Monday Morning Quarterback

(Monday, November 27, 2023)

Investors here is an early Christmas present from Fannie Mae. They have just rolled out a 5% down payment program. Fannie Mae lowered its down payment requirement for owner-occupied multi-family property loans. The move is hailed as a breakthrough for real estate investors (and prospective homeowners) as it makes it significantly easier to buy an investment property with less cash. The program arrives at just the right time, given the current high-interest rate climate that has hit real estate affordability hard. Borrowers will now need just 5% of the total multifamily home value as a down payment, as opposed to the 15% to 25% required prior to the policy change. The change affects loans on duplexes, triplexes, and 4-plexes. The most important requirement to be aware of is that this is a loan program based on “owner-occupancy.” This means that the borrower will have to live at the property and act as a resident landlord. The major upside of this requirement is that future rental income can be used to qualify for a mortgage loan. While future rental payments alone won’t make you qualify (you must also meet current income requirements and be paying rent where you currently live) they can count toward the total income requirement for the loan. Even better, Fannie Mae has removed the FHA self-sufficiency test requirement for 3-4-unit property loans. The FHA self-sufficiency test requires 75% of the rental income from 3-4-unit properties to be greater than the monthly mortgage repayment amount. Under the new rule, 3-4-unit properties will not need to meet this threshold. Removing this requirement will make getting pre-approved for a mortgage on a multifamily property easier. The cap on the 2-4-unit loans under the program has been set at $1,396,800, which significantly expands the pool of properties available to investors to include expensive and more luxurious properties. This is obviously significant for beginning investors in more expensive areas like Southern California, where investors previously would have been priced out of the multifamily unit market. In other real estate news, let’s dig into the details…

SoCal Apartment Rents Will Rise 2 - 4% In Coming Years. Speaking of multi-residential properties, apartment rents are expected to grow between 2% and 4% in the next two years in all five Southern California housing markets, according to the new University of Southern California Casden Real Estate Economic Forecast. In Los Angeles County alone, rents are projected to grow a moderate 2% over the next two years. It is a statistic that might not be welcome news for apartment owners. “I don't think anyone on the ownership side — direct owners, operators and developers — like to hear 2%. Currently, inflation exceeds that number, so it's tough to make money with a 2% rent growth target.” Northmarq’s third-quarter report for this year also anticipates 2% rent growth in LA County in the coming year. Los Angeles rents were relatively flat month-over-month at the end of October and down 2.8% year-over-year, according to Apartment List website. Rent growth in Los Angeles in the 12 months trailing October was below both the national average of negative 1.2% and the California average of negative 2%. Median rent for a one-bedroom unit in LA stood at $1,633 per month and $2,157 for a two-bedroom as of the end of October, according to Apartment List. But owners of the more than 600,000 rent-stabilized apartments in the city of Los Angeles, the majority of rental units in LA, can raise rents for the first time in three years after a pandemic-related pause on increases. The Los Angeles City Council voted last week to allow rent increase of 4% (or 6% if landlords pay for tenants' utilities and gas) beginning Feb. 1. Of course, a 4% increase doesn't even begin to make up for the fact that there have been no increases for 36 months and collection issues during Covid. But some owners said that, while rent growth is an important metric, it isn't the only factor in the value of a property. 

Housing Starts Rise Unexpectedly For Second Straight Month. The term “housing start” refers to the start of construction on a new home. The U.S. Department of Commerce keeps track of how many new starts builders make in a given month. In this regard, the Department reports that construction of new homes rose 1.9% in October, as builders amped up new projects. The pace of construction increased as builders saw a pressing need for more housing, with the resale market continuing to deal with severe shortages. In fact, housing starts rose to a 1.37 million annualized pace from 1.35 million in September. (That’s how many houses would be built over an entire year if construction took place at the same pace every month as it did in October.) But housing starts are down from a peak of 1.8 million in April 2022. Despite newly-built homes becoming more popular among buyers (amid an ongoing inventory shortage of existing homes), builders are sensitive to rising rates, and have ramped up price cuts and other incentives in November. The construction pace of single-family homes rose by 0.2% in October, and apartment construction rose by 4.9%. Around 1.67 million homes were under construction as of September. Looking ahead, home-builder confidence is falling because mortgage rates are approaching 8%. But it is likely to get back on track if rates eventually drop as our economy slows. If rates fall, buyer demand is likely to bounce back. And given that builders are among the few who are adding new housing stock, they will ramp up starts in the months to come, barring any major weather events. “Broadly, while the demand for homes has weakened over the past year to 18 months with the rise of mortgage rates and home prices, builders are generally looking beyond the near-term and are well aware that there is a structural shortage of housing in the U.S. and are responding” says Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. 

Existing Home Sales Declined in October. Existing home sales declined 4.1% in October to a 3.790 million annualized rate. Sales are down 14.6% versus a year ago. Sales continued to struggle, falling for a fifth consecutive month to hit the slowest pace since the aftermath of the 2008/9 Financial Crisis. The housing market is facing a series of headwinds, some of them temporary. The first (and most significant) has been the surge in benchmark interest rates like the 10-year Treasury yield since the summer. This has translated into 30-year fixed mortgage rates jumping, which are currently hovering near 8% for the first time in more than two decades. Assuming a 20% down payment, the rise in mortgage rates (since the Federal Reserve began its current tightening cycle in March 2022) amounts to a 44% increase in monthly payments on a new 30-year mortgage for the median existing home. Eventually, the housing market will adapt to these increases, but continued volatility in financing costs will cause indigestion. In addition, many existing homeowners are reluctant to sell due to a “mortgage lock-in” phenomenon, after buying or refinancing at much lower rates before 2022. That will limit future existing sales (and inventories). Case in point, the months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) was 3.6 in October, well below the benchmark of 6.0 months that the National Association of Realtors uses to denote a normal market. A tight inventory of existing homes means that while the pace of sales may resemble 2008, we aren’t seeing that translate to a big decline in prices. In fact, home prices appear to be rising again, although modestly, with the median price of an existing home up 3.4% from a year ago. Putting this together, expect sales and prices to drag on in the months ahead, with no persistent recovery in existing home sales until 2025, or sooner if mortgage rates fall.

The World’s Most Unusual Neighborhood Design. As you wind your way through The Netherlands’ extensive network of canals, you’ll spot an odd collection of concrete orbs in the neighborhood of s-Hertogenbosch (colloquially known as “Den Bosch”). Though the buildings may look like giant golf balls when viewed from the air, these Bolwoningen (“bulb houses”) are functional, albeit cramped, homes. Far from some self-made sculptural oddity, the fifty Bolwoningen along a canal just south of the Meuse River actually represent a past vision for the future of affordable housing. The brainchild of Dries Kreijkamp, the Bolwoningen draw on his experience in both industrial design and sculpture, in concert with his fascination of spheres. But it wasn’t the novelty structure that convinced the Dutch government to support the project as part of its foray into experimental housing solutions in the 1980s. Rather, the simple, sustainable nature of the lightweight, prefabricated homes meant they could be erected in as little as one day! By 1984, a mini-neighborhood of Kreijkamp’s Bolwoningen had sprung up, standing out in stark contrast from the more traditional residences just across the street. A cylindrical base serves as a combination entryway, storage, and utility area, leading upward to the sphere, which measures roughly 18 feet in diameter. The living quarters, which can accommodate up to two people, are subdivided into three small sections. A living and kitchen area sits at the top, with a separate bathroom and bedroom below. Pivoting circular windows across the sphere provide ample natural light and airflow to counteract the stuffiness of the close quarters. Though certainly eye-catching from the exterior, the reality of life inside one of these spheres made from cement and reinforced fiberglass explains why the Bolwoningen have remained a curiosity rather than the new standard in prefabricated living.

The Future of Gas Stations. By now, you’ve certainly driven by the futuristic gas station on the southeast corner of Olympic and Robertson, and exclaimed “what the heck is that?” Called “Helios House,” this gas station is made from recycled stainless steel. Owners Ogilvy & Mather and Brian Collins hired Office dA, asking the team to reimagine gas stations. It is designed as a ”green” station with special features and is considered to be the "station of the future." It is the first gas station in the world ever to be submitted for prestigious LEED Certification. The gas station was designed by Office dA’s principal architects Monica Ponce de Leon and Nader Tehrani in Boston and Johnston Marklee Architects in Los Angeles. And they have indeed re-imagined the gas station. The station's roof is designed of triangles made from recycled stainless steel and contains cacti and 90 solar panels. This reduces energy consumption of the station by 16%. Grass is planted on roof to reduce the need for mechanical heating or cooling. Catch basin prevents runoff into ocean. Canopy collects rainwater used for on-site irrigation and to meet station's water needs. Even the signage made from recycled material. The station's roof is drought tolerant and collects water for irrigation. The station replaced a run-down Thrifty gas station that previously occupied the site. Built in 2007, it is seen as a Los Angeles landmark. It started out selling BP branded gasoline (at the time, the only BP branded station in the West Coast). As of 2021, it is a Speedway Express, a gas station-only brand of the Speedway chain. 

Housing Market’s Fundamentals Have Changed. The market fundamentals that have kept property values stable through 2023 are changing. Since the beginning of 2022, as interest rates have risen, supply and demand have dropped somewhat proportionately. From a cycle-high in 2022, demand has dropped about 40%. But supply has actually dropped further—about 45%. When this happens, prices remain relatively stable while volume drops. This is exactly what we’re seeing—prices are up about 3% year over year, while volume is down 16%. In just the last few weeks, supply and demand are moving in opposite directions. One of the best leading indicators for housing supply is new listings (how many new properties are listed for sale each month). In this respect, two critical things are happening. First, new listings, which have been well below 2022 levels all year, just exceeded 2022 levels for the first time. Second, new listings typically decline seasonally toward the end of the year. But this year, that’s not happening—or at least not yet. Of course, this is a very recent trend, but this could lead to increases in inventory, days on market, and total supply, which would be very good news. Active listings (how many properties are for sale in a given week) are following a very similar pattern. Active listings have been climbing for months now and not showing any sign of seasonal declines. Of course, increasing supply doesn’t necessarily mean there will be downward pressure on pricing if demand follows the same trend. The problem is that demand is going in the other direction. According to the Mortgage Bankers Association, demand continues to deteriorate and is now at the lowest point since the mid-1980s. The potential for a modest price correction in the coming months does pose a risk for investors. But it also creates opportunity! Remember that rising inventory and days on market shift the balance of power in the market. When there are more sellers than buyers, the buyers who remain have leverage and negotiating power—this is often how great deals are made. 

What Can You Build On L.A.’s Steepest Narrow Lot? Who says you can’t build on a steep hill? When architect Simon Storey’s clients took him to a steep lot of undeveloped land for sale in Silver Lake, he advised them to pass. Storey’s firm, Anonymous Architects, is used to building on difficult sites, but he knew this particular lot would be especially challenging. But the lot lingered on the market for a few years and then the asking price dropped. That’s when Storey and his wife, Jen Holmes, decided they were willing to take on the difficult ground-up construction. Sloped lots typically require excavation and complicated and costly foundations, and have issues ranging from erosion to drainage to landscaping. It’s certainly not for the faint of heart. Nevertheless, Storey and Holmes bought the 2,900-square-foot lot in 2017 for $92,000 and started to plan their home. The land was not just extraordinarily steep (a grade of 33%) but also long and narrow. (For comparison, the steepest street in Los Angeles, Eldred Street in Highland Park, has the same slope.) Once again the constraints of the lot dictated the design. “We had no choice but to go right up to maximum width and stick with it for the entire building,” explains Storey. The result is a very long building that spans just 18 feet across and 100 feet long. “Every inch makes an outsize difference. I don’t think of it as being a narrow building,” says Storey. Storey wanted the house to be as utilitarian as possible. He chose a corrugated cement panel typically used for farming and industrial buildings in Europe as a siding material above the two-story concrete base. With the structure built three feet from the property line, the couple were constrained by city code in the amount of windows allowed on the side of the building. As a result, the windows are arranged in a horizontal expanse, providing panoramic views of the hills in Silver Lake and Echo Park. The entrance to the house is set back five feet, allowing double-height windows that span two stories, bringing in more light. A floating staircase makes an appearance, across from the entrance. Other expenses included $300,000 for the foundation (more than three times what it would have cost for a similarly sized project on a flat lot), and about $20,500 for geology consultants to survey the slope. All together the project came in at roughly $1.3 million.

The Dog That Became Mayor. Most politicians caught with their tail between their legs are voted out of office or run out of town, but not the mayor of Idyllwild, a small mountain community about 25 miles south of Banning. Here the top dog is an actual dog — a 1-year-old, full grown American purebred golden retriever with the legal name of Maximus Mighty-Dog Mueller III. People call him “Mayor Max” and he is hopelessly adorable. Mayor Max III keeps a selection of ties inside his closet at his home in Idyllwild, which he doles out as patronage at public appearances. He’s the third dog to hold office in Idyllwild, part of a tradition dating back to 2012 when Idyllwild Animal Rescue Friends came up with a novel idea for a fundraiser: a mayoral election in which no humans were allowed to run, according to Phyllis Mueller, 72, who serves with her husband, Glen Warren, 59, as the mayor’s co-chiefs of staff. The animal election didn’t upset the local political establishment, since Idyllwild doesn’t have a human mayor of its own. The mountain town is unincorporated, with local political decisions handled by the Riverside County Board of Supervisors. Animal candidates (and their human owners) had to live in Idyllwild or the nearby towns of Fern Valley, Pine Cove or Mountain Center. It cost a dollar to vote and people were encouraged to cast as many ballots as they liked. With 21,132 votes, Maximus Mighty Dog Mueller defeated 13 other dogs and two cats, to become top dog (and netted the animal rescue more than $31,000). He was the first in a political dynasty now stretching three generations. Mayor Max stays very busy!  There are public appearances in downtown Idyllwild on Thursdays, Fridays and weekends. Private appearances at schools, nursing homes, hospice organizations and businesses round out the calendar. The mayor has attended birthday parties and weddings, Mueller said. There’s no fee for a public or private event; though like all politicians the mayor accepts donations. With some help, Mueller managed to get the mayor into his professional attire before the gallery owner snipped a yellow ribbon with an oversized pair of scissors. (At events Mueller hands out novelty neckties (more than 12,000 a year) and some 10,000 Mayor Max calendars.) “I like the message of a golden retriever, which is unconditional love,” Mueller says.

Vendors Expo Returns! Our world-famous "Vendors Expo" returns on Thursday night, December 14, 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. 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.

Out-of-State Summit. For our 6th Annual Out-Of-State Summit, LAC-REIA has identified the four strongest cities in the USA that have dynamic job and population growth, along with affordability, landlord-friendly laws, renter desirability, and positive cash flow. We then identified the most professional turnkey operators in each of these cities and invited them to speak at our Out-of-State Summit: Michael Drew (Indianapolis, IN), Emily Nesselroad (Montgomery, AL), Michael Scher (Little Rock, AK), and Phil Alexander (Baltimore, MD). Thursday night, December 14, 2023, 6:30 to 9:30 pm, Iman Cultural Center, 3376 Motor Avenue, Los Angeles, CA 90034 (Culver City). RSVP: www.LARealEstateInvestors.com. 

“LARealEstateInvestors.com” Podcast. We are so very excited about our 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. Every Tuesday at 3:00 pm, and anytime thereafter on YouTube, Facebook, and Google.

This Week. This week's highlights include the Federal Reserve’s preferred inflation measure and a handful of major earnings reports. The Bureau of Labor Statistics releases its personal income and expenditures data on Thursday. That report will include the core personal-consumption expenditures price index for October, which is the Fed’s preferred inflation measure. It is expected to be up 3.5% from a year earlier, versus an increase of 3.7% in the year through September. Other economic data out this week will include the Census Bureau’s new-home sales data on Monday, S&P CoreLogic’s Case-Shiller national home price index for September and the Conference Board's consumer confidence index for November on Tuesday, and the Institute for Supply Management’s manufacturing purchasing managers’ index for November on Friday. 

Weekly Changes:

10-Year Treasuries:            Fell    020 bps

Dow Jones Average:          Rose  600 points

NASDAQ:                           Rose  300 points

Calendar:

Thursday (11/30):                Core PCE

Thursday (11/30):                Personal Income

For further information, comments, and questions:

Lloyd Segal

President

Los Angeles County Real Estate Investors Association, LLC

www.LARealEstateInvestors.com

310-409-8310