Monday Morning Quarterback

(Monday, September 26, 2022)

The Federal Reserve predicts “pain” (their word, not mine) as it battles inflation. Specifically, the pain Americans are likely to endure from higher interest rates is a tepid economy in 2023 and rising layoffs and unemployment, according to the Fed. As you no doubt already know, last Wednesday the central bank raised a key U.S. interest rate ¾ of one percent, the fifth rate increase this year. The rate hikes are meant to slow the economy enough to bring down the highest inflation in 40 years. In a major speech last month, Fed Chairman Jerome Powell warned the public it would experience “some pain” as a result of the Fed’s aggressive efforts to roll back inflation. But last Wednesday, Powell remove the “some” when discussing the “pain.” Now it’s just pain, plain and simple. Are you ready? A slowing economy will curb hiring and induce more layoffs as businesses face the prospect of slower sales. The Fed wants to cool off a scorching labor market in which worker shortages are rapidly driving up wages and adding to inflation. In updated forecasts, the Fed predicts our economy will grow at a meager 0.2% annual pace this year and a lackluster 1.2% next year, well below the outsized 5.7% gain in 2021. The unemployment rate, meanwhile, is forecast to rise to as high as 4.4% in 2023 and stay there through 2024. Historically such sizable increases in the unemployment rate foreshadow a pending recession. And indeed, a rising number of Wall Street economists believe the U.S. will suffer a mild downturn within the year. Senior Fed officials acknowledge a recession is possible, but they are still suggesting publicly that they can pull off a so-called “soft landing.” But really, that’s a Goldilocks scenario in which our economy slows just enough to slash inflation without triggering a recession. Highly unlikely. Meanwhile in other real estate news, let’s get under the hood…

Existing-Home Sales Fell to 4.8 Million In August. U.S. existing-home sales fell 0.4% to a seasonally adjusted annualized rate of 4.8 million in August, the National Association of Realtors reports. In fact, this is the seventh straight monthly decline. This is the lowest level of existing home sales since May 2020 (during the pandemic downturn). Compared with August 2021, home sales were down 19.9%. The median price for an existing home fell to $389,500, down from a peak of $413,800 reached in June. Home prices are still up 7.7% from August 2021, but that’s the smallest increase since June 2020. The number of homes on the market fell 1.5% to 1.28 million units in August. Expressed in terms of the months-supply metric, there was a 3.2-month supply of homes for sale in August, up from 2.6 months in July. Before the pandemic, a four or five-month supply was the norm. Homes remained on the market for 16 days on average, up from 14 days in July. Pre-pandemic, the average time for homes to remain on the market was a month. To be clear, homes are still expensive. And borrowing costs are elevated, with the average contract rate for a 30-year fixed-rate mortgage at 6.25%, according to the Mortgage Bankers Association. The latest rise in mortgage rates – up nearly 30 basis points since the end of August – has taken a further toll on homebuying affordability that will weigh on home sales in the months ahead. Forecasts call for sales to average 4.6mn in the fourth quarter, but the risk is probably tilted to the downside. Home price growth is likely to continue to decelerate, but the limited supply of homes for sale will likely prevent too steep a decline. Also, keep in mind the famous "Segal Adage" that house prices never fall as quickly as they rise. In other words, there is a natural reluctance of sellers to drop their prices until all else fails. 

Home-Builder Confidence Fell For Ninth Straight Month. The National Association of Home Builders’ (NAHB) “Monthly Confidence Index” fell 3 points to 46 in September. It’s the ninth month in a row that the index has fallen, and excluding the pandemic, the September reading of 46 is the lowest since May 2014. (A year ago, the index stood at 76.) New-home builders are struggling to attract buyers due to higher interest rates. Mortgage rates rose above 6% (doubling since last year), which has considerably cooled buyer demand. Meanwhile, home prices continue to be elevated, with the median sales price for a new home at $439,400 in July, according to the U.S. Census Bureau. Builders are pulling out all the stops to boost sales. Nearly a quarter of builders, up from 19% the previous month, are dropping prices to attract buyers, the NAHB reports. Some are even offering free amenities and mortgage rate buydowns. “Builder sentiment has declined every month in 2022, and the housing recession shows no signs of abating,” said Robert Dietz, the NAHB’s chief economist. The drop comes as builders are dealing with higher construction costs and mortgage rates have risen to their highest level since 2008. More than half of the builders the NAHB surveyed used incentives to lure buyers, Dietz said. Builder confidence continues to decline, and other data that will be released this week will paint a picture of a struggling sector. “It’s little surprise that the most interest-sensitive segment of the economy is breaking hard, especially after prices ran wild the past two years, pushing affordability to the worst level in 33 years,” Sal Guatieri, senior economist at BMO Capital Markets, wrote in a note.

Home Flipping Dips Across U.S. During Second Quarter of 2022. According to ATTOM’s second-quarter 2022 “Home Flipping Report” 115,198 single-family houses and condominiums in the United States were flipped in the second quarter. Those transactions represented 8.2 percent of all home sales in the second quarter of 2022 (or one in 12 transactions). This latest portion was down from 9.7 percent, or one in every 10 home sales, in the nation during the first quarter of 2022. Despite the decline, the home-flipping rate during the second quarter of this year still stood at the third-highest level since 2000. “The second quarter was another strong showing for fix-and-flip investors. The total number of properties flipped was the second-highest total we’ve recorded in the past 22 years, and the median sales price of a flipped property – $328,000 – was the highest ever,” said Rick Sharga, executive vice president at ATTOM, and the Keynote speaker at our 3^rd Annual Los Angeles Real Estate Grand Expo (www.LAGrandExpo.com). Among all flips nationwide, the gross profit on typical transactions (the difference between the median purchase price paid by investors and the median resale price) hit $73,700 in the second quarter of 2022. That was up 10 percent from $66,944 in the second quarter of 2021. That typical gross-flipping profit of $73,700 translated into a 29 percent return on investment compared to the original acquisition price. Specifically, in the second quarter of 2022, the typical resale price on flipped homes reached another all-time high of $328,000. That was up 21.5 percent from $270,000 a year earlier. Among the largest metros, the largest flipping rates during the second quarter of 2022 were in Tucson, AZ (flips comprised 14.5 percent of all home sales); Phoenix, AZ (14.1 percent); Jacksonville, FL (13.8 percent); Atlanta, GA (13.6 percent) and Gainesville, GA (13.5 percent).

Studios Become Hot Commodities. Savvy investors are flocking to production facilities and sound stages to park their dollars. Why? Because thanks to Netflix, Prime, Hulu, and similar networks, production of movies and TV shows has tripled over the last few years. The big demand for soundstages has meant that developers are looking to aggressively build everywhere and anywhere in LA County. For example, Quixote Studios (a 27-year-old provider of sound stages, cast trailers, trucks, grip and lighting, and other equipment essential for content production) was purchased by Brentwood-based Hudson Pacific Properties Inc. for $360 million. Last year, Hudson Pacific acquired two transportation and logistics service companies (Sylmar-based Star Waggons and Zio Studio Services) for $222 million. Hudson Pacific’s Sunset Studios include more than 60 stages across five lots in Los Angeles and the U.K. Hudson Pacific’s L.A. stages include Sunset Gower, Sunset Bronson and Sunset Las Palmas. Along with Blackstone, it is currently developing Sunset Glenoaks, a $190 million, seven-soundstage project in Sun Valley that will span 240,000 square feet when completed next year. Hudson Pacific isn’t the only local company interested in investing in soundstages. In what is the largest studio redevelopment project in the nation, Santa Monica-based Worthe Real Estate Group is redeveloping Warner Bros.’ historic Ranch Lot in Burbank to include 16 soundstages and a 320,000-square-foot office complex. Culver City-based Hackman Capital Partners and New York-based Square Mile Capital Management, meanwhile, purchased CBS Studio Center in Studio City for $1.85 billion last November and plans to renovate the property. Hackman Capital previously purchased CBS Television City in the Fairfax District for $750 million and has plans to expand the site by 1.9 million square feet, adding studios, offices and retail facilities with an expected price tag of $1.25 billion. Globally, Hackman Capital owns 19 studios for a combined 120 active soundstages and another 90 in development, adding up to well over $10 billion in assets. A studio is a very land-intensive type of sector. For L.A., there is only a finite geography where you can be, which is called the “30-mile zone.” It’s made land for soundstages valuable because if filming goes beyond the 30-mile zone, studios have to pay travel expenses for talent and crew, which they obviously want to avoid.

It's Curtains For Some Movie Theaters. Although movie and TV productions are going gangbusters (see above), people are not returning to movie theaters to watch them. As a result, theaters have struggled in the two-plus years since the pandemic confined us to our couches. And although summer blockbusters boosted traffic this year, financial troubles have shuttered theaters across the country, leaving huge, specialized empty spaces in their stead. Long seen as a potential saving grace for battered retail centers, movie theaters had always been well-trafficked destinations that could draw crowds to nearby stores and restaurants. But as major theater chains faltered, these empty big boxes have instead become redevelopment targets. Some reopen as fancier theaters with better amenities and newer technology, while others are turned into something else or razed entirely. For example, Decurion Corp. (parent of movie theater chain Arclight Cinemas), closed all of its locations in 2021 in the aftermath of the pandemic. But toward the end of that year, the company filed a permit application with the city of Los Angeles to develop a 273K SF industrial campus on the site of one of its dark theaters in Chatsworth. In other areas, closed theaters are seen as an opportunity to put a dent in the growing need for multi-family space, adding apartment complexes or mixed-use developments in place of the big screens. While the wheels turn on redevelopment plans for the theaters that have already closed, new closures keep coming. Following the Chapter 11 bankruptcy filing of its parent company, Cineworld, Regal Cinemas is closing three Southern California theaters as part of a restructuring plan. The company plans to close at least 20 of its locations, perhaps more, according to its bankruptcy filings, which also note the company is burdened by more than $5B in debt. Meanwhile, AMC Theatres, the country's largest operator of movie theaters, is pushing in the opposite direction from Regal Cinema - expansion, even though the company is still running at a loss. During the second quarter of 2022, AMC lost $121.6M, which represented an improvement compared to a net loss of $344M during the second quarter of 2021!

There’s a Human Skull Beneath This House. Jack Fleming, brilliant staff writer at the Los Angeles Times, recently did a fantastic job profiling foundation engineer Kyle Tourje. Tourje is one of nine structural assessors for Alpha Structural, a Los Angeles company that specializes in engineering and constructing foundation repairs. In other words, Tourje makes sure your house doesn’t slide down the hill and crush the ones below it. His parents, David and Linda, founded the company three decades ago, and Kyle has been around the business most of his life. In a region as hilly and earthquake-prone as Southern California, his work is vital no matter the market. Vital and, at times, shocking. Besides black widow spiders, abandoned pitbulls, and buried military cargo crates, there is the occasional human skull. “We’ve seen anything you can imagine under a home,” Tourje says. And he’s got the photos to prove it. Each week, Tourje goes out into the field and send back photos and videos depict a dark underworld brimming with life, death and foundation disasters just waiting to happen. It’s part entertainment, part cautionary tale. The company handles more than 4,000 assessments every year. A lot of the business comes from properties that are about to be sold and need to be inspected, but the team also addresses individual cases of landslide damage, termite infestations, retaining wall issues or foundation damage. Many homes suffer from the long-term effects of age combined with lax building codes of a bygone era and life near a fault line (i.e. cracked walls of concrete, crumbling mortar that turns to dust with the touch of a finger, shifting support beams centimeters away from collapsing). Recently Tourje found himself beneath a house in Brentwood. The property was on the market, and he was checking its structural integrity before it could be sold. That’s when he saw it: a human skull, complete with a clump of long, black hair and a few chunks of mummified flesh. Murder? Shocked, he skedaddled out from under the home as fast as he could to report his findings to the agent and seller (the son of a suddenly very suspicious woman in her late 90s who owned the home). Police swarmed the estate along with a coroner, who had a doctorate in forensic anthropology. Surprising everyone, the coroner concluded that it wasn’t a fresh murder; in fact, it wasn’t even a murder from this millennium. The skull was roughly 2,000 years old, the coroner said, explaining that black hair doesn’t necessarily turn white once you die. Further conversations uncovered that the woman had gone on a family vacation to Peru in the 1970s, found the skull while hiking in the mountains, smuggled it back into the country and buried it beneath the house. Police took the skull into custody. No arrests were made, and the sale eventually went through. All in a day’s work for Kyle Touje.

Vin Scully Was Just Vinny to His Hidden Hills Neighbors. Before his death at age 94, legendary Dodger broadcaster Vince Scully spent his final years living in Hidden Hills, a guard-gated community in the western edge of the San Fernando Valley. Free from sidewalks and equestrian-oriented, Hidden Hills remains a ritzy but bucolic slice of Kentucky on the outskirts of Los Angeles County. Scully reportedly loved his Hidden Hills neighborhood despite its geographic challenges. In fact, until his retirement at the end of 2016, he would happily drive a 60-mile roundtrip commute from his home to the announcer’s booth at Dodger Stadium. That is true love. While the New York native and his late wife Sandi didn’t get out as much in recent years, the couple were often spotted walking along Ashley Ridge, the neighborhood pocket of Hidden Hills where they lived since 2009. Though his net worth was well into the tens of millions, Scully would sometimes hand out candy to the trick-or-treating children of neighbors, who knew him as Vinny. Of course, Scully’s Hidden Hills home wasn’t exactly modest — the two-acre spread is a bonafide estate, with seven bedrooms and nine bathrooms in an 11,000-square-foot, chateau-inspired mansion. There’s also a detached guesthouse, plus a large swimming pool and outdoor spa. Multiple fountains, grassy lawns, a putting green and full-size tennis court are also on the premises, and the vast motorcourt has room for well over a dozen cars. But alas, no baseball field. The compound was sold to Scully in March 2009 for $12.4 million in cash, well over the market value at the time. Today, Redfin estimates the estate is worth $19 million. Scully was named the Ford C. Frick Award winner by the National Baseball Hall of Fame in 1982. In 2016, he was awarded the Presidential Medal of Freedom by President Obama.

3^rd Annual Los Angeles Real Estate Grand Expo. Our 3^rd Annual Grand Expo returns on Saturday, October 22, 2022, 9:00 am to 6:00 pm. This year we’ve taken over the entire Iman Cultural Center – it’s all ours for the day! The north hall, the south hall, and the parking lot in the middle (with tents and food trucks). One entire day celebrating real estate investing. The theme of this year’s Grand Expo is “How to Invest in a Pre-Recessionary Market.” There will be 12 national speakers in breakout sessions, and over 70+ vendors in the North Exhibition Hall. Keynote speaker will be Rick Sharga, the number #1 authority on real estate economics. The Grand Expo is a joint presentation of the Los Angeles County Real Estate Investors Association, Sam’s Real Estate Club, Ventura County Real Estate Investors Association, and Realty 411. Best of all, the Grand Expo is FREE to attend. Street parking is free and metered, and valet parking will also be available. But please RSVP at www.LAGrandExpo.com.

Basic Training Boot Camp. Saturday, October 29, 2022, 9:00 am to 6:00 pm, will be our semi-annual Real Estate Basic Training Boot Camp. Everything you ever wanted to know about real estate investing but were afraid to ask. Location: Iman Cultural Center, South Hall, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034 (it’s really Culver City, but don’t tell anyone). The cost of the Boot Camp is $149.00 per person, if paid before October 21. Thereafter, the price jumps to $1 million per person. So don’t wait to register. Gold Members (and former Boot Campers) can attend for FREE. You can register at LARealEstateInvestors.com.

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 since the Ice Age! 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 anytime thereafter on YouTube, Facebook, and Google. Because of the Jewish high holidays, Bill's podcast will not return until Tuesday, October 11th.

This Week. Going forward, investors will be hoping for more specific guidance on the pace of future rate hikes and bond portfolio reduction. Tomorrow will be a busy day for economic news. Census Bureau will release their New Home Sales tomorrow (9/27). Also, the Conference Board will release their Consumer Confidence Index tomorrow (9/27). Finally, S&P Corelogic’s Case-Shiller National Home Price Index for July will also be released tomorrow (9/27). At the end of the week, the Core PCE Price Index, published by the Bureau of Economic Analysis (the inflation indicator favored by the Fed) will come out on Friday (9/30).

Weekly Changes:

10-year Treasuries:            Rose  025 bps

Dow Jones average:          Fell  1200 points

NASDAQ:                           Fell    600 points

Calendar:

Tuesday (9/27):                   New Home Sales

Tuesday (9/27):                   Confidence Index

Friday (9/30):                       Core PCE    

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