Monday Morning Quarterback

(Monday, May 16, 2022)

The “Used-Car Indicator.” My Dad always says if you want to anticipate inflation, pay attention to used-car sales. And sure enough, he’s right again! For example, the prices of used cars started spiking nearly two years ago. That was a harbinger of things to come, fierce inflation. So can falling used-car prices now mean the reverse – that inflation is ready to fall? That’s the question I had when I looked at last week’s CPI report and saw that used cars was the only category posting a month-over-month price decline. Used cars and trucks are still up 22.7% from a year ago, but they did fall 0.4% in April. It’s actually the third consecutive month of declines for the used-car category. No other part of the CPI has even posted two straight declines, let alone three! So it’s fair to call used cars an outlier at the moment. According to Mark Zandi, chief economist at Moody’s Analytics, the decline in used-car prices shows that the continuing supply chain issues that heated up inflation are starting to subside. In his view, car prices surged because of chip shortages and supply-chain problems, and the fact that they are falling now is an indication that supply chains (though still not where they should be), are starting to improve. If that’s the case, prices could start falling for other products as well. So I think my Dad was right. I think the used-car price declines are the first real indication that inflation is slowing down and maybe even rolling over. So, with used cars on our mind, let’s get under the hood…

Consumer Price Index Increased in April. If you squint, you can see that inflation is slowing down, kinda. I say this because the Consumer Price Index (“CPI”) increased only 0.3% in April, but still up 8.3% from a year ago. Although some analysts and investors might take solace in the fact that headline inflation ticked down on a year-ago comparison basis (to 8.3% in April from 8.5% in March), that doesn't mean inflation is going to drop anywhere as fast as the Federal Reserve needs. Looking at the details of the report, prices for shelter, food, and airline fares were the main drivers of April's increase. Historically, food and energy prices have been very volatile month-to-month. That was true once again in April, as food prices rose 0.9% and energy fell 2.7%. But "core" prices showed substantial inflation pressure. For example, housing rents (for both actual tenants and the rental value of owner-occupied homes) continued to move higher in April, rising 0.5% for the month. I expect rents to continue to be a key driver for inflation in 2022 and beyond because they make up more than 30% of the overall CPI and still have a long way to go to catch up to home prices (which have skyrocketed more than 30% since COVID started). Airline fares posted the largest monthly increase on record dating back to 1963 (18.6%), signaling increased demand. Meanwhile, the auto sector had a split picture for inflation for the month. New vehicle prices rose 1.1% in April and are up 13.2% from a year ago. However, as my Dad emphasizes, used cars and trucks are starting to see a turn in prices. Although they're up 22.7% from a year ago, they declined 0.4% in April for the third straight monthly decline. Follow that car! The M2 measure of the money supply soared during COVID and now consumers are paying the price in skyrocketing inflation.

Producer Price Index Rose in April. As I mentioned previously, if you want to be a true amateur economist like me, pay attention to the Producers Price Index (“PPI”), not the Consumer Price Index. Why? Because the PPI tells us what the CPI will be months from now, which is what we really want to know. For example, the Producer Price Index rose 0.5% in April, up 11.0% versus a year ago. Producer prices rose 0.5% in April following three consecutive monthly increases of 1.0% or more to start 2022. But producer prices are now up 11.0% versus a year ago, which is a modest improvement from the March reading of 11.2%, but nothing to write home about. And nothing that should persuade the Fed that anything other than combating inflation is (and rightfully should be) their primary mission for the foreseeable future. Looking at the details of the April report, goods prices led the overall index higher. Energy prices rose 1.7% in April, while food prices rose 1.5% on the month, but the main drivers of inflation came from outside of these typically volatile categories. Prices for motor vehicles and equipment rose 0.8%, leading "core" producer prices higher by 0.4% in April, bringing the twelve-month increase in core prices to 8.8%. And price pressures remain elevated further back in the supply chain, as prices for processed and unprocessed goods for intermediate demand are up 21.9% and 48.1%, respectively, in the past year. On the services side of the PPI, a 3.6% rise in the costs for transportation and warehousing services was offset by a decline in margins to services producers (trade services – which measures the margins received by wholesalers and retailers – fell 0.5% in April), leaving services prices unchanged for the month. In short, inflation continues to run at the highest pace in decades. This is what happens when you add money to the system at a faster pace than you can grow output. Fed Chair Jerome Powell was right in saying that the Fed needs to act "expeditiously" to address the damaging impacts of inflation, but a focus on raising interest rates and reducing the size of the Fed balance sheet are not enough by themselves. Until the Fed gets money growth under control, high inflation is here to stay. 

Hidden History Of LA Real Estate. One of Hollywood’s vintage scandals involves the home located at 858 N. Andrews Blvd., in Silver Lake. In 1922, police were called to the home after there were reports of gunshots. When the police arrived, they found a man lying dead in the living room with multiple gunshot wounds, including one to the back of the head. The dead man’s wife, Dolly Oesterreich, was found alive, locked in the closet. Dolly told the police that there was a robbery, and that the robber locked her in the closet. But the police were suspicious of Dolly and her story. Dolly told the detective that she and her husband never fought. Not even once. The intensity of her denial made the detective skeptical. What married couple doesn’t fight? Plus, her husband was killed with a .25 caliber pistol, a very small caliber, generally considered a “woman’s gun.” What kind of robber carries a woman’s gun? But the police could not figure out how Dolly could have killed her husband when she was locked in the closet. They would later learn that there was much more to this seductive L.A. housewife than anyone could have imagined. In 1913, Dolly was in her thirties and 17-years old Otto Sanhuber worked as a sewing machine repairman. One day Dolly called her husband at work and told him that her sewing machine was broken. Her husband told Dolly to call a sewing repairman, to which Dolly dutifully complied. When Otto arrived to fix the machine, Dolly answered the door wearing nothing but stockings and a silk robe. The two became lovers and soon Otto, who had become fixated with Dolly, moved into her attic so he could be close to her. Thereafter, Dolly’s husband had no idea of the “sewing” going on inside his own home. Dolly would let Otto out of the attic during the day (while her husband was at work) so Otto could do household chores and perform his duties as a lover, before being stowed away up in the attic at night when Dolly’s husband returned home. Otto would later describe himself as Dolly’s “sex slave.” This routine continued year after year, after year. Otto stayed in the attic until one night in 1922. That night, Dolly and her husband got into a loud argument. Otto listened as the argument became more heated. Fearing Dolly was in danger of physical harm, Otto rushed out of the attic with a .25 caliber pistol. 

                 [continued in Part II at the end of this Quarterback.]

How To Make Money In Real Estate When Interest Rates Go Up. Those under the age of 36 probably haven’t worked in real estate at a time when interest rates were higher than 3% in the U.S. Well now they may be in for a shock. Since 2008, when the central bank dropped interest rates to near zero to boost the economy, rates have been below cap rates. As a result, investors paid a lot less in interest rates than they took in from rent and could sweep the difference off the table. That gap between rates and yields drew ever more investors to real estate, driving prices up. But in the past week, both the Federal Reserve and the Bank of England have hiked rates, by 0.5% and 0.25% respectively, to combat inflation that is rising fast and hitting highs not seen for more than 25 years. Rates are still below property yields, but both central banks have said there are more rises to come — and that cosy cushion is being eroded quickly. So how is it possible to make money in real estate investment when that arbitrage is no longer so pronounced and interest rates are rising to combat inflation? One thing seems sure: It is much harder to be an investor that relies on debt when interest rates are higher. Beyond using more equity than debt, real estate investors are going to have to think about something that hasn’t needed to be at the forefront of their mind for the past 15 years, but is always nice to have: rental growth. If you have only ever known an environment in which interest rates are zero, it almost didn’t matter whether rents grew or not: It was possible to collect more in rent than you paid in interest, and there was likely to be someone always willing to buy it for more than what you paid when it came time to sell. But that is not necessarily going to be the case anymore. You need to compare the situation today to the 1970s and 1980s when the real estate industry had to improve the quality of its analysis. People are going to have to start understanding where the rental growth for individual properties is going to come from in a lot more detail. Those that seem most likely to benefit, rented residential. Rented residential, like multifamily or build to rent, has the ability to capture price inflation. But just because you can raise rents doesn’t mean you should. Increasing residential rents in line with inflation when it is at 5% or more might look appealing to landlords, but it risks creating political pushback. In sectors like affordable housing, which traditional real estate investors have embraced in a big way in recent years, the idea of increasing rents by 5% for lower-income renters risks creating an outcry. Ideally you want to have leases with annual increases linked to inflation, or with short yearly, or month-to-month leases, which allows you to increase the rent. A 10-year lease with a review every five years isn’t much good to you. For example, niches like student housing or shorter tenancies, therefore allowing that opportunity to capture growth.  

Families’ Displaced by Dodger Stadium Petition for Reparations. As L.A. celebrates a kick-ass 2022 Dodgers team, a growing movement seeks to bring uncomfortable truths to the light and demand retribution from the Dodgers organization. “Displacers” stickers are being spotted from Santa Monica to Highland Park. An online petition has just been served to the city, demanding justice for the forced removal of Mexican, Mexican-American, and indigenous families from the communities of Palo Verde, Bishop, and La Loma, where Dodger Stadium now sits. The organizers have banded together under the non-profit banner of “Buried Under the Blue.” They’re made up of grandparents, parents, and descendants that survived the brutal destruction of these three barrios and resulting trauma that has been passed down from generation to generation. It seeks to spread awareness of the removal of the entire population, said to be about 1,800 families, of the stolen land now known as Chavez Ravine under the behest of the municipal government, and wants justice for the compulsorily displaced families. The “Battle of Chavez Ravine” met its conclusion 63 years ago this week when the Los Angeles County Sherriff’s department forcibly removed and arrested the area’s last remaining landowners. The land had initially been taken over by the city through agreed-upon purchases and through powers of eminent domain pending the construction of 54 acres of public housing (which was later scrapped by an opposed new mayor). The land was then used to entice the Brooklyn Dodgers to move to L.A.  The petition makes the following demands: (1) A public apology for the destruction of our three communities and the robbing of generational wealth from the people of Palo Verde, La Loma, and Bishop, and (2) Reparations from the City that destroyed the three communities and robbed the generational wealth of the people of Palo Verde, La Loma, and Bishop. 

Developer Wants to Build Where Landslide Destroyed Homes 24 Years Ago. In 1998, after a winter of heavy rains, the hill below Via Estoril in Laguna Niguel collapsed. In the collapse, several homes slid down the hill and were destroyed, and the condominiums below were heavily damaged. The developer and original builder, J.M. Peters, paid millions to the Niguel Summit Community Association as part of a legal settlement. The money was used to build a massive concrete wall with tieback anchors, a giant mass of soil called a buttress, and subdrains to move rainwater. City officials told residents it was “highly unlikely” that the land would ever be built on again. But now, 24 years later, a developer is proposing new condominiums at the base of the hill. Improvements made since the landslide will prevent disaster from striking again, the project’s proponents say. The developer, Barry Hon of Laguna Niguel Properties LLC, is familiar with the risk. He built the original Niguel Summit neighborhood, including the Via Estoril homes (which now sell for more than $1 million), and the condos below. In the 1980s, Hon built about 1,500 homes, including the ones on Via Estoril, on a man-made hill about five miles from the ocean. Residents fear that Hon’s new project will destabilize the hill and send it crashing down again. Many also worry that officials will use the increasing pressure for housing across Southern California and a requirement that the city zone for more than 1,200 new units as justification to approve the project, when there are safer places in the city to build. Residents sued the developer, alleging faulty construction. When the hill finally gave way, it sounded like thunder. Two large two-story homes slid down and crumpled into heaps. Below, several condominium units were also crushed, and the entire complex was demolished so the land could be graded to stabilize the area. Hon and his company are now proposing 22 three-story condos on two acres at the bottom of the hill along Crown Valley Parkway. To provide space for yards and a retaining wall, the construction plan would involve grading the bottom edge of the soil buttress that helps stabilize the hill. According to geotechnical experts hired by the developer (as well as a separate firm that reviewed the plans for the city), shaving off part of the buttress is safe and won’t affect the stability of the hillside. As home prices soar amid a longstanding housing shortage, well-heeled suburbs like Laguna Niguel that have room to grow are facing increasing pressure to build. Many south and coastal Orange County cities, including Laguna Niguel, have a long history of landslides. Niguel Summit was built on six old landslide areas that were graded and buttressed. Many nearby residents are worried that city officials may put the need for housing above safety concerns. It’s the fear that what happened 24 years ago could happen again.

The House Was Listed At $1.2 Million. The Sales Price? Even Crazier. We’ve all heard crazy stories about houses selling above asking price, but this story may just be the craziest. The three-bedroom, one-bath house in Pasadena was listed at $1.2 million. It sold in a week, at more than double that price. Yes, for $2.5 million! In the insane Southern California housing market (in which legions of people are priced out of home ownership while people with boatloads of hard cash are battling it out in epic bidding wars), we’re all familiar with houses selling above the listing price. But I think we’ve now, officially, reached a level of absurdity. I have nothing against either the buyer or the seller here. More power to them. But this is a case of capitalism run amok, and it speaks to a culture that keeps putting distance between the haves and have-nots. When I first saw the ad in the Pasadena Outlook, touting the $2.5-million transaction in South Pasadena, I thought it was a misprint. “$1.3 MILLION OVER ASKING PRICE,” said the ad. The selling agent, Ruth Mayeda, works out of Coldwell Banker’s San Marino office and has been in the business for over 20 years. She says homes in the area have sold for a few hundred thousand dollars above asking, and sometimes even more. But a common tactic for creating a feeding frenzy is to price a house on the low end. Mayeda says she didn’t use that strategy, although other agents told me they thought the house had been underpriced at $1,198,000. Mayeda says she checked “comps” (or comparable prices), for similar houses in the neighborhood and set what she considered a fair price for the 1,922-square-foot home with a two-car detached garage. South Pasadena has a throwback, small-town vibe. The public schools are among the best in the region, the crime rate is low, people can walk places and the Metro Gold Line runs right through town. Mayeda says more than 400 people dropped by to look at the property she listed, which was freshly painted, landscaped and staged. About 60 made offers — many of them all cash, no financing and no other contingencies. Mortgage rates are climbing, but that’s not a consideration for people who can reach into deep pockets and keep upping the ante. Mayeda says eight of the offers were at $2 million or above, and the winning bid of $2.5 million, all cash, made for a tidy return on a modest investment that was made 40 years ago. The seller, a man in his 80s (who asked not to use his name), bought the house in 1983 for $155,000. But now the problem is that it creates a new comp. The next listing in that neighborhood is going to automatically use that $2.5 million sale.

Furniture Mogul Gets $24 Million for Beverly Hills Flipper. Ever wonder where all your money goes that you over-spent at Restoration Hardware? Well, here’s the answer. Chief executive of the high-end furniture retailer RH (formerly Restoration Hardware), Gary Friedman, just quietly sold his half-built home in Beverly Hills for $24 million. The off-market deal highlights the skyrocketing value of land in affluent pockets of L.A. since the pandemic. Records show Friedman bought the property in its half-finished state for $15 million in 2019, so the sale brings a modest profit of $9 million. Yes, for doing nothing! That’s called a “flip without the fix.” Even in its unlivable state, it’s no surprise the property fetched such a fortune. It sits at the end of a cul-de-sac and spans 2.8 acres, a rare amount of land for the neighborhood. The house was originally built in 2013 by Marmol Radziner, an L.A.-based architecture firm known for its contemporary designs and restoration work, including the 2007 restoration of Richard Neutra’s Kaufmann Desert House in Palm Springs. The mansion spans four staggered levels and takes in views from Downtown L.A. to the ocean. Its sleek, sharp exterior is still intact, but the living spaces have been hollowed out down to the studs and boarded up. It was marketed as either a tear-down or renovation project. Restoration Hardware, had $3.76 billion in revenue last year, and Forbes puts Friedman’s net worth at $2.2 billion. Now you can add another $9 million to his net worth.  

Part II Continued (History of L.A. Real Estate History). When last we left our characters, Otto was racing down from the attic with a loaded pistol to save Dolly from her husband. Sure enough, when Dolly’s husband saw Otto, he became enraged and rushed toward him. During the struggle, Dolly’s husband was shot three times, and he died. In a panic, Dolly and Otto staged the scene to look like a robbery. Otto took the husband’s watch and Dolly hid herself in the closet. Otto locked the closet door from the outside and returned to the attic. The police never found Otto and therefore could not explain how Dolly could have killed her husband and then lock herself in the closet. After her husband’s death, Dolly moved into a different house, which also had an attic. Otto moved in as well. But inevitably Otto was not enough for Dolly, and she started having affairs with multiple other men. The murder of her husband finally caught up to Dolly after she gave her dead husband’s watch to a lover, the same watch that was allegedly stolen during the robbery. Then she asked a different lover to dispose of the .25 caliber gun, which he threw into the La Brea Tar Pits. She even asked one of her lovers, who was also her attorney, to bring groceries to Otto in the attic. When these men started telling the police what Dolly had asked from them, the police started piecing together what really happened the night of the murder. Finally, eight years after the death of her husband, Dolly was charged with conspiracy to commit murder. Otto was charged with murder. Otto immediately confessed and told the police the whole story. He told investigators that he had an overpowering love for Dolly. On that fateful night, he believed Dolly was going to be killed, and so he shot the husband to protect her. He even took officers to the house and showed them where he hid in the attic. During trial, Dolly admitted that Otto shot her husband and covered it up to look like a robbery, but contended that she took no part in either, and only lied to the police to protect Otto. However, the prosecutor painted her as a cold-blooded murderer who aided and abetted the “garret ghost” lover in perpetrating the murder. Otto found guilty of manslaughter, but was released because the statute of limitations for manslaughter had expired. The case against Dolly ended with a hung jury, and she was also released. After the trial, Dolly found a new lover but died in 1961 at the age of 75. We don’t know what happened to Otto, but he is probably still hiding in an attic somewhere. Moral of the story: Be careful what you store in your attic!

"Women Making Moves (& Money) in Real Estate."  Join us on Thursday night, June 9, 2022, when we have a very special panel on women investors. Our moderator will be Deborah Razo, President of the Women’s Real Estate Network (“WREN”). Deborah is an all-star investor, including fixing and flipping houses, residential construction, and multi-residential properties in the U.S. and Puerto Rico. The panel will feature Cindy Coleman discussing note investing, Angela Sillman discussing short-term rentals, and Jen Maldonado discussing raising capital for your projects. If you’re a woman investor, DO NOT miss this presentation. (If you’re a man, you can attend only at your own risk!)  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 having to park in Long Beach and taking an Uber!) RSVP at www.LARealEstateInvestors.com.

Vendors Expo Returns! Our carbon-neutral, bio-degradable, gluten-free, super-duper "Vendors Expo" returns on Thursday night, June 9, 2022. The Vendor Expo will be open 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.

Weekly “Rubbing Elbows” Podcast. LAC-REIA hosts the weekly podcast, “Rubbing Elbows” staring our very own Chuck Dorfman and 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 enjoy “Rubbing Elbows” (i.e. YouTube, Facebook, Google), or our website, www.LARealEstateInvestors.com/RubbingElbows.

This Week. Looking ahead, investors will continue to closely follow news on Ukraine and Covid case counts in China. They will also look for additional Fed guidance on the pace of future rate hikes and bond portfolio reductions. Beyond that, the Census Bureau will release its Retail Sales on Tuesday (5/17). 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. Housing Starts will be released on Wednesday (5/18) by the National Association of Home Builders and the National Association of Realtors will report on Existing Home Sales for April on Thursday (5/19).

Weekly Changes:

10-year Treasuries:            Fell    020 bps

Dow Jones Average:          Fell    700 points

NASDAQ:                           Fell    400 points

Calendar:

Tuesday (5/17):                   Retail Sales

Wednesday (5/18):              Housing Starts

Thursday (5/19):                  Existing Home Sales

For further information, comments, and questions:

Lloyd Segal

President

Los Angeles County Real Estate Investors Association, LLC

www.LARealEstateInvestors.com

This email address is being protected from spambots. You need JavaScript enabled to view it.

310-409-8310