Monday Morning Quarterback

(Monday, November 7, 2022)

The next time one of your tenants complain about the rent, remind them they should be thankful they’re not in New York. Look at Manhattan, where the average monthly rent reached $5,000 for the first time ever. Ever! It’s not great news for tenants, but what fun to live through history. According to Jonathan Miller of the appraisal consulting firm Miller Samuel, the jump is in part a product of would-be buyers turning back to the humble lease. “The spike in mortgage rates has immediately tipped potential buyers on the margin back into the rental market,” Miller told the Real Deal. “And the rental market was already tight before rates began to jump.” It’s a trend Miller expects to carry into 2023 at which point things may plateau at whatever level of unaffordable they’ve reached by then. “Barring a recession, I’m not so sure what relief there is for renters, at least for the next year,” he said. History again! It is certainly an exciting time to be a landlord. In other real estate news, let’s get down into the weeds…

Rent Growth Is Slowing. The pace of growth in American rents slowed in October to its lowest rate in 16 months. But the hugely elevated post-pandemic cost of renting a home is not likely to subside anytime soon. Compared to Manhattan (see above), the average monthly rental cost for homes of between zero and two bedrooms in the U.S. was $1,760, according to data from Realtor.com. That is 7.8% higher than a year earlier, the slowest rate of growth since early 2021. A recent sharp rise in inflation and mortgage rates has made homeownership less viable. Coupled with limited new supply, it means that even as rents become less affordable for the average American, they are unlikely to drop significantly anytime soon. The stable income provided by apartments at the more affordable end of the spectrum is attracting investors to the sector from across the globe. But despite voracious appetite for affordable rental property in the U.S. from both investors and renters, meeting that demand is becoming increasingly difficult. Reversing the trend seen at the height of the coronavirus pandemic, the biggest year-on-year rental increases came in large urban centers in September, led by Chicago, Boston, New York and San Jose. Rises in Chicago topped 20%. But the spike in suburban rents that occurred during the worst of the pandemic, when city dwellers gravitated to less dense areas, has limited options for urbanites looking to make the time-honored move out of the city to save money. The average gap between city and suburban rents is now less than 6%, compared to a historic average of above 20%. That has made owning a home more expensive than renting. The elevated level of rents is eating up disposable income, which gives people less money to spend in the wider economy. The average renter now spends 26.5% of their net monthly income on rent, Realtor.com says. In a survey, it found 60% of renters felt financially stressed due to the amount they spent on rent and other home costs like fuel bills. But here’s some good news.  High rents are propelling investors and developers to buy up older Class-B and C properties, refurbishing them and charging Class-A rents, taking them out of the affordable bracket.

Home Builders Sentiment Index Falls For Record Tenth Month. The National Association of Home Builders’ (NAHB) “Monthly Confidence Index” fell 8 points to 38 in October. It’s the tenth month in a row that the Index has fallen. Outside of the pandemic, the October reading of 38 is the lowest level since August 2012. (A year ago, the index stood at 80.) The index’s ten-month drop is a new record. The index last fell for 8 months straight in 2006 and 2007. All three gauges that underpin the overall Builder-Confidence Index fell:

1.   The gauge that marks “current sales conditions” fell by 9 points. 

2.   The gauge “sales expectations” for the next six months fell by 11 points.

3.   The gauge that measures “traffic of prospective buyers” fell by 6 points.

It’s also likely that this year will be the first time since 2011 that single-family starts see a decline, the NAHB added. Why? Because builders continue to struggle to find buyers with the current rate environment. Now builders are saying they’re worried about depressed demand impacting supply moving forward. Specifically, they’re concerned about housing affordability worsening, with potentially fewer new homes being built in the future. Mortgage rates have doubled from last year (now exceeding 7%), which has considerably cooled buyer demand. Home price growth is moderating, but prices have not come down substantially — yet. Builders are expecting single-family starts to fall for the first time in 11 years, and expect additional declines through 2023, said NAHB Chief Economist Robert Dietz, due to the Federal Reserve’s projected rate hikes to control inflation. “So expect building activity to be depressed,” he added.

Foreclosure Activity Nearing Pre-Pandemic Levels. ATTOM data services released its Q3 2022 U.S. “Foreclosure Market Report,” which shows there were a total of 92,634 U.S. properties with foreclosure filings (i.e. default notices, scheduled auctions or bank repossessions) up 104 percent from a year ago. The report also shows there were a total of 31,836 U.S. properties with foreclosure filings in September 2022 up 62 percent from September 2021. Lenders started the foreclosure process on 67,249 U.S. properties in Q3 2022, up 167 percent from a year ago (nearly reaching pre-pandemic levels). “Foreclosure starts, while rising since the end of the government’s foreclosure moratorium, still lag behind pre-pandemic levels,” said Rick Sharga, executive vice president at ATTOM (and Keynote Speaker at our Grand Expo). “Foreclosure activity is reflecting other aspects of the economy, as unemployment rates continue to be historically low, and mortgage delinquency rates are lower than they were before the COVID-19 outbreak.” States that posted the greatest number of foreclosure starts in Q3 2022, included the usual culprits California (7,368 foreclosure starts); Florida (6,671 foreclosure starts); Texas (6,217 foreclosure starts); Illinois (4,702 foreclosure starts); and New York (3,997 foreclosure starts). Among the 223 metropolitan statistical areas analyzed in the report those that posted the greatest number of foreclosure starts in Q3 2022, included New York (4,621 foreclosure starts); Chicago (3,950 foreclosure starts); Los Angeles (2,275 foreclosure starts); Philadelphia (1,991 foreclosure starts); and Miami (1,990 foreclosure starts).

Opendoor Keeps Losing Money. No matter how many houses Opendoor sells, they keep losing money. I mention this because Opendoor again announced major revenue growth in the third quarter as the iBuyer hit the gas on cash purchases and subsequent resale of homes. Company revenue soared 91% from the second quarter to $2.3 billion, and Opendoor sold 5,988 homes, a 72% leap from the prior quarter. However, the San Francisco-headquartered outfit could not leverage a historically fantastic housing market to turn a profit, posting a $57 million net income loss (which is music to my ears). In fact, Opendoor has lost money every quarter since becoming a publicly traded company in late 2020. The business’s losses total $421 million in the first nine months of 2021. That compares to a $199 million in the first nine months of 2020, a period when operations were partially paused amid the coronavirus pandemic. There was, ahem, a bit of a backdrop to Opendoor’s earnings call. The company’s main rival Zillow shockingly announced a wind-down of its iBuying arm one week earlier, deeming its home price forecaster “too volatile.” In the flurry of examinations and post-mortems on Zillow, Opendoor has, by comparison, come off as a fiscally responsible company. For example, an analysis from Mike DelPrete indicated that while Zillow wildly overpaid for homes in Phoenix and Atlanta, Opendoor forked over market value. The earning’s report, meanwhile, revealed that Opendoor ramped up its purchases almost as quickly as Zillow. The company bought 15,181 homes in quarter three. That’s a 79% hike from the second quarter. Opendoor now has 17,164 homes on its books. The iBuyer lists these homes on its balance sheet as a $6.4 billion asset. On the company’s earnings call, Opendoor CEO Eric Wu conveniently said nothing at all about the company’s net loss and gave limited remarks about the downfall of Opendoor’s chief rival.

Existing Home Sales Declined in October. Existing home sales fell for the eighth month in a row in October, posting the longest streak of declines since 2007. Falling affordability has played a major role in the recent string of weak reports. The prime culprit is the surge in mortgage rates, which are now above 7% for the first time since 2000. While financing costs remain a burden, the good news is that median prices fell for the third month in a row. Part of this is just seasonality (prices typically begin to fall following the summer buying season). But even with recent declines, median prices are up 8.4% in the past year. That is a notable slowing from the 25.2% peak in the twelve-months ending May 2021, but still above the 4.8% average seen since 2000. When you do the math it’s not hard to see why home sales have slowed down so rapidly. Assuming a 20% down payment, the rise in mortgage rates and home prices since December amounts to a 67% increase in monthly payments on a new 30-year mortgage for the median existing home. The report also showed that the inventory of existing homes on the market remains tight. Available listings fell slightly in September and were virtually flat from a year ago. While this is still a notable improvement following thirty-six straight months of declines that ended in June, don’t expect a flood of new listings to materialize anytime soon. Many homeowners locked in mortgage rates at rock bottom levels during the pandemic are unlikely to brave a 400-basis point increase in financing costs by reentering the market to trade up. Despite the lack of options, demand remains strong, with buyer urgency so high in October that 70% of existing homes sold in less than a month. While sales are clearly under pressure, this is not a repeat of 2007-09. I do not foresee a widespread collapse in home sales even with higher mortgage rates, though it is likely that existing home sales are lower in 2022 than 2021, and prices head south. 

Chicago Tops Rattiest Cities List For Eighth Consecutive Year. Chicago may soon need to change its name from “The Windy City” to the “Rattiest City,” after topping Orkin’s Top 50 Rattiest Cities List, yet again. Orkin released the list today, and for the eighth consecutive year, the Midwest city takes the top spot. New York beat out Los Angeles for the #2 ranking and entering the top 20 this year is Hartford, CT, taking the#19 spot, and Miami, rising three spots to secure the #20 spot. Orkin ranked metro regions by the number of new rodent treatments performed from September 1, 2021, to August 31, 2022. This ranking includes both residential and commercial treatments. Each fall, mice and other rodents invade an estimated 21 million homes in the United States. They typically enter homes between October and February looking for food, water and shelter from the cold. And unique to previous years, with the influx of outdoor dining structures brought on by the pandemic, rodents have found the perfect place to dine, live and multiply, so consumers should pay extra attention to the attractants that entice rats and mice. “Rodent infestations are among the top pest issues of the fall and winter seasons,” said Ben Hottel, an Orkin entomologist. “Not only are mice and rats a nuisance, but they are known to spread a variety of dangerous diseases, including Salmonella and Hantavirus.” Beyond health issues, rodents can cause severe structural damage with their strong jaws and burrowing skills. They have oversized front teeth for gnawing, and teeth which are adapted for chewing a variety of items including electrical wires, water pipes and gas lines. Orkin’s top 10 rattiest cities include:

1. Chicago
2. New York (+1)
3. Los Angeles (-1)
4. Washington, D.C.
5. San Francisco
6. Philadelphia (+1)
7. Baltimore (-1)
8. Cleveland, Oh. (+2)
9. Detroit (-1)
10. Denver

We’re Getting Closer & Closer to a Martian Housing Market. The New York Times reports that researchers have been remotely scouting Mars in an effort to identify subterranean caves that would make for a suitable shelter should someone (not me) someday wish to live in them. Geoscientists at the University of Arizona considered two main criteria in their search, and they’re honestly not that different from what you might look for in an apartment: (1) transit accessibility (near a landing site), and (2) good listing photos (high-resolution imagery taken from the HiRISE camera aboard the Mars Reconnaissance Orbiter). So far they’ve found nine caves that seem promising. Why caves? Because as University of Arizona’s Nicole Bardabelias explained, they could offer humans (not me - again) shelter from Mars’s surface, which is “subject to harsh radiation, possible meteorite or micro-meteorite bombardment and really large day-to-night temperature swings.” So if you’ve gotten tired of mindlessly browsing Zillow and Redfin, you can check out HiRISE’s catalogue and help researchers decide what places on Mars to photograph next. This would include your (not my) favorite possible future dwellings. While you’re at it, tantalizing options include: Large New Crater on Mars and Terrain West of Reuyl Crater.)

Bird’s 8,435-Mile Flight Sets World Record. A young bar-tailed godwit appears to have set a nonstop distance record for migratory birds by flying 8,435 miles from Alaska to the Australian state of Tasmania. How do we know this? Glad you asked. Because the bird was tagged as a hatchling in Alaska during the Northern Hemisphere summer with a GPS chip and tiny solar panel that enabled an international research team to follow its first migration across the Pacific Ocean, according to BirdLife Tasmania convenor Eric Woehler. Because the bird was so young, its gender wasn’t known. Aged about 5 months, it left southwest Alaska at the Yukon-Kuskokwim Delta on Oct. 13 and touched down 11 days later at Ansons Bay on the island of Tasmania’s northeastern tip, according to data from Germany’s Max Planck Institute for Ornithology. The research has yet to be published or peer reviewed. The bird started on a southwestern course toward Japan then turned southeast over Alaska’s Aleutian Islands, a map published by New Zealand’s Pūkorokoro Miranda Shorebird Center shows. The bird was again tracking southwest when it flew over or near Kiribati and New Caledonia, then past the Australian mainland before turning directly west for Tasmania, Australia’s most southerly state. The satellite trail showed that it covered 8,435 miles without stopping. Prior to this, Guinness World Records lists the longest recorded migration by a bird without stopping for food or rest as 7,580 miles by a satellite-tagged male bar-tailed godwit flying from Alaska to New Zealand. Woehler said researchers did not know whether the latest bird, known by its satellite tag 234684, flew alone or as part of a flock. Adult birds depart Alaska earlier than juveniles, so the tagged bird was unlikely to have followed more experienced travelers south, Woehler said. Woehler hopes to see the bird once wet weather clears in the remote corner of Tasmania, where it will fatten up after having lost half its body weight on its journey.

“How to Acquire and Develop Raw Land.” Special guest speaker at our November meeting will be the number #1 authority on developing raw land, Steve Matley. As investors, we often discuss the buildings on the land. But the land always comes first. And clever investors have learned that big profits can be derived by finding and developing raw land. The expert in this field is master land developer Steve Matley, and he will be the featured speaker at our November meeting. The title of Steve’s presentation is “How to Acquire and Develop Raw Land.” Thursday night, November 10, 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 world-famous "Vendors Expo" returns on Thursday night, November 10, 2022. 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.

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. 

This Week. Investors will be hoping for more specific Fed guidance on the pace of future rate hikes and bond portfolio reduction. The biggest economic report will be the CPI inflation data on Thursday (11/10). The Consumer Price Index (CPI) is a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services. Beyond that, any major surprises in the election results on Tuesday (11/8) could influence mortgage rates and real estate markets. Consumer sentiment will be released on Friday (11/11).

Weekly Changes:

10-year Treasuries:            Rose  010 bps

Dow Jones average:          Fell    500 points

NASDAQ:                           Fell    600 points

Calendar:

Tuesday (11/8):                   Election Day

Thursday (11/10):                Consumer Price Index

Friday (11/11):                     Consumer Sentiment                                

For further information, comments, and questions:

Lloyd Segal
President
Los Angeles County Real Estate Investors Association, LLC
www.LARealEstateInvestors.com

310-409-8310