Monday Morning Quarterback

Monday Morning Quarterback

(Monday, August 15, 2022)

If you’re a real estate investor, you gotta love architecture and interior design.?And if you do, you’ll be happy to know that the Hollyhock House in East Hollywood’s Barnsdall Park is finally re-opening. Long known as one of the most unique architectural structures in the United States, the Hollyhock House was designed by Frank Lloyd Wright in 1918.?As the legend goes, Wright was visiting Los Angeles regularly as a stopover on his travels to Tokyo (where he was designing the Imperial Hotel).?Along the way, he met oil heiress Louise Aline Barnsdall, a philanthropist, theater producer, political progressive, world traveler and lover of the hollyhock flower. Barnsdall contracted with Wright to design and construct a home for her.?Wright even agreed to incorporate the floral element into his design for the house. The result, Times architecture critic Christopher Hawthorne wrote in 2017, “is a transitional work — a bridge between the scores of charismatic Prairie Style houses he’d designed in the Midwest and the starker architecture he’d turn to once he was fully established in Los Angeles.” Barnsdall and Wright famously feuded over the construction of the home and what she perceived as design flaws. The architect later said Barnsdall was his “most difficult client.” She never lived in the Hollyhock House and donated it to the city of Los Angeles in 1927. In 2019, UNESCO declared the home a “World Heritage Site” (the only property in Los Angeles to achieve that international status symbol).?Less than a year later, the home became one of many cultural institutions to close with the onset of the pandemic. But the Los Angeles Department of Cultural Affairs, to their credit, used the hiatus to complete a series of restoration and improvement projects at the home. Among the many renovations, the monumental fireplace (which brings together the four classical elements of earth, air, fire and water), has been restored, as have the art-glass balcony doors in the master bedroom. Exterior finishes long covered by multiple layers of paint have been restored to Wright’s original vision.?Hollyhock House officially reopens this Thursday (August 18).?Now, let’s get under the hood and unravel this week’s real estate related news…

Consumer Price Index Unchanged in July.?The Consumer Price Index (“CPI”) was unchanged in July, but up 8.5% from a year ago.?The “core” CPI (which excludes food and energy), rose 0.3% in July, but up 5.9% versus a year ago.?Is the inflation scare over??Not by a long shot.?The downside surprise to July’s consumer prices was the mirror-image of June’s surprise to the upside, both of which were driven by the volatile energy sector. Consumer prices were unchanged in July, muted by a 4.6% decline in energy, which followed a 7.5% energy price spike in June.?Excluding energy, consumer prices were up 0.4% in July.?The decline in energy prices for the month drove the year-ago comparison for the headline index down to 8.5% (versus 9.1% in June).?When you look at inflation on a year-ago comparison basis, it probably peaked back in June at 9.1%, but that doesn’t mean inflation is no longer a major problem.?In the past two months (taking the surge in June as well as the unchanged overall price level in July) consumer prices are up at an 8.1% annualized rate. That is no different than the 8.1% annualized increase in April and May, before the spike and then decline in energy prices.?Looking at the details of the report, food prices (the other typically volatile category) was a different story from energy,?posting its seventh consecutive monthly gain of at least 0.9%, on the back of higher costs for all six major grocery-store food groups.?Stripping out food and energy, “core” prices rose 0.3% in July, leaving the year-ago comparison unchanged at 5.9%. Housing rents (for both actual tenants and the rental value of owner-occupied homes) continued to increase at an outsized pace in July, rising 0.6%.?Notably, in the past two months, rental prices for actual tenants have posted the two largest monthly increases since 1987.?Rents have been a key driver for inflation in 2022, and should continue to do so in 2023-24. This is because rents make up more than 30% of the overall CPI and still have a long way to go to catch up to home prices (which skyrocketed during COVID). Other core categories increasing in July were prices for motor vehicle insurance (+1.3%), new vehicles (+0.6%), and hospital services (+0.5%).?Meanwhile, several categories that have risen sharply in prior months cooled in July, including prices for airline fares (-7.8%), hotels (-3.2%), and used vehicles (-0.4%).?

Producer Prices Downshift For First Time Since 2020 Recession.?My Dad always says if you’re a real estate investor, focus on the Producer Price Index, not the Consumer Price Index. And, as you know, father know best. He says this because the PPI is a leading economic indicator of CPI in the months ahead. Sure enough, the Producer Price index fell 0.5% in July, according to the Labor Department. That’s down from a 1.0% jump in June and the first negative monthly percentage since April 2020. Meanwhile, the “core” Producer Price Index (which excludes volatile food and energy prices), rose 0.2% in July, down from a 0.3% gain in the prior month. In annualized terms, the headline PPI was up 9.8% in July, but down from 11.3% in the prior month. Core prices are up 5.8% from a year earlier, but down from 6.4% in June. The good news is also that the cost of goods fell 1.8 % in July, the largest decline since the 2020 pandemic recession. The cost of services inched up 0.1% last month, down slightly from 0.3% in June. Energy prices dropped 9% in July, down sharply from a 9.4% gain in the prior month. Wholesale food prices jumped 1% after a 0.2% drop in June. But there could be more relief in coming months as earlier stage processed?foods (my favorite) fell 0.1% for second month in a row. Economists don’t expect too much more moderation in producer prices until later in the fall. Nevertheless, this potential peak in annual PPI inflation is a welcome sign for consumers, businesses, and especially our nervous FOMC. Remember, you heard it first.

Mortgage Rates Tick Back Up Above 5%. The 30-year fixed-rate mortgage averaged 5.22% as of August 11, according to Freddie Mac,?up 23 basis points from the previous week. (One basis point is equal to one hundredth of a percentage point, or 1% of 1%.) Meanwhile, the average rate on the 15-year fixed-rate mortgage rose 33 basis points over the past week to 4.59%. The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 4.43%, up 18 basis points from the prior week.?Declines in purchase demand continue to diminish while supply remains fairly tight across most markets. The consequence is that house prices will continue to rise, but likely at a much slower pace for the rest of the summer. Both rates and prices are challenging first-time buyers’ wallets. For example, the monthly mortgage payment on a typical existing single-family home (if a family pays with a 20% down payment) has jumped by $444 to $1,841, with rates rising from the first quarter to the second quarter of this year. For a buyer looking at a starter home, valued typically at $351,000, with a 10% down payment loan, their monthly mortgage is $1,810. That’s up 31% from the prior quarter, and up 49% from one year ago! Meanwhile, the yield on the 10-year Treasury note?closed Friday at 2.76%.

Sun Belt Apartments Set Up For Significant Collapse Of Demand. Rent growth is slowing considerably around the country, especially in some of the Sun Belt?markets that were once scorching-hot, a new report shows.?For the first time since 2020, 12 markets experienced a drop?in asking rents over the course of a month, according to a report released?Wednesday by?Co-Star-owned Apartments.com. The markets that experienced the most month-over-month rent declines?in July included?Miami with a 0.5% drop, Phoenix with a 0.4% drop and Dallas-Fort Worth with a 0.2% drop.?Beyond these markets where rents are falling, other hot?markets are also seeing a slowdown in their pace of?rent growth. Though Sun Belt markets still occupy eight of the top 10 spots for growth, many have seen that growth percentage decline by double digits since last year, per the Apartments.com report. In Palm Beach, Florida, for instance, rent growth peaked at 30.6% in the fourth quarter of last year. By the end of July, growth was at 12.7%, per the report. "While multifamily yearly rents continued to perform well above historical averages, the deceleration of rent growth quickened at a time when markets typically post their best results,” Jay Lybik, national director of multifamily analytics at CoStar Group, said in a statement. "The deteriorating rent situation highlights a significant collapse of demand in the sector when new unit deliveries are projected to hit 230,000 in the second half of 2022." Though Florida is home to four of the five top markets for rent growth, it's not the only place seeing signs of a slowdown: Las Vegas rent growth also declined by double digits. There were some markets that performed better. In San Francisco, average rents rose 40 basis points over the past month, nearing the market's all-time peak. The East Bay in California also didn't see a decline in rent growth.

California Rents Skyrocket 10%. Blame inflation. Speaking of rents, some California landlords can now bump up rent demands by as much as 10%, the maximum annual increase under a law passed three years ago.?The tenant protection and rent control law (enacted in 2019) allows landlords to raise rents by 5% annually, plus the rate of inflation in their metropolitan area, with a maximum of a 10% hike. In previous years, the total increase has hovered between 5.7% and 9%. But the 10% limit applies only to complexes built before 2007 and those not subjected to rent-control restrictions, meaning that landlords of buildings that fall outside those parameters can raise their rents even higher. And because inflation is so high across the board right now, every region in the state meets the requirement for the cap to be set at a 10% increase. In Los Angeles, units built before October 1978 are forbidden from increasing rents?until a year after the COVID-19 emergency period is over. The city banned evictions for nonpayment of rent for tenants who have endured financial hardships because of the pandemic, including lost jobs and higher medical bills and child-care costs. But many parts of the rest of the state have no such protections. A 10% rent hike would make up for an increase in expenses in most cases, but not in Los Angeles.?That’s because the city extended its eviction moratorium?for qualifying tenants through the end of the year.

July Grocery Prices Largest Increase Since 1979.?The rise in the cost of living may have cooled in July, but not for grocery prices.?After all, have you been to the supermarket lately? The price of food rose 1.3% from June to July, marking a 13.1% increase compared to last year. It was the largest price increase for groceries since 1979, according to the U.S. Bureau of Labor Statistics.?In July, the inflation rate compared to a year ago was 8.5% (lower than 9.1% in June, a 41-year record), helped by lower prices in energy. Food, however, rose by 1.1% last month and 10.9% this year. It was the seventh consecutive month where the price rose by 0.9% and above. Dining out rose by 0.7% in July on the month and 7.6% compared to last year.?Among groceries, egg prices had the biggest increase. Their cost rose by 4.3% in the month of July, and 38% in the year.?Butter was up over 26% on the year in July, and coffee rose by over 20% over the same period. Potatoes also rose 4.6% on the month and 13.3% year-to-year. There was mixed news among other items. The price of beef and veal declined from June to July, part of a three-month downward trajectory. But they too rose 3.4% in July versus last year. Core CPI (excluding food and energy prices), rose by 5.9% on the year in July and just 0.3% in the month. The Consumer Price Index was positive news for our economy. But the war in Ukraine, and other pandemic-related supply-chain disruptions continue to impact food prices.

The Fight Over the Auction Proceeds of The One is Getting Ugly.?The saga over “The One” continues.?Now they’re arguing over the proceeds from the trustee’s sale.?But for our purposes this dispute is more instructive if we focus on the real estate concepts of: (1) priorities of liens, and (2) subordination. So fasten your seat belts! When the mega-mansion known as The One was auctioned off in March for less than half its $295-million list price, it wasn’t just a great deal for the buyer: It set the stage for what is turning out to be a very nasty fight among creditors as to who has priority. The $141-million sale of the 105,000-square-foot property to L.A. fashion mogul Richard Saghian meant that some lenders of the bankrupt Bel-Air project could be “out of the money,” given claims against the estate exceed more than $250 million. The home’s bankrupt limited liability company, Crestlloyd, had sought court permission to pay nearly $104 million out of the $138 million net proceeds received from the auction to Los Angeles billionaire Don Hankey. His Hankey Capital is by far the largest creditor of the estate, having made three loans totaling more than $100 million to Crestlloyd starting in 2018 (when Niami was in search of cash to finish the opulent mansion). But now, another lender has filed a lawsuit claiming unfair business practices against Hankey Capital and forgery of a subordination document. The lawsuit was filed in U.S. Bankruptcy Court by Inferno Investments, owned by Julien Remillard, a longtime associate (and now, needless to say, enemy) of developer Nile Niami. With such a large payout going to Hankey, there would be nothing left for other creditors, including Remillard’s Inferno Investment, which claims it is owed $20.9 million. Inferno says it and related entities loaned about $18 million for the acquisition of the property on Airole Way in 2013 and to start construction. Though Inferno lent before Hankey Capital, the lawsuit acknowledges Inferno signed a subordination agreement in 2016 allowing Crestlloyd to repay later loans needed to finish the mansion before Inferno was repaid. However, that subordination agreement also required Crestlloyd to obtain prior written approval from Remillard, for specific loans that would become senior to Inferno’s debt, according to the lawsuit. It alleges that never happened. Instead, the lawsuit claims Remillard’s signature was forged on an October 2018 subordination agreement allowing Hankey to be paid first. The lawsuit doesn’t allege who conducted the forgery but says Niami’s longtime notary falsely notarized that Remillard signed the document in his presence in Los Angeles when in fact, Remillard was actually in Montreal that day. Let’s just say, Inferno is steaming mad!?Adding to the mystery, the notary has now conveniently disappeared. Inferno is asking in its lawsuit for a Bankruptcy Court judge to move Inferno to the front of the line for repayment among the estate’s secured creditors. Stay tuned, this is far from over…

Oath Keepers General Counsel’s Playful, Minimalist Kitchen.?If you’re like me, we’re always distracted by people's backgrounds during a Zoom meeting. I mention Zoom backgrounds because during last month’s House Select Committee hearing on the January 6 riot, we were introduced to Kellye SoRelle, general counsel to the right-wing militia group, the Oath Keepers. In a prerecorded Zoom interview played by the panel, SoRelle said that conspiracy theorists Ali Alexander and Alex Jones “became, like, the center point for everything” involving the “Stop the Steal” rallies that preceded the breach of the Capitol. Behind her was what appeared to be a lovely set of leather barstools, white marble counters, and a kitchen island with a welcome splash of color. Honestly — very nice. But ironically, it was (as noted?by Crooked Media’s Erin Ryan), a screenshot of the Kansas City loft that served as the home base to the cast of?Queer Eye?during season three, which I’m sure would have thrilled SoRelle. Bobby Berk styled the space with West Elm, and the photograph comes from Landon Vonderschmidt. SoRelle apparently liked it so much that she used it as her Zoom background.?If you?also?like the look, and want to use it before testifying about your relationship to a right-wing militia and the events leading up to an attempted insurrection, the Cora leather stools?that SoRelle’s head mostly covers are still available (only $324), as are the perforated LED hoop chandeliers?above the island (only $499).?A real “stop the steal,” if you ask me!

Ozzy and Sharon asking $18 million for their Hancock Park Estate. Power couple Sharon and her heavy-metal hubby, the legendary rocker, Ozzy Osbourne, are looking to unload their trophy home in Hancock Park. They have listed the 1920s architectural gem for $18 million. If you’ve ever wondered where old rockers live, this is it. It’s no Crazy Train, but definitely a suicide solution. Built in 1929, the architectural gem spans 11,500 square feet with six bedrooms, nine bathrooms and a plush red screening room. Ozzy, who rose to fame as the lead singer of Black Sabbath, and Sharon, who co-hosted “The Talk” for more than a decade, bought the manor for $11.85 million in 2015 from Oren Koules, a film producer best known for the “Saw” franchise.?The mansion was built in 1929, and during their seven-year stay, the Osbournes updated the place while keeping close to its Old Hollywood style. An arched wooden door sets a stately tone, leading to formal spaces such as a two-story foyer with herringbone floors, a living room under a crystal chandelier and a wood-paneled office anchored by a stone fireplace. If you buy it, you’ll definitely be able to bark at the moon and tell your mama, “I’m coming home.”

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. Plus he is an expert on probates and so many other strategies. 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.?

“How to Buy Out-of-State Properties.”?Our special guest speaker at our September meeting will be the number #1 authority on the nuts and bolts of buying out-of-state properties, Kathy Fettke.?Kathy is the President of Real Wealth Network and an experienced investors of properties in other states. After all, why buy one house in California for $700,000 and have negative cash flow, when you can buy seven houses for $700,000 in other states and have positive cash flow??Kathy has just written several books about her experiences and will be sharing her unique knowledge with us. Kathy will have nothing to sell, just sharing her vast knowledge of out-of-state investments.?Thursday night, September 8, 2022, 6:30 to 9:30 pm. Come early and enjoy our Vendors Expo. Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034.?FREE Admission.?Metered and free street parking (but don’t come “fashionably late” or you’ll be forced to park in Long Beach and take an Uber!). RSVP: LARealEstateInvestors.com.

Vendors Expo Returns!?Our carbon-neutral, bio-degradable, gluten-free, super-duper "Vendors Expo"?returns on Thursday night,?September 8, 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 watch for additional Fed guidance on the pace of future rate hikes and bond portfolio reduction. Beyond that, the National Association of Home Builders releases its “Housing Market Index” on Tuesday. Also on Tuesday, the Census Bureau reports on “New Housing Starts.” Retail Sales will be released on Wednesday. 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. Then, on Thursday, the National Association of Realtors reports on “Existing Home Sales,”?and the Conference Board releases its “Leading Economic Index.”?

Weekly Change:

10-year Treasuries:????????????Rose??020 bps

Dow Jones Average:??????????Rose??700 points

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

Calendar:

Tuesday (8/16):???????????????????Housing Starts

Wednesday (8/17):??????????????Retail Sales

Thursday (8/18):??????????????????Existing 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