Monday Morning Quarterback

(Monday, May 22, 2023)

The national media is abuzz about the debt ceiling deadline and the risks of another government shutdown. It would cause a catastrophic default on U.S. debt if an agreement cannot be reached. The ceiling (currently sitting at $31.4 trillion) is set to be hit on June 1. Leaders from Congress and the White House are trying to forge a 11^th hour agreement to lift the federal debt ceiling, with only two weeks before the Treasury Department will no longer be able to avert an unprecedented U.S. default. If they fail, and the government can’t meet its payment obligations, economists and financial experts predict chaos. Well, that sounds horrible. So, is this something real estate investors should be concerned about, and if so, how should we prepare? The debt ceiling is supposed to set a cap on the total amount of money the United States federal government is authorized to borrow. Over recent years, this “ceiling” has, for the most part, been something of a joke. As the website for the U.S. Treasury Department admits, “Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit.” As a result, we always paid our bills on time. Always! But this time its different (and political). As BiggerPockets points out, there are a variety of difficult unresolved issues, including clawing back unspent Covid-19 money (about $30 billion), future budget caps, regulations on energy development, and whether to increase work requirements for those receiving food stamps, Medicaid and/or TANF (Temporary Assistance for Needy Families). With so much on the table, it could be difficult to work out a deal in time. Thus, the deadline might get missed, which is what all the fuss is about. If the deadline is missed, the Treasury would keep making payments until it runs out of money. If it did run out without some sort of resolution, then the U.S. federal government would default on its debt for the first time in its history! A default would indeed be catastrophic. If a default were to happen, it would cause an array of very serious problems for real estate investors. There would be a run on U.S. banks, and credit would dry up. So, getting a bank loan would be close to impossible. Yahoo News predicts mortgage payments would go up a whopping 22%! Lines of credit would probably be called, so investors would lose access to those. Thereby, real estate prices would likely plunge. Our economy would plunge into a recession, and many tenants would lose their jobs, causing delinquencies to spike. Contractors and vendors would go out of business, making it difficult to find people to do work even if you had the money to pay.  In short, it would be bad, very bad, for real estate investors. But the odds of an outright default are extremely negligible. I don’t have a lot of faith in politicians, yet the sheer insanity of failing to pay our debts (when the money is available to do so) would be incomprehensible. Default is not an option…

Construction Of New Homes Rose 2.2% In April. Housing starts rose in April as homebuilders continue to see strong demand from home buyers. Builders in the Midwest and West were particularly active this spring. Housing starts rose to a 1.4 million annualized pace last month from 1.37 million in March, the government said Wednesday (meaning that’s how many houses would be built over an entire year if construction took place at the same rate in every month as it did in April). Both single and multi-family construction rose in April. The strength in new construction comes from strong demand from would-be home buyers who don’t have many options in the resale market. The construction pace of single-family homes rose 1.6% in April while apartment building rose 5.2%. Overall, housing starts are down year-over-year. The annual rate of total housing starts fell from 22.3% from the previous year. New listings of previously-owned homes are low, and buyers are seeing increasing competition, which is pricing some out. Between 2000 and 2019, new homes only comprised about 13% of listings, the National Association of Home Builders said. In March, 33% of homes listed for sale were new – and they were in various stages of construction. Meanwhile, building permits, a key indicator of the pace of future construction, fell 1.5% to a 1.42 million rate. The decline was larger than expected. Permits for single-family homes rose 3.1% in April while permits in buildings with at least five units fell by 9.7%.

Housing Market Recovery is Stumbling Along. Sales of previously-owned homes in the U.S. fell 3.4% in April for the second month in a row, as buyers continue to deal with low inventory of listings and see-sawing mortgage rates. Sales of existing homes in the U.S. fell to an annualized rate of 4.28 million in April, the National Association of Realtors reports. (That’s the number of homes that would be sold over an entire year if sales took place at the same rate in every month as it did in April.) The numbers are seasonally adjusted. Compared with April 2022, home sales were down a shocking 23.2%. The median price for an existing home fell by 1.7% from last April to $388,800 this year. The drop is the largest since January 2012, when home prices fell 2%. Home prices peaked in May 2021, where they grew 25.2% annually. The number of homes on the market rose by 7.2% in April to 1.04 million units. But the number of fresh listings is still down from a year ago, the NAR says. Homes listed for sale remained on the market for 22 days on average, down from 29 days in March. All-cash buyers made up 28% of sales. The share of individual investors or second-home buyers was 17%. About 29% of homes were sold to first-time home buyers. Despite home sales dipping in April, most of the housing data is indicating that the U.S. housing market is in broad recovery. But a combination of issues are making it a slow recovery, from a lack of new listings to see-sawing mortgage rates. 

Foreclosure Activity Nationwide Shows Slight Decline In April. ATTOM Real Estate Data Services released its April 2023 “Foreclosure Market Report,” which shows there were a total of 32,977 U.S. properties with foreclosure filings (i.e. default notices, scheduled auctions or bank repossessions) up 8 percent from a year ago. Nationwide one in every 4,234 housing units had a foreclosure filing in April 2023. States with the highest foreclosure rates were Illinois (one in every 2,221 housing units with a foreclosure filing); Maryland (one in every 2,283 housing units); New Jersey (one in every 2,334 housing units); South Carolina (one in every 2,495 housing units); and Delaware (one in every 2,603 housing units). Among the 223 metropolitan statistical areas with a population of at least 200,000, those with the highest foreclosure rates in April 2023 were Atlantic City, NJ (one in every 1,356 housing units with a foreclosure filing); Cleveland, OH (one in every 1,580 housing units); Lakeland, FL (one in every 1,649 housing units); Columbia, SC (one in every 1,651 housing units); and Chicago, IL (one in every 1,950 housing units). Those major metropolitan areas with a population greater than 1 million that had the greatest number of foreclosure starts in April 2023 included: New York, NY (1,711 foreclosure starts); Chicago, IL (1,153 foreclosure starts); Miami, FL (846 foreclosure starts); Los Angeles, CA (829 foreclosure starts); and Philadelphia, PA (747 foreclosure starts). Lenders repossessed 2,919 U.S. properties through completed foreclosures (REOs) in April 2023, up 3 percent from last year. Those states that had the greatest number of REOs in April 2023 included: Illinois (334 REOs); Pennsylvania (218 REOs); New York (199 REOs); Texas (184 REOs); and California (171 REOs).

Homeownership Rates Plummeting For Younger Californians. Young Californians won’t be surprised to hear that homeownership rates are declining in their age group. A new study finds that on average, it takes longer to become a homeowner in California than in any other state. The point when half of Californians at any given age become homeowners is 49, according to the study by UC Berkeley’s Terner Center for Housing Innovation. That exceeds other expensive states like New York (46), and it’s much higher than many of the states Californians have been flocking to, such as Texas (37) and Arizona (35). The study finds that in 1980, almost two-thirds of Californians aged 35 to 45 owned a home, but only 40% of residents in that age group owned a home in 2021. The same trend is happening among younger age groups. About 40% of Californians aged 25 to 35 owned a home in 1980, but only 16% in that age group own homes today. Terner researcher and study co-author Issi Romem said after careful analysis of home-buying affordability trends, he and his colleagues concluded that declining homeownership in California is driven more by skyrocketing home prices than decisions to delay marriage or childbearing. In other words, yes, younger generations are less likely to get married, and they’re having fewer kids. But those trends don’t explain California’s shift toward long-term renting. If California home prices had risen in line with prices nationally since 2000, there would be around 735,000 more Californians who could afford to buy a home today, the researchers estimate. What should be done to address the problem? The first step is to build new housing across the state. The report said home-buying assistance programs won’t solve California’s supply and demand imbalances, but they could help to correct home-owning disparities between white residents and Californians of Black, Indigenous, Latino and Asian descent.

Surging Demand for Entertainment Production Space Expected After Writers' Strike. No doubt this writer’s strike is very painful to writers, and everyone else involved in the entertainment business. And, of course, the strike inevitably effects the Los Angeles’ economy in general. But this strike, like all strikes thorughout history, will eventually settle. And when it does, real estate professionals and analysts say owners of soundstages and other entertainment-related space will see a deluge of demand. The anticipated extra need for this unique type of real estate (critical for making films and TV shows) results not only from the strike but from the number of shooting days cancelled in the months before the walkout. North America and the United Kingdom has roughly 23 million square feet of soundstage space, according to FilmLA, a not-for-profit firm based in Los Angeles that tracks this data. The entertainment industry will need to catch up after the strike, says John Raulet, vice president of Atlanta-based real estate broker Raulet Property Partners. Raulet expects production after the strike will return to pre-pandemic levels, a positive for both the entertainment industry and the Los Angeles economy. He says that no developer has so far pulled out of work on the more than a dozen speculative soundstage projects that are proposed around Los Angeles. When it comes to demand for production space after the strike, "it'll be a boomerang effect," Raulet says. Soundstage space and studio owners, though, have been feeling the pain as production slowed in the U.S. and Canada leading up to and including the strike. Executives at Los Angeles-based Hudson Pacific Properties a major office and soundstage space owner, said this month that the strike has already been affecting the company's operating results. The company's share price fell roughly 17% over the past five trading days.

Drake Wants $88 Million for Beverly Crest $75 million Mega-Mansion. Are you kidding me? Drake spent longer looking for an L.A. home than living in it. A year after dropping $75 million on a mega-mansion in Beverly Crest, the rapper has put it back on the market with an even bigger price tag: $88 million. It’s a surprising move for the hip-hop star, who spent over a year scouring the Southern California market in search of the perfect estate. He eventually settled on the home of singer-songwriter Robbie Williams, and the $75 million he spent was more than double the $32.67 million that Williams paid for it in 2015. If Drake gets his price, it’ll be Southern California’s most expensive home sale so far this year and a shot in the arm for L.A.’s lagging luxury real estate market, which has slowed significantly since Measure ULA went into effect in April, bringing a hefty transfer tax to L.A. property sales above $5 million. Because the compound is found in Beverly Crest (an affluent enclave above Beverly Hills, but technically in the city of L.A.) it’ll be subject to the transfer tax when it sells. Specifically, at $88 million, the sale would raise $4.84 million for affordable housing and homelessness prevention efforts. The impressive estate is the priciest property up for grabs in the 90210 ZIP Code due to its rare combination of size and scale. The house itself spans more than 24,000 square feet, and the property covers roughly 20 acres (more than double the acreage of any other house on the market in the area). Built in 2001, the Tuscan-style showplace includes 10 bedrooms, 22 bathrooms and a host of amenities including a wine cellar, gym, library, game room, movie theater and 11-car garage. Sweeping staircases and an elevator navigate the three-story floor plan. But $13 million profit on a one-year flip?

Mall Owners Embracing Pickleball To Lure Shoppers. If developers build courts, America’s 8.9 million pickleball players will come to play. Then they’ll stay for dinner. That’s the calculation being made by mall owners as anchor tenants like Bed Bath & Beyond and Regal Cinemas' parent company declare bankruptcy and landlords look for new tenants to draw shoppers. Pickleball’s explosive popularity (the number of people playing grew by 159% in 2022 according to the trade group Sports & Fitness Industry Association) has created new demand as tennis courts around the country overflow with pickleball players. That demand has created an opportunity for mall owners to fill vacant anchor spaces with indoor courts as they pivot toward social experiences like virtual golf, breweries and indoor skydiving. Several pickleball facilities have already signed leases or opened across the country in malls, according to a recent report by JLL. Landlords hope that pickleball facilities will draw players to the mall and then those players will grab food or go shopping. If they’re right, court operators could become valuable tenants for mall owners that have lost anchor tenants like Macy’s, Sears, or Burlington. Vacancies offered a chance to ”step back from some older tenants over time and bring in a new wave of tenants who are more relevant to consumers.” Laura Gainor, a writer for USA Pickleball (the national governing body of the sport), said that malls provided an ideal space for pickleball’s expansion. “It is a pickleball player’s dream, because it’s a big indoor space and you can play the sport year-round,” Gainor told CNN. “You can fit six or even 12 courts in an empty department store space.”

Japan’s Crying Baby Sumo Festival Returns. Dozens of bawling Japanese babies faced off in a traditional “crying sumo” ritual this past weekend. The festival returned for the first time in four years after the pandemic. Pairs of toddlers wearing ceremonial sumo aprons were held up by their parents and faced each other in the sumo ring at Sensoji Temple in Tokyo on Saturday. What is “Crying Baby Sumo” you ask? The children face each other in a sumo ring, with the first to cry declared the winner. (Crying is believed in Japanese folklore to bring the infants good health.) But how do they make the babies cry? Glad you asked. Staff wearing scary demon masks (called “oni”) tried to make the babies cry, with the first to bawl declared the winner by a sumo referee (in an elaborate traditional uniform) holding a wooden fan used to signal victory. “We can tell a baby’s health condition by listening to the way they cry. Today she may get nervous and not cry so much, but I want to hear her healthy crying,” Hisae Watanabe, mother of an eight-month-old, told AFP. The “crying sumo” is held at shrines and temples nationwide, to the delight of parents and onlookers. Shigemi Fuji, chairman of Asakusa Tourism Federation which organized the event, said some people (like me) might think it’s terrible they make babies cry. “But in Japan, we believe babies who cry powerfully also grow up healthily. This kind of event takes place in many places in Japan,” Fuji said. A total of 64 babies participated in the ritual, according to the organizer. The rules vary from region to region – in some places parents want their offspring to be the first to cry out loud, in others the first to weep is the loser. Nevertheless, I think I’d rather still see adult sumo wrestlers.

“An Evening with Brad Sumrok.” When it comes to multi-residential properties, there is no one more experienced and popular than Brad Sumrok. Visiting us from Dallas, Texas, Brad is the number #1 authority on finding, evaluating, buying, financing, and managing apartment buildings. Every year his presentation is the most attended of all our meetings. Brad will be our special guest at LAC-REIA’s June 8, 2023 meeting, at the Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034 (Culver City adjacent). FREE Admission. RSVP at www.LARealEstateInvestors.com.

Vendors Expo Returns! Our carbon-neutral, bio-degradable, gluten-free, super-duper "Vendors Expo" returns on Thursday night, June 8, 2023. 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. Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, CA 90034 (Culver City adjacent). FREE Admission. Please RSVP at www.LARealEstateInvestors.com. 

Basic Training Boot Camp. Saturday, June 24, 2023, 9:00 am to 6:00 pm, will be our semi-annual Basic Training Boot Camp. Everything you ever wanted to know about real estate investing but were afraid to ask. Iman Cultural Center, South Hall, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034.The cost of the Boot Camp is $149.00 per person, if paid before June 17. After June 17, the price jumps to $1 million per person. So don’t wait to register. (Gold Members and former Boot Campers can attend for FREE, but still need to register.) You can register at LARealEstateInvestors.com.

LARealEstateInvestors.com Podcast. We are very excited about our weekly podcast, "LARealEstateInvestors.com" (cleverly 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. Each week Bill interviews real estate professionals sharing their insights and advice for real estate investors. Every Tuesday live at 3:00 pm, and anytime thereafter on YouTube, Facebook, Zoom, and Google.

This Week. Investors will continue to keep a close eye on the debt ceiling negotiations and banking sector troubles. They will also watch to see if Fed officials elaborate on their plans for future monetary policy. For economic reports, New Home Sales will come out tomorrow (5/23). Personal Income and the core PCE price index, the inflation indicator favored by the Fed, will be released on Friday (5/26).

Weekly Changes:

10-year Treasuries:            Rose  020 bps

Dow Jones Average:          Rose  300 points

NASDAQ:                           Rose  400 points

Calendar:

Tuesday (5/23):                    New Home Sales

Friday (5/26):                        Core PCE

Friday (5/26):                        Income

For further information, comments, and questions,

Lloyd Segal

President

Los Angeles County Real Estate Investors Association, LLC

www.LARealEstateInvestors.com

310-409-8310