Monday Morning Quarterback

(Monday, December 18, 2023)

Long commutes are nothing new to Southern California. But the pandemic and our region’s housing affordability crisis have worsened the pain for those who can’t afford to live in affluent job centers such as Orange County and Los Angeles’ Westside. An L.A. Times review of census data found that about 750,000 people had commutes that cross a county border as of 2020, and that the number has steadily risen over several decades. For the years of 2016 to 2020, census data show worsening commute times coming into Los Angeles County, especially compared with the much lighter drive from L.A. into places such as the Inland Empire and Antelope Valley. Commute times improved during the pandemic thanks to work-from-home policies. But those who work from home are disproportionately higher-income workers. Data from the 2022 census show that the median annual earnings of Californians who worked primarily from home was almost $80,000, compared with just under $50,000 for those who drove alone to work. For low-income households, though, “it’s an enormous problem that we don’t have enough housing,” the Times reports. When people are pushed out because of high housing costs, generally “they’re not commuting back to their service-sector job in L.A.” Far-flung suburbs offer significantly cheaper housing than core areas of Los Angeles and Orange counties, but they have far fewer jobs. And that is what is driving the hellish commutes. In Ventura County, 30,000 more motorists drove into Los Angeles County than the other way around from 2016 to 2022. In Riverside County, that difference was closer to 40,000 drivers, and in San Bernardino County, the difference was 70,000. There was one Southern California exception: Around 16,000 more commuters from Los Angeles County went to Orange County than the reverse. As a result, commute time declined from 2019 to 2022, especially for higher-income households. Flexible work-from-home policies have meant that “the afternoon peak has spread out,” even on buses. In total, congestion is less severe at peak hours but more widespread over the course of the average day. “My hunch is that some of these new patterns are here to stay.” In other real estate news, let’s get down into the weeds…

Could You Afford to Buy Your Own House Right Now? How many of you could afford the monthly payment on your house at current levels of mortgage rates and home prices? Take the current value of your home, subtract 20% for a down payment and slap a 7% mortgage rate on it. Could you still afford it? My theory is a large percentage of current homeowners would have a difficult time affording the payment on their own house if they were forced to buy it at prevailing market rates. Of course, the equity piece is why this exercise is purely theoretical. Americans have an obscene amount of equity in their homes right now. We’ve gone from $16 trillion in home equity at the end of 2017 to more than $32 trillion today. In other words, home equity has doubled in a little less than six years. Housing price gains are the biggest reason for the increase, but low rates have helped a lot too. When mortgage rates are 7-8%, so much more of your payment goes towards paying interest expenses. Over the course of the first five years of the mortgage using these assumptions:

• at a 3% rate, 44% would go to principal paydown while 56% of payments would cover interest expense.
• at an 8% rate, just 11% would go to principal paydown while 89% of payments would cover interest expense.

So if you were to stay in an 8% mortgage rate for the life of the loan, you’d be paying more than $590k in interest costs. With a 3% loan, interest expense over the life of a 30 year mortgage is $186k. Obviously, the hope for investors in the current rate environment is they’ll eventually be able to refinance at lower rates. That should help. But the numbers are eye-opening from the perspective of a first-time homebuyer. The late-1970s/early-1980s time frame was an outlier but if you look at the average since 2000 it’s been more like 5%. So the sub-3% pandemic rates were a historical outlier. Regardless, most homeowners couldn’t afford to buy their own house right now if they were forced to pay current prices and borrowing rates.

L.A.’s Property Values Climb to Near $2 Trillion. Los Angeles County and its more than 4,000 square miles are home to nearly $2 trillion worth of residential and commercial real estate, according to Assessor Jeff Prang. Prang’s office’s annual report released last week reports growth in the assessed value of taxable property for the 13th consecutive year. This year’s assessment found an annual increase of more than $111 billion (over 5.9 percent) bringing the net value of the county’s taxable property to $1.997 trillion. All 88 cities in our county recorded an increase in assessed valuation compared to 2022. Of the 2.4 million parcels of land in the county, more than 250,500 are multifamily properties, 248,123 are commercial or industrial properties, and almost 1.9 million are single-family homes. As you can see, single-family residential accounts for $1.15 trillion, or a whopping 57 percent of the total value, while making up more than 79 percent of the total property inventory. The commercial and industrial parcels are valued at $572 billion, garnering about 28.6 percent of the value, while making up just 10 percent of the total property stock. The 250,511 multifamily and residential income properties are valued at more than $279 billion — equal to 14 percent of the total value and accounting for the final 10 percent of the total parcels. The property types’ shares of the total value have been slowly shifting toward single-family and away from commercial over the past 30 years: In 1985, commercial and multifamily accounted for nearly 53 percent of the county’s total property value as opposed to less than 43 percent today. The city of Los Angeles with 500 square miles has an assessed valuation of $819.6 billion (5.9 percent increase). The city accounts for more than 36 percent of the total value for Los Angeles County. The other cities in the top five are Long Beach with $74.8 billion for a 6.8 percent increase; Santa Monica with $48.9 billion for a 5.3 percent increase; Beverly Hills with $44.9 billion and another 5.3 percent increase; and Santa Clarita with $44.8 billion for a 8.5 percent increase. 

6,000 L.A.-Area Buildings In Need of Retrofitting. We all know the “big one” is coming to Southern California, but we don’t know when that massive earthquake will strike. A new study by the Los Angeles Times found that 6,000 Los Angeles-area buildings are in need of retrofitting. The Times constructed an interactive map (which you can find on their website) that shows residents the status of the buildings they live and work in. “A retrofit strengthens earthquake-vulnerable buildings to better withstand shaking, making them less likely to collapse or be damaged,” the article states. The research shows that most of the buildings awaiting improvement are described as “soft-story” structures. About 200 soft-story structures collapsed during the 1994 Northridge earthquake. Only 6% of the area’s “non-ductile” concrete buildings (similar to those that crumbled in a recent massive earthquake in Turkey) are retrofitted, according to the study. For concrete buildings, mostly in downtown L.A., the retrofit process can take five to six years, the study concludes.

Across California, Evictions Have Soared Post-Pandemic. Eviction cases soared across our state in the year after a statewide moratorium lapsed, a CalMatters analysis of court data shows. The elevated numbers (in some places beyond pre-pandemic levels) show a significant portion of renters remain at risk of losing their homes, despite the state’s rollout of a $5 billion rent relief program during the pandemic and a yearslong pause on many eviction cases that many landlords have said disrupted their businesses and income. A nationwide study published this year found increases in eviction filings are associated with upticks in the population of homeless people living in shelters. The statewide moratorium was extended until June 2022 for those who had applied for rental assistance by March, barring evictions in cases where tenants had not paid rent and said they couldn’t because of financial hardship wrought by the pandemic. The law didn’t stop evictions completely (thousands were still locked out under various exceptions) but it dropped cases to record lows. After it ended, a patchwork of local protections for tenants kicked in for cities that had passed their own eviction limits, which then phased out later in 2022 or earlier this year. Recently obtained data from when the statewide moratorium was lifted through the summer of 2023 show that in a dozen of the state’s most populous counties the average monthly eviction filings surpassed pre-pandemic averages. Counties that extended local moratoria also are seeing waves of landlords seeking to remove tenants, albeit delayed until after their own rules end. That’s led to particularly acute spikes this year in Alameda County and Los Angeles counties. Some smaller counties (such as Kern, Ventura, Stanislaus and Tulare) have returned to seeing cases filed at slightly lower rates than pre-pandemic, as of August. But in some counties (including Sacramento, Los Angeles and San Mateo) the number of cases of tenants facing eviction increased this year by more than 10% compared to pre-pandemic levels, according to the CalMatters analysis.

Could ADUs Help Solve CA Housing Crisis? As a state with some of the highest housing costs in the country and an eviction rate that is creeping back up to pre-pandemic levels (see previous story), cities across California are considering a variety of solutions to address its housing crunch. One possible way to dramatically increase affordable housing, writes CalMatters housing reporter Ben Christopher is the proliferation of “accessory dwelling units” or ADUs. Typically small in size, these “backyard cottages” allow property owners to build a secondary dwelling on the same lot as their main residence and rent the place out for extra cash. Because they usually require less regulation and review to build, some parts of California are experiencing a boom — about one in six of all new units permitted in the state are ADUs. These dwellings are particularly popular in San Diego because of the city’s unique rule that lets landlords construct a second “bonus” ADU unit for everyone that they build, as long as the first unit is set aside for lower-income tenants. In parts of our city without nearby public transportation, one property can have as many as five units. And while there are some limitations, for landlords that have property in “transit priority” areas, they can build affordable and bonus ADUs many times over. This has led to ambitious ADU projects — with some units constructed on top of each other and resembling full-fledged apartment complexes rather than bespoke cottages or traditional “granny flats.” There is talk about building lots more ADUs across our state. But critics are concerned that landlords aren’t truly making them affordable. They also argue that the dwellings change the character of neighborhoods and are wary of the casual regulatory approach to ADUs. As one co-founder of a local neighborhood group put it, “Don’t call them ‘accessory’ if they’re dominant.”

VA Halts Foreclosures For Thousands Of Veterans. The Department of Veterans Affairs is halting foreclosures for 6 months for veterans and current servicemembers who have VA Loans in default. The move follows an investigation by NPR that found thousands of veterans who took what's called a COVID forbearance are now at risk of losing their homes through no fault of their own. "Helping Veterans and their families stay in their homes is a top priority at VA," said VA Press Secretary Terrence Hayes in a statement. "We are calling on mortgage servicers to pause all foreclosures of VA-guaranteed loans through May 31, 2024." The forbearance program was set up by Congress after the pandemic hit in order to let people who suffered a loss of income skip mortgage payments for six or 12 months, and then have an affordable way to start paying their mortgage again. But in October 2022, the VA ended the part of the program that allowed homeowners an affordable way to get current on their loans again, which has left many veterans facing foreclosure. The VA has a new program to replace it, but says it will take four or five months to implement. That's too late to help many of the 6,000 people with VA loans who had COVID forbearances and are currently in the foreclosure process. 34,000 more are delinquent, according to the data firm ICE Mortgage Technology. After NPR first reported on the problem, a group of senators sent a letter to the VA asking them to immediately stop the foreclosures. The VA said in its statement that by pausing foreclosures "we can continue assisting Veterans with their loans while we launch our newest home retention option." Through the new program, the VA says it will basically purchase the loans back from the companies that currently hold them, modify them and then hold them within a VA-owned loan portfolio. The VA's Under Secretary for Benefits Josh Jacobs said in a statement that he encourages any Veteran who is struggling with making their payments to visit www.VA.gov/housing-assistance or call 877-827-3702.

Taylor Swift Influencing Home Prices. There’s no bad blood between Taylor Swift and real estate. I say this because her sold-out stadium concerts are proving to be good karma for local housing markets, Architectural Digest explores in a new study (which proves once again my theory that there is a study for everything). The possible housing impact of Taylor Swift’s record-breaking Eras Tour, which has grossed $1 billion to date. And look at what you made her do: Home prices rose in host cities by an average of 2.1% following Swift’s concerts compared to the national average of 0.5%, the study finds. The study measured the impact of the first leg of Swift’s U.S. tour from March through August. Atlanta saw some of the most significant home price appreciation after a Swift concert, with an uptick of 8.8%. Certainly, Swift’s tour has been hitting large cities with markets that were already seeing home prices rise, but researchers say the hype around the singer’s concerts has a real effect. "Taylor Swift's Eras Tour wielded an unexpected influence on the real estate market,” says Amanda Lutz, a contributor and researcher for Architectural Digest. “This surge in home prices directly stems from the tour's profound economic impact on these cities” and highlights “the tour’s role as a catalyst for potential relocations.” Architectural Digest also surveyed 1,000 concertgoers who traveled to see Swift and their perception of the host cities’ reputation. One in five who ventured to a different city for the show said they are now contemplating moving there. Swifties are most tempted to move to Houston: 45% of those who traveled to an Eras Tour concert there say they now want to relocate to Houston. Seattle, Atlanta and Denver also apparently have enchanted concertgoers enough to want to move there. Swift’s “remarkable influence on the real estate market reveals just how far-reaching her impact truly is,” the study notes. “From transforming cities into Swiftie havens to sparking relocations and skyrocketing home prices, Taylor Swift’s soaring popularity has brought plenty of good karma to local economies.” Indeed, researchers note that sparks fly when Swift’s Eras Tour arrives, bringing an economic boost to the hotel and short-term rental sectors. Fans reported spending nearly $1,000 in the hosting cities when attending the concert—an average of $208 on accommodations, $121 on activities, $145 on food and $452 for concert tickets, the Architectural Digest study notes.

Doritos Thinks We Want Nacho Cheese-Flavored Booze. CNN reports that Doritos is betting on a new way to get people addicted to their tortilla chips: booze. The PepsiCo-owned brand is releasing a new alcoholic beverage based off of Doritos’ nacho cheese flavor that “tastes just like the real thing,” according to a press release. Yes, but who really wants to taste nacho cheese in their drink? The chip maker partnered with Empirical, a Danish company known for making custom spirits with creative flavors. Available online (so far), the limited-edition flavor goes on sale Wednesday in New York and California and costs $65 for a 750ml bottle. The goal of these products is to pique customers’ curiosity, spark a conversation and increase brand recognition. In other words: It’s a marketing ploy disguised as a product for sale. Don’t expect this to boost Pepsi’s bottom line. For Doritos and Empirical, the companies are describing the collaboration as a “first-of-a-kind innovation for both brands.” The spirit was made in Empirical’s lab through a production process that used Doritos chips to retain their “essence through vacuum distillation,” which the spirit maker says preserves more of the Doritos flavor compared to a traditional method. The spirit’s flavor “opens with umami and tangy aromas of nacho cheese, moving to the deeper, corn-forward flavors of the chip to finish on a soft salty note,” the company said. Since it’s a flavored spirit and not a specific category of liquor, Doritos recommends mixing it with a tequila or mezcal to make a Bloody Mary or a margarita. The booze can also be sipped straight or over ice. “While the flavor may seem wacky, the collaboration has novelty value, and it is likely a lot of people will be interested enough to try it out,” said Neil Saunders, retail analyst and managing director at GlobalData Retail. He added that Empirical and Doritos are both known for “being playful and fun.” Yuck!

Vendors Expo Returns! Our world-famous "Vendors Expo" returns in the new year, Thursday night, January 11, 2024. 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.

Basic Training Boot Camp. Your first resolution for the New Year should be to start buying properties. No more excuses! No more delays! No more procrastination! And the best way to get started is to attend our semi-annual Basic Training Real Estate Boot Camp. Saturday, January 27, 2024, 9:00 am to 6:00 pm. 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 if paid before January 20^th. After January 20^th, the price is $249.00 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 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. Investors will continue to watch for Fed officials to elaborate on their plans for future monetary policy. For economic reports, this week will be focused on the United States housing market. Housing Starts will be released on Tuesday by the Census Bureau. Existing Home Sales will come out on Wednesday from the National Association of Realtors and New Home Sales will be released by the National Association of Home Builders on Friday. Personal Income and the PCE price index, the inflation indicator favored by the Fed, also will be released on Friday.

Weekly Changes:

10-Year Treasuries:            Fell    030 bps

Dow Jones Average:          Rose  900 points

NASDAQ:                           Rose  400 points

Calendar:

Tuesday (12/19):                Housing Starts

Wednesday (12/20):           Existing Home sales

Friday (12/22):                    Core PCE

For further information, comments, and questions:

Lloyd Segal

President

Los Angeles County Real Estate Investors Association, LLC

www.LARealEstateInvestors.com

310-409-8310