Monday Morning Quarterback

(Monday, November 20, 2023

Last week a fire burned more than 100 concrete support columns underneath the 10 Freeway, forcing the closure of a major transit artery through downtown L.A. It's expected to partially reopen this week, according to Gov. Gavin Newsom. But behind every fire is always a story. The fire initiated underneath the Freeway, which is rented by Apex Development, Inc., a Calabasas-based storage company. In violation to the lease, Apex sublet parts of the Freeway property to at least six other companies. The companies included one that stored wooden pallets, a mechanic, and one that sold wire hangers and other materials to businesses in the nearby Garment District. Photos of the area after the fire showed burned out cars, shipping containers, motors and produce strewn about the ground. Apex has been in multiple legal disputes with Caltrans, each accusing the other of mismanaging properties under freeways. In a 2020 lawsuit, Apex accused Caltrans of failing to take care of two properties in Sun Valley and the downtown property. Apex claimed it was forced to spend over $700,000 to remove contaminated soil, pavement waste, and “approximately 1,000 tires” from the properties. But that lawsuit was thrown out. In September of this year, Caltrans sued Apex again for eviction alleging Apex failed to pay $78,000 in rent on the downtown property for over one year. The state is also trying to evict Apex from five freeway properties, alleging it owes at least $400,000 in back rent. Caltrans also alleges that Apex subleased its spaces in violation of its rental agreement. In addition, Newsom said highly flammable sanitizer was among the items that burned. The rental agreement specifically states the 48,000 square foot space shall not be used “for any storage of flammable materials, explosives or other materials.” In other news, let’s get it on…

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Housing Market Has Become an Impossible Mess. Bloomberg reports American homeowners with cheap loans don’t want to sell. This is creating a new affordability crisis and an inventory crisis. And this time, there’s no obvious way out. The Federal Reserve bank’s aggressive tightening since last year has driven the interest rate on a 30-year mortgage close to 8%, the highest point in almost a quarter century. That might be manageable if higher rates led to lower prices. But the impact on supply is even more drastic because of the so-called “lock-in effect.” The lock-in Effect states that homeowners are unwilling to let go of cheap mortgages?they got when rates were scraping bottom. This has resulted in the least affordable housing market since the 1980s, with sales approaching record lows. In the 1980’s, University of California at Berkeley economist?John Quigley?identified the “lock-in effect,” which he said was preventing Americans from selling their homes. Mortgage rates had spiked from 9% in 1978 to 18% in 1981, leaving millions of households with older mortgages paying what amounted to below-market rates. Buying a new home meant a more expensive loan, adding substantial costs—a powerful disincentive to moving. But as interest rates fell, Quigley’s work was largely forgotten—until Covid-19 hit. Now the Federal Reserve’s tightening campaign quickly cooled demand. It cooled supply even more, though, because of Quigley’s lock-in effect. These days, most existing mortgages are below 4%, roughly half the cost of a new 30-year loan. The large spread reduces the rate at which homeowners move over the next decade, according to estimates from Julia Fonseca of the University of Illinois and Lu Liu of the University of Pennsylvania. The lock-in effect threatens to prevent younger owners from moving to larger homes and expanding their families while causing empty nesters to put off downsizing. And decreased mobility makes for a less efficient labor market, as workers will be less likely to move for new jobs if they don’t want to give up their old mortgages.?

Consumer Price Index Unchanged in October. The Consumer Price Index (CPI) was unchanged in October. Which means the Federal Reserve has gained traction in its fight against inflation, but the battle is not fully over. More important, economists continue to believe that a monetary policy tight enough to bring inflation down is also tight enough to induce an eventual recession.?Consumer prices were unchanged in October on an overall basis, but were held down by volatile energy prices, which fell 2.5% after outsized increases the prior two months.?The year-ago comparison moved down to 3.2% – a huge improvement versus the 7.7% reading in the year ending October 2022.?However, inflation is still a problem, with consumer prices up 4.4% at an annualized rate in the last three months.?Stripping out energy and its often-volatile counterpart – food prices (+0.3% in October) – “core” prices rose 0.2% and the twelve-month comparison ticked down to a still elevated 4.0% – not as much of an improvement versus the 6.3% reading ending in October 2022.?Taking a deeper look under the inflation hood, rental inflation (both for actual tenants and the imputed rental value of owner-occupied homes) continues to run hot, up 0.4% for the month and running close to or above a 6% annualized rate over three-, six-, and twelve-month timeframes.?Meanwhile, a subset category of inflation that the Fed is watching closely – known as the “Super Core” – which excludes food, energy, other goods, and housing rents, rose 0.2% in October. This measure is up 3.7% in the last twelve months but has been accelerating of late; up at a 4.9% annualized rate in the last three months.??

Foreclosure Activity Remained Steady In October 2023. ATTOM real estate data released its October “2023 U.S. Foreclosure Market Report,” which shows there were a total of 34,472 U.S. properties with foreclosure filings?(i.e. default notices, scheduled auctions or bank repossessions) up 6 percent from a year ago. Nationwide one in every 4,051 housing units had a foreclosure filing in October 2023. States with the highest foreclosure rates were Delaware (one in every 2,432 housing units with a foreclosure filing); Ohio (one in every 2,492 housing units); New Jersey (one in every 2,550 housing units); Maryland (one in every 2,565 housing units); and South Carolina (one in every 2,569 housing units). Among the 223 metropolitan statistical areas with a population of at least 200,000, those with the highest foreclosure rates in October were Cleveland, OH (one in every 1,403 housing units with a foreclosure filing); Atlantic City, NJ (one in every 1,547 housing units); Spartanburg, SC (one in every 1,708 housing units); Bakersfield, CA (one in every 1,785 housing units); and Jacksonville, NC (one in every 1,848 housing units). Those metropolitan areas with a population greater than 1 million with the worst foreclosure rates in October, including Cleveland, OH, were: Miami-Fort Lauderdale, FL (one in every 2,180 housing units); Riverside, CA (one in every 2,254 housing units); Houston, TX (one in every 2,269 housing units); and Philadelphia, PA (one in every 2,323 housing units).

L.A. City Council Approves Rent Hikes. Landlords you can breathe again. After a lengthy discussion, the Los Angeles City Council approved rent increases on rent-stabilized units to 4% (or up to 6% if landlords cover gas and electric costs). Council members voted 10-2 last Tuesday night to move forward on the proposal, meant to limit anticipated rent hikes for properties that are subject to the city's rent-control law. As part of the plan, the council instructed the Housing Department, in consultation with the United to House LA Citizens Oversight Committee, to develop programs assisting landlords and tenants, as well as for small housing providers, for the maintenance and preservation of rent-controlled units. The council also amended its proposal to include a report back on establishing a policy that would help distinguish mom-and-pop landlords from corporate landlords, in an attempt to ensure small landlords can receive city resources to stay afloat. The hikes would be calculated using a formula outlined in the city's rent control law, using the consumer price index from October 2022 to September 2023 instead of from October 2021 to September 2022. "We can't ignore that we continue to put the burden of affordability on private property owners," Rodriguez said. "The people that are left holding the bag have historically been the same housing providers that have unfortunately borne a greater burden in this conversation." Casper Martin, speaking on behalf of his parents, who own a rent-controlled, six-unit apartment in the Pico-Robertson area, told the Housing and Homeless Committee that his parents love being landlords. While his parents rent out units below the market rate, they can't continue doing so without being able to raise the rent at least a little. Other landlords who spoke against extending the rent freeze also cited financial concerns. Last week, the Los Angeles County Board of Supervisors took similar action, extending but slightly increasing a cap on rent increases allowed for rent-controlled apartments in unincorporated areas.?

Homebuilder Sentiment Drops To Lowest Point In Years. High mortgage rates continue to weigh on the nation’s homebuilders, leading to an increase in price cuts to lure buyers. But builders are cautiously optimistic about recent signs that interest rates?may move lower soon. Homebuilder sentiment fell six points to 34 in November on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). Anything below 50 is considered negative. Analysts had expected the number to come in unchanged from October. This marks the fourth straight month of declines. Sentiment is down 22 points since July and is now at the lowest level since the end of last year. The builders did note that nearly all of the monthly data for November was collected before the monthly consumer price index, released earlier this week, showed inflation moderating. “Given the lack of existing home inventory, somewhat lower mortgage rates?will price in housing demand and likely set the stage for improved builder views of market conditions in December.” Of the index’s three components, current sales conditions fell six points to 40, sales expectations in the next six months dropped five points to 39, and buyer traffic fell five points to 21. More builders reported cutting prices in November – 36%, up from 32% in the previous two months. That is the highest share in this cycle tying the previous high two years ago. The average price cut was 6%.

San Jose Home With Meth Lab On Market For $1.5 Million. If you have any doubt it’s a seller’s market, listen to this. A San Jose home that was busted as a meth lab seven months ago is now up for sale for more than $1.5 million. Yep, $1.5 million for a former meth lab!?What’s more, the San Jose home at 668 Potomac Court is being sold as-is. Surrounded by chain link fencing and warning signs reading “condemned,” the home has been deemed unsafe to occupy. Nevertheless, Keller Williams Reality’s website lists the 2,743 sq ft home?for $1,550,000 and states, “Great opportunity to own large home. Great location to freeway and expressway. Home has inactive meth lab and meth.” The homeowner, 35-year-old Peter Karasev, was arrested in March?for keeping explosive materials, guns and narcotics inside. FBI agents said Karasev stockpiled highly explosive bomb-making chemicals while he lived at the home with his wife and three young children. Police found chemicals drugs, and firearms “within easy reach of children. It was not a safe environment for children, or for anyone,” San Jose Police Department Assistant Chief Paul Joseph previously told reporters. When he was questioned by detectives, Karasev said he was interested in building model rockets, used meth, and was concerned about the war in Ukraine, according to court documents. Investigators said Karasev built bombs that he used to blow up PG&E transformers around the city. The property’s listing description says the home will be transferred to a new buyer in its current state. The listing Realtor warns getting the home to a safe, livable state won’t be cheap. “Somebody will have to come and rip out the flooring, the sheet rock, insulation … so you’re looking at about $200,000 to $300,000 to bring this home back to where it needs to be,” he explained.

Katy Perry’s Real Estate Woes. Katy Perry is talked about plenty for her music, for her adventurous fashion sense, and for her long run on?American Idol.?But over the past ten years, she’s been getting a lot of attention for real estate woes too. Between a deal with the Roman Catholic Archdiocese gone wrong and a years-long battle over a Montecito property, there’s been plenty of chatter—and confusion—surrounding Perry’s?real estate holdings. This week marks some kind of closure for the latter, with a judge ruling in favor of Perry.?But for all those wondering how we got there, here’s what you need to know. The most recent of Perry’s public real estate battles surrounds the $15 million purchase of an estate in Montecito, California, that small village just south of Santa Barbara preferred by celebrities like Gwenyth Paltrow, Oprah, and Ariana Grande. In the summer of 2020, Perry and her fiancé Orlando Bloom were looking for a home in the area for their young family, as she was pregnant with their first child. Perry’s business manager Bernie Gudvi presented homeowner Carl Wescott with a written offer for his home in July 2020. The home was not on the market at the time, and Wescott had been out of the hospital for four days following back surgery and was allegedly on painkillers when he signed. Wescott and his lawyers later contested the validity of the deal. The homeowner and his lawyers attempted to rescind the deal and Wescott filed a suit against Gudvi in August of 2020. On November 8, 2023, over three years later, the court ruled in favor of Perry. “Wescott presented no persuasive evidence that he lacked capacity to enter into a real estate contract,” reads the court’s decision, per People.?According to The Daily Beast, Judge Joseph Lipner said that the medical expert’s testimony did not support Wescott’s claims. Compounding the questionable nature of Wescott’s rescinding is his real estate agent’s claim that he in fact had a higher backup offer on the home in place from Maria Shriver. Though part of the case has now been put to rest, it was split into two lawsuits, and the damages suit is expected to come to a close in February.

National Museum of Qatar. ?When it comes to architectural significant buildings, we must travel to the tiny country of Qatar. Qatar needed a national museum.?It was a necessity. Their many Picassos, Rothkos, Pollocks, and Cézannes needed a home. That finally occurred in 2019, with the opening of National Museum of Qatar. But what the public got though, was a stunning new Jean Nouvel–designed building. The 361,861-square-foot structure contains the many artifacts, stories, and images (from the discovery of oil to life along the Persian Gulf) that encompass the creation of modern-day Qatar (a list of the wings include: The Formation of Qatar, Qatar's National Environments, and Qatar Today). Sure, many national museums around the world, in some form, tout the history of their people from their beginnings to modern times. What separates the National Museum of Qatar from any other museum, of course, is its revolutionary architecture. There are the facts about the building which are easy to rattle off: The exterior consists of 539 disks, with 76,000 patterned cladding elements throughout; the interiors twist and turn, with the ceiling rising and dipping, constantly keeping visitors surprised through the eleven linked galleries. That, however, is where any simple explanation ends. What made Nouvel's task of designing this museum so difficult is what was being asked of him—to create a building that, by shape and formation, would become the very embodiment of Qatari identity. His answer came in the form of the desert rose, a naturally occurring phenomenon in the region that consists of a layered crystallization of minerals occurring in salty sand. With a deft stroke of hand, Nouvel was able to capture the essence of the miracle that has been the formation of Qatar, a tiny nation that spans only 4,416 square miles (an area smaller than Connecticut).?

Vendors Expo Returns!?Our world-famous "Vendors Expo"?returns on Thursday night,?December 14, 2023. The Vendor Expo opens 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.?FREE Admission.?Metered and free street parking. Please RSVP at www.LARealEstateInvestors.com.

Out-of-State Summit. For our annual Summit, LAC-REIA has identified the four strongest cities in the USA that have dynamic job and population growth, along with affordability, landlord-friendly laws, renter desirability, and positive cash flow.?We then identified the most professional turnkey operators in each of these cities and invited them to speak at our Out-of-State Summit: Michael Drew (Indianapolis, IN), Emily Nesselroad (Montgomery, AL), Michael Scher (Little Rock, AK), and Phil Alexander (Baltimore, MD). Thursday night, December 14, 2023, 6:30 to 9:30 pm, Iman Cultural Center, 3376 Motor Avenue, Los Angeles, CA 90034 (Culver City). RSVP: www.LARealEstateInvestrors.com.?

Investment Fund. If you're just starting out as an investor and frustrated because you don't have enough money, or can't find any deals, I’ve got the perfect solution for you. We are very excited to announce the formation of a new Investment Fund to buy fixer upper properties around Southern California. Best of all, the entry level to invest is purposely very low ($5,000 - $10,000, or more) to encourage your participation. Think crowdfunding for real estate. The idea is we’re going to find, fix, and flip a distressed property and share in the net profits. Plus, as an investor we invite you to hangout (if you want) and learn how the process works so that you can eventually do it yourself!?So,?if you’re interested, please let me know...?

“LARealEstateInvestors.com” Podcast.?We are so very excited about our podcast, "LARealEstateInvestors.com" (cleverly named after our domain) 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. Each week, Bill interviews real estate professionals sharing their insights and advice. Every Tuesday at 3:00 pm, and anytime thereafter on YouTube, Facebook, and Google.

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This Week. Investors will continue to watch for Fed officials to elaborate on their plans for future monetary policy. For economic reports, Existing Home Sales will be released on Tuesday from the National Association of Realtors. After that, the schedule will be very light until Personal Income and the PCE price index, the inflation indicator favored by the Fed, come out on November 30 from the Bureau of Economic Analysis. Mortgage markets will be closed on Thursday for Thanksgiving.

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Weekly Changes:

10-Year Treasuries:????????? ??Fell????020 bps

Dow Jones Average:??????????Rose??600 points

NASDAQ:???????????????????????????Rose??300 points

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Calendar:

Tuesday (11/21):?????????????????Existing Home Sales

Thursday (11/30):????????????????Core PCE

Thursday (11/30):????????????????Personal Income

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For further information, comments, and questions

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Lloyd Segal

President

Los Angeles County Real Estate Investors Association, LLC

www.LARealEstateInvestors.com

[email protected]

310-409-8310

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