, an L.A. native, gained fame for her roles in “The Time Machine,” “Where the Boys Are” and “Light in the Piazza.” She owned the home for decades with her husband, real estate magnate Howard Ruby.
So You Want to Build a Sex Room. Question: Does your rehab include a sex room??I ask this important question because Melanie Rose, the star of Netflix’s newest home-renovation show, says “every home should have a sex room.” On?Netflix’s "How to Build a Sex Room," the rooms may look different, but they all help the people who use them experience more pleasure. With her red-framed glasses, close-cropped gray hair, statement necklaces, and sensible sneakers, Rose looks like your cool aunt. But in her bag, she carries plugs, dildos, and other adult toys along with her hammer, screwdrivers (multiple uses), and tape measure. In the first episode, the self-proclaimed “Mary Poppins of Sex Rooms” hands home rehabbers, Taylor and Ajay, a black-leather flogger. The couple hired her because they want to turn an unfinished basement (accessed by a ladder down a trap door in the laundry room’s floor) into a “sexy rock-and-roll dungeon.” I would like to meet Taylor and Ajay. How to Build a Sex Room?is technically a home-makeover reality show like?Extreme Makeover: Home Edition,?Flip or Flop, and?Fixer Upper?— complete with sledgehammering walls, ripping out unsightly wallpaper, and laying (if you’ll excuse the expression) new flooring. But after watching, you might want to buy your own inversion table or flogger, per Rose’s recommendations. The show offers more than consumption inspiration; it’s also sex-positive sex ed. Rose’s construction methods include open discussions about intimacy and consent, a crash course in toys and furniture, and lessons with experts in dirty talk, BDSM, and boudoir photography. After all, sexy sex isn’t aspirational enough anymore; people demand a dream home to have it in. And?How to Build a Sex Room?shows you how to get both! In case you were curious, the spaces in?Sex Room?are filled with saturated colors, a wide range of textures, erotic art, and toys. Lots and lots of toys: vibrators, dildos, handcuffs, blindfolds, and ElectroWands (whatever that is?). When it comes to conceiving of a pleasure-room design, Rose has a few rules: no carpet, not even a stainproof one. She recommends tile (and installing a drain “if there’s going to be that much bodily fluid”). Safety is another big one: Know your room’s structural hard points if you are installing anything that’s weight bearing. “If you’re installing a sex swing, do it on a ceiling joist,” she says. And see everything in person before putting it in. “I like to smell the leathers, pick up the vibrators and the dildos,” she says. You’ll be happy to know that most of the toys on the show are from the Stockroom right here in Los Angeles.
New “LARealEstateInvestors.com” Podcast.?We are so very excited to announce our new podcast, "LARealEstateInvestors.com" (named after our domain) hosted by our very own Bill Gross. Bill has been a Realtor, broker and real estate investor forever!?No one is more experienced in local Southern California real estate than Bill Gross. Each week, Bill interviews real estate professionals sharing their insights and advice. Every Tuesday at 3:00 pm, and thereafter anytime on YouTube, Facebook, and Google.
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“How to Fix & Flip Houses.”?Our special guest speaker at our August meeting will be the incomparable Joe Arias. Joe is an experienced house flipper and will be showing us how to get started finding, financing, fixing and flipping houses.?Joe and his team have flipped more than 100 houses in Southern California and has just written a book about his experiences, “Flipped for Real Success.”?Don’t miss Joe’s presentation on August 11, 2022, 6:30 to 9:30 pm.?Location: Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034 (Culver City adjacent).?FREE Admission.?Metered and free street parking. (But don’t come “fashionably late” or you’ll be forced to park in Long Beach and taking an Uber!) RSVP: LARealEstateInvestors.com .
Vendors Expo Returns!?Our carbon-neutral, bio-degradable, gluten-free, super-duper "Vendors Expo"?returns on Thursday night,?August 11, 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 look for additional Fed guidance on the pace of future rate hikes and bond portfolio reductions. Beyond that, the Institute for Supply Management’s “Manufacturing Sector Index” will come out today (8/1) and the ISM “National Services Sector Index” on Wednesday (8/3). On Friday (8/5), the key Employment report will be released by the Bureau of Labor Statistics. These figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Stay tuned.
?Weekly Changes:
10-year Treasuries:????????????Fell????050 bps
Dow Jones Averages:????????Rose??800 points
NASDAQ:??????????????????????????Rose??500 points
?Calendar:
Monday (8/1):???????????????????????ISM Manufacturing
Wednesday (8/3):???????????????? ISM Services
Friday (8/5):??????????????????????????Employment??
For further information, comments, and questions
?Lloyd Segal
President
Los Angeles County Real Estate Investors Association, LLC
310-409-8310