Monday Morning Quarterback (Monday, May 2, 2022)
Monday Morning Quarterback
(Monday, May 2, 2022)
Has the U.S. economy really shrunk in early 2022? The surprising contraction in our economy in the first quarter has been written off by Wall Street as a misleadingly weak number that in no way signals an oncoming recession. So how well did the economy really perform??Not bad, it seems. Maybe even pretty good, economists say. Let’s start with the 1.4% drop in Gross Domestic Product (“GDP”), the headline number that gets all the media attention. GDP is the official scorecard for our economy. But if we look closer, most of the decline was tied to a record U.S. trade deficit, shrinking inventories and reduced government spending. Added altogether these oft-volatile categories subtracted a whopping 4.5 points from GDP. The real strength of our economy, however, lies in: (1) consumer spending and (2) business investment. And both were quite sturdy in the first quarter of the year. Consumer spending rose at a healthy 2.7% pace after inflation (the highest in three quarters) and business investment jumped 7.3%. Great news - that was the biggest increase in a year. So although GDP fell in the first quarter, our economy is not in recession. A better way to assess our economy’s performance, economists say, is to look at final sales to U.S. customers. Simply put, this measure strips out exports and inventories and focuses on how much stuff Americans are actually buying. These sales rose at a solid 2.6% annual clip, up considerably from the second half of 2021. Strip out reduced U.S government spending, and final sales to private customers (that is, to households and businesses) rose an even stronger 3.7%. Looked at that way, our economy actually strengthened from January to March (first quarter, 2022) as compared with the end of last year. Nevertheless, the U.S. could be facing tougher times ahead, with the Federal Reserve raising interest rates and continued turbulence overseas.?In other real estate/economic news…
New Single-Family Home Sales Declined in March.?New single-family home sales declined 8.6% in March to a 0.763 million annualized rate.?Sales are down 12.6% from a year ago.?Sales fell for the third month in a row in March as the housing market continues to struggle to find its footing in the face of declining affordability and a limited inventory of completed homes.?While rapidly rising prices have been an issue in the housing market throughout the COVID-19 pandemic, the recent run-up in borrowing costs has been adding to the burden.?30-year mortgage rates are up roughly 200 basis points since December, sidelining some potential buyers.?That said, while demand for housing has been falling to some degree due to rising interest rates, it's important to remember that potential buyers still exceed available supply.?This is evident from the fact that median sales price growth has been accelerating and prices are now up 21.4% from a year ago.?The main problem is still that buyers are stuck dealing with very few options when it comes to completed homes.?It's true that overall inventories have been rising recently and now sit at the highest level since 2008.?This has pushed up the months' supply (how long it would take to sell the current inventory at today's sales pace) to 6.4 from a record low reading of 3.5 in late 2020.?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 (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 currently at the highest levels since 2006.?Ultimately, that added supply will facilitate more sales while slowing the pace of new home price appreciation.?
Mortgage Rates Climb to Highest Level Since 2009.?Purchase mortgages were down 17 percent last week compared to the same time a year ago, as mortgage rates climbed to their highest level since 2009, according to the Mortgage Bankers Association.?Thirty-year fixed-rate conforming mortgages rose, on average, to 5.37 percent, up from 5.20 percent a week earlier while rates for 15-year fixed-rate mortgages averaged 4.68 percent, up from 4.44 percent the week previous.?Rising mortgage rates are having an even more dramatic impact on refinancing, with the MBA survey showing demand for refinancing falling 71 percent from the same week a year ago. Requests to refinance accounted for 35 percent of applications.?With mortgage rates increasing by 1.5 percentage points over the last three months, some borrowers are coping by applying for adjustable-rate mortgages (ARMs). ARM loans typically have a lower introductory rate than fixed-rate mortgages, but that rate can go up or down after an introductory period that typically lasts for three to seven years.?Because borrowers seeking ARM loans tended to apply for bigger loans ($728,900, on average, compared to $359,000 for borrowers requesting fixed-rate mortgages), ARM loans represented 17 percent of the dollar volume borrowers applied for last week. For the week ending April 22, 2022, the MBA reports average rates for 30-year fixed-rate conforming mortgages (loan balances $647,200 or less), rates averaged 5.37 percent, up from 5.20 percent the week before.
Housing: Heartburn, Not a Heart Attack.?When interest rates go up, economists worry about recession.?That's not wrong to do.?After all Federal Reserve rate cycles are important.?Lately, the market has settled on expectations for a total of about 2.25% or more of interest rate hikes this year.?The result is a jump in many longer-term yields.?The 10-year Treasury yield is 2.77%, while the typical 30-year mortgage has climbed from 3.2% in December (according to Bankrate.com), to over 5.1%.?So, analysts think that a housing bust is likely, which would drag down the entire economy.?I certainly agree that higher mortgage rates will be a headwind for the housing market in the year ahead.?But what I see is heartburn, not a heart attack.?While 5% mortgage rates are high relative to where they were, home prices should still rise 5 - 10% this year, meaning home prices either keep up with or exceed borrowing costs.?Real mortgage rates (the rate minus inflation) are still negative.?With respect to housing, yes, it is true that national home prices have soared in the past couple of years.?However, so have construction costs.?The Census Bureau's price-index for single-family homes under construction (which does not include the rising cost of land), is up 25% from two years ago.?For 2022, I expect rising mortgage rates to slow national average home price increases (versus 2020-21), but for prices to still go up in the 5 - 10% range.?By contrast, rents should accelerate for several reasons: (1) general price inflation, (2) the end of eviction moratoriums, (3) higher mortgage rates shifting demand toward renting, and (4) the fact that home prices are already high relative to rents.?What really matters for our economy is how higher mortgage rates affect the pace of home construction.?There, again, we see some heartburn, but no heart attack.?Builders started 1.605 million homes last year and I expect total housing starts to exceed that in 2022.?But starts are not the whole story when it comes to home construction.?The total amount of construction can rise as builders move toward completing homes they began months ago.?And remember: home building includes not only single-family homes but also multi-family units (which captures buildings designed for people who want or need to rent).?
Housing Prices Still Surging, But Is a Bubble Likely??The widely followed S&P Corelogic’s “20-City Home Price Index”?was up 19.1% compared with January of last year — a blistering pace, especially considering that the growth was on top of the 11%-plus growth rate reported for January 2021.?It’s highly anomalous for housing prices to rise over 32% in a span of two years, and so the trend is causing economists to start worrying about a possible “bubble.”?In fact, the growth rates we are now seeing exceed those immediately preceding the Great Financial Recession of 2008.?That’s enough to make anyone a little nervous, especially now that mortgage rates have risen over 5%?from a low of around 2.7%.?But there is one big difference between today’s bull market in housing and the one that ended so badly more than a decade ago. Generally speaking, we are NOT seeing the kind of speculation that was so rampant back then.?We don’t see investors buying multiple condos with the expectation of selling them at a large gain within months. And we don’t see the critical ingredient that made this “flipping” activity possible, which was the ready availability of loans on very easy terms.?Shady lending practices, including very small or even no down payments, adjustable-rate mortgages, mortgages without proper documentation, mortgages without any documentation, teaser rates, pay-option ARMs and inflated sales appraisals, are not contributing in any meaningful way to the strength in housing prices we are now seeing.?And more critically, there is a very limited market for bonds backed by sub-prime or Alt-A mortgages, keeping origination activity for unqualified borrowers limited as well.?No, the strength we are seeing in today’s housing market has a much more straightforward explanation.?Rather than speculation and easy credit, there has simply been a large mismatch between the supply and demand for housing, and the mismatch is especially pronounced for lower-priced, entry-level homes.?And that because builders have simply not built enough entry-level houses (smaller profits).?Some of the factors inhibiting building activity include a severe shortage of labor; supply-chain disruptions associated with trade wars and Covid; rapid inflation in raw materials; and land shortages driven by zoning restrictions and land-use regulations. These headwinds to more rapid construction have only intensified, and so supply is likely to be constrained well into the future (which will continue to support elevated housing prices). Nevertheless, higher home prices and strong demand are obviously good things for homebuilders, landlords, and investors.
Police Ask Landlords For Help.?If the police call you, don’t be alarmed.?It’s not what you think.?You can keep “doing” what you’re doing.?I won’t tell anyone.?Actually, the police are calling you merely to ask if you’re a landlord.?Because if you are, they need your help.?The police have a problem. The Los Angeles Police Department is having such a difficult time attracting recruits that leaders plan to seek help from landlords.?The central problem is that the police department is seeing the roster of sworn officers dwindle alarmingly. In the last fiscal year, the department lost 633 officers but was able to hire only 75, Moore said. The department stood at 10,100 officers before the coronavirus pandemic but is down to 9,400 now.?In the current fiscal year, which ends June 30, the department needs to hire 740 officers – the highest number ever – but Moore said at best 500 will be hired.?There are several reasons for the fall in applicants. In Los Angeles, the expensive cost of housing is among the biggest deterrents, especially for those migrating from other areas of the country.?Police commissioner Steve Soboroff figures the math this way: Recruits are paid $71,000 per year, beginning when they start training at the Los Angeles Police Academy. If each recruit paid rent equal to about 40 percent of his or her after-tax income, that would come to only $1,500 a month. But rents are far higher in Los Angeles averaging over $2,500.?So Chef Moore wants landlords to step up and subsidize rent above that amount, which may come to roughly $1,000 a month for each unit. Specifically, L.A.’s landlords will be asked to voluntarily subsidize apartments for police recruits for two years. In that way, those incoming officers can afford to live in the city as they go through their six-month training and then get rooted in their careers.?“A housing initiative is what we’re forming,” Police Chief Michael Moore said.??Moore and Soboroff said there’s a strategic reason for having the subsidy last for two years. It’s because it would give the young officers time to get rooted and make Los Angeles their home. Otherwise, they may get training (which is expensive) and then move to a different city.?How many apartment owners will be able to help and take a financial haircut at this moment is an open question.?Many landlords continue to suffer under Los Angeles County’s eviction moratorium, which has resulted in a number of tenants not paying rent at all and landlords unable to evict them. The moratorium recently was extended into next year for some.?The police initiative is still taking shape.?No website or phone number has yet been set up to take inquiries from those who may want to help. But Soboroff said those landlords who are interested could send him an email at [email protected].
Investor Interest in L.A. Increases in 2021.?Investor interest in the Los Angeles commercial real estate market was high in 2021 with an 83% year-over-year increase to $58 billion in sales volume for the year, according to data from CBRE Group. It was the leading commercial market in the U.S., followed by New York and Dallas.?The $58 billion in investments seen in 2021 was far above pre-pandemic levels. In 2019, only $47 billion of commercial real estate traded hands in L.A.?Mike Condon Jr., a vice chairman at Cushman & Wakefield Inc., agreed.?“With L.A. being a gateway city and one of the most desirable and stable markets in the world, we’re seeing continued investor interest in the market, even during Covid.”?Last year the commercial asset type that saw the most sales volume was industrial. Roughly $20.7 billion of industrial properties traded hands, compared with $18.5 billion of apartment buildings, $8.6 billion of office properties and $6.3 billion of retail properties, according to CBRE data. It’s no surprise industrial and multifamily are the darlings of the ball. Everyone wants to own them.?In contrast, office sales last year were below pre-pandemic levels. “L.A. is one of the five national logistics hubs,” said Kevin Shannon, co-head of U.S. capital markets at Newmark Group Inc. “We’ve got the busiest ports in the country (the port of L.A. and the port of Long Beach), so industrial is on fire and the rent growth is incredible and the escalation in industrial value and land prices has been pretty spectacular. Industrial is really doing well.?And apartment buildings are in high demand as well. Multi-family remains strong,” We don’t have enough housing for the population and the barriers for getting entitlements remain restricted.?There has been rent growth in multifamily properties which is causing increased interest.?Some retail that is trading now is a redevelopment opportunity with investors expecting to tear down the existing property to make room for a multifamily or industrial property. International investors are also interested in L.A. because of the content creation, tech and life sciences jobs in the market.?And experts agree that 2022 is poised to be a busy year for sales.?Shannon expects multifamily and industrial assets to continue to do well while office demand slowly increases.?The continuation of “content wars” is leading to high demand for studio space in markets like L.A. and he expects that to continue.?Investment in L.A. is “going to continue to grow for all the right reasons,” Shannon said.
Most Affordable Housing Market in the World.?Homebuyers and investors looking for affordability in today’s tough housing market will find it in a rebounding Rust Belt city.?I am proud to announce that my hometown, Pittsburgh Pennsylvania, has been named the most affordable city in the world (yes, world) by the Urban Reform Institute and the Frontier Centre for Public Policy. In a recent study from the two nonprofits, the Steel City (home to the Pittsburgh Steelers, Pirates and Penguins) edged out every other major metropolitan area globally. Two other U.S. cities — Oklahoma City and Rochester, N.Y. — tied for second.?The study determined housing affordability for middle-income households by comparing home prices to household incomes in 92 cities (and eight different countries) and then ranked them from most to least affordable.?The median listing price for a typical Pittsburgh home is $222,500, according to data from Realtor.com. That compares favorably to the national median listing price of $405,000.?Pittsburgh is seeing an increase in housing inventory, which means buyers have more options when it comes to their home search. Currently, there’s a two-month supply of homes for sale nationally, well below the six-month supply many experts consider "healthy." In Pittsburgh, though, new listings have increased by 30% month-over-month in the first two weeks of April, just in time for the spring buying season.?Competition isn’t as fierce in Pittsburgh as it is in other markets, either.?For example, the median number of days a house sits on the market in Pittsburgh is 61 days; much longer than most U.S. cities. (Houses in Denver, on the other hand, are scooped up after a median of 9 days on the market.)?Compared to the same time last year home prices in Pittsburgh have decreased by 13.7%.?The U.S. cities that round out the study's list of the most affordable housing markets are St. Louis, Cleveland, Cincinnati and Buffalo. The city of Edmonton in Alberta, Canada and Glasgow, Scotland also made the top ten.?The three U.S cities that ranked the lowest in affordability are San Francisco, Honolulu, and San Jose, Calif., according to the two nonprofits.
Seth Rogen’s Weed Palace. Architectural Digest’s “Open Door” series has long been a way for celebrities to show off (and potentially sell) their houses, but the latest installment features more explicit commerce: Seth Rogen offers a bubbly tour through his office that is also a weed-experience lab that is also a house. It’s a walk through the 1918 Hollywood bungalow that serves as the operations base for Houseplant, Rogen’s new cannabis-and-homewares company. “This is a front yard,” Rogen says as he gestures to the front yard.?Inside the house we get to see Rogen’s?ashtrays and his dog-shaped lighter caddy (both available for purchase) while he very charmingly laughs and says things like “ashtray ingenuity is on the rise once again.” But, more important, we get a little glimpse inside Rogen’s mind. When he shows off a lamp with a built-in ashtray, Rogen explains how it came to be. “For years and years, I would look at an ashtray and a lamp sitting on my desk side by side. Two different things,” Rogen says. “And I thought,?what if it was one thing?” That this very stoner thought was made reality leads one to consider more terrifying and expansive possibilities —?what two different things?can’t?be made into one thing? A weed store and a home-goods store? Ceramics and acting??Most of the products Rogen shows off are ashtrays— vintage hedgehog ashtrays, glass ashtrays, gloopy ashtrays. Truth be told, they are stylish.?Natural light fills the house-office as Seth leads the tour. ?You can see Seth’s house tour at ArchitecturalDigest.com.
Vendors Expo Returns!?Our carbon-neutral, bio-degradable, gluten-free, super-duper "Vendors Expo"?returns on Thursday night,?May 12, 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 our new home, the Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, CA 90034 (Culver City adjacent).?FREE Admission.?FREE parking on the Iman parking lot and metered street parking. Please RSVP at www.LARealEstateInvestors.com.
“Learn How to Wholesale with Cliff Gager.”?When it comes to wholesaling, there is no one more experienced and popular than Cliff Gager.?Cliff is the number #1 authority on how to get started wholesaling, the subtlety of finding deals worthy of wholesaling, evaluating the property, structuring the deals for assigning, finding your buyers/investors, and how to get paid.?Cliff will be our special guest at LAC-REIA’s May 12th meeting at the Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034 (Culver City adjacent).?FREE Admission.?FREE parking on the Iman parking lot and metered street parking. (And don’t come “fashionably late” or you’ll end up parking in Long Beach and taking an Uber!)?RSVP at www.LARealEstateInvestors.com.
International REI Conference. Yours truly has been invited to be a featured speaker at the International REI conference, October 6-8, 2022, at the Texas Convention Center, Corpus Christi, Texas. ?There will be nine of the top national speakers including Robert Kiyosaki, Dr. Ben Carson, Robert Allen, Mark Victor Hanson, and drum roll…. Lloyd Martin Segal!?Plus 50 vendors in the exhibition hall. Tickets are $1,000 for the three days and a virtual ticket costs $400. More info at www.IREIProductions.com.
Weekly “Rubbing Elbows” Podcast.?LAC-REIA hosts the weekly podcast, “Rubbing Elbows” staring our very own Chuck Dorfman, and his co-host, Lior Yehuda.?Every Thursday live at 8:00 pm (and streaming anytime thereafter), Chuck and Lior interview real estate professionals sharing their insights and advice.?Its real estate uncensored and unfiltered.?These guys may be unorthodox, but they know what they’re talking about.?You can subscribe to “Rubbing Elbows” wherever you view podcasts (i.e. YouTube, Facebook, Google), and www.LARealEstateInvestors.com/RubbingElbows.
This Week. Looking ahead, the Federal Open Market Committee concludes a two-day meeting on Wednesday, when it will announce its latest monetary decision.?Market pricing overwhelming implies expectations of an interest-rate increase of half a percentage point, to a Fed Funds target range of 0.75% to 1%. Investors will look for additional guidance on the pace of future rate hikes and balance sheet reduction. The Institute for Supply Management’s (“ISM”) national manufacturing index will come out today (5/2) and the ISM’s national service sector index will be released on Thursday (5/5).?Beyond that, the key Employment report will be released by the Bureau of Labor Statistics on Friday (5/6), 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.
Weekly Changes:
10-year Treasuries:????????????Flat ???000 bps
Dow Jones Avg:??????????????????Rose??100 points
NASDAQ:?????????????????????????????Fell????100 points
Calendar:
Wednesday (5/4):????????????????Fed Meeting
Thursday (5/5):????????????????????ISM Services
Friday (5/6):??????????????????????????Employment
For further information, comments, and questions:
Lloyd Segal
President
Los Angeles County Real Estate Investors Association, LLC
www.LARealEstateInvestors.com
310-409-8310