Monday Morning Quarterback

(Monday, February 5, 2024)

The housing market is broken. Affordability is as bad as it’s ever been. Mortgage rates are high. Prices are even higher. There is no supply of homes for sale on the market. It’s a mess. So who’s to blame? In a recent article, Fortune went through the usual suspects to figure out how we got here. Prices skyrocketed 50% nationally over the course of the pandemic. Then mortgage rates went through the roof from sub-3% to more than 7.5% in a hurry as the Fed aggressively raised interest rates to battle inflation. And now supply is severely constrained because affordability is so poor and homeowners don’t want to give up their once-in-a-lifetime 3% mortgage. Housing affordability is as bad as it’s been in decades, and it’s hard to see what fixes things. So who is to blame for this mess? It’s the baby boomers, according to economists at Barclays. But is it? The gist of their argument is the Baby-Boomer Generation is so much larger than previous older generations. Once the kids are out of the house, Baby Boomers are now crowding out the housing supply. There is some credence to this argument. Nearly 40% of all mortgages in this country are paid off free and clear. That’s mostly owing to baby boomers. As a result, they have substantial equity built up in their homes so they aren’t nearly as worried about high mortgage rates as young people. Plus, Baby Boomers are in a far better position than most potential homebuyers. According to Redfin, nearly one-third of all homebuyers are paying cash. However, in my humble opinion, there are far bigger culprits than baby boomers for the broken housing market. Specifically, we simply haven’t built enough houses in this country to keep up with demand. Yes, millions of homes have been completed in this country, going back to the 1970s. Yes, millions! But still not enough! The good news is four million homes have already been completed in the 2020-23 period, so we’re off to a better start this decade. However, we still have a lot of building to do. After all, we went from an environment with too much supply to now not enough supply.  In other real estate news, let’s get it on…

Groundhog Day – Again. As some of you know I was born and raised in Pittsburgh, Pennsylvania (Go Steelers!). About an hour northeast of Pittsburgh is the town of Punxsutawney. Every year, on the first Friday in February, Punxsutawney is the center of the universe because it is “Groundhog Day”!  Yes, made famous by the 1993 blockbuster film “Groundhog Day,” starring Bill Murray, interest in Punxsutawney Phil has inspired worldwide interest. Actually, the annual event is a tongue-in-cheek ritual in which a groundhog, affectionally named “Punxsutawney Phil” comes out of his cave to predict the weather based upon seeing his shadow. Now stay with me here. If Phil sees his shadow, there will be a six more weeks of winter. If no shadow, spring will come early. Over 10,000 people have made their way in recent years to Punxsutawney, where festivities begin in the dead of night and culminate in the midwinter forecast. A bundled-up crowd, some wearing groundhog-themed hats, watched musical performances and fireworks as they waited for the appearance of Punxsutawney Phil. But before the announcement, President Tom Dunkel, in the traditional top hat and tuxedo worn by the club’s inner circle, explained that his cane, handed down from previous presidents (including his father) gave him the power to speak “Groundhog-ese” and that Phil would tell him which of two scrolls to use. At Dunkel’s direction, the crowd helped fire up the groundhog with repeated chants of “Phil, Phil, Phil” before a club member just after sunrise Friday pulled the groundhog from a door in a stump on the stage and held it aloft. Sure enough, , the Punxsutawney Groundhog Club announced Phil did not see his shadow, which will usher in early springlike weather. Pennsylvania Gov. Josh Shapiro took the stage before Phil to announce that the famed groundhog is the new official meteorologist for Pennsylvania. Phil predicts more winter far more often than he sees an early spring, not a bad bet for February and March in western Pennsylvania. But recently a federal agency took a look at his record over the years and put his accuracy rate at only 40%. 

LA County's Industrial Market Loosens Up. The industrial market's descent from the astronomical highs of 2020 and 2021 continues. In Los Angeles County, that means rising vacancy, more space available for sublease, fewer square feet under construction and negative absorption. But many experts aren't worried. “We’re probably getting to a more sustainable pace,” NAI Capital Managing Director of Research J.C. Casillas announces. The double-digit rent growth and near-nothing vacancy rates of two years ago were neither healthy nor sustainable, Casillas adds. “It’s hard to say the sky is falling,” he argues. “When the market was extremely tight, that was unhealthy as well.” NAI Capital found that fourth-quarter vacancy in LA County was 4.2%, “the highest since Q4 2013,” according to a quarterly report. A Savills report from the same period pegged in the LA market, but Savills includes Ventura County in its figures. The average vacancy for the seven LA County regions Savills tracks is closer to 4%. CBRE, meanwhile, clocked a vacancy rate of 2.1%. In LA's industrial market, where a single property can reach into the millions of square feet, tracking just one or two leases differently can result in discrepancies between reports. At the vacancy rate that CBRE found, developers would usually be clamoring to develop new projects, Knutsen adds. The fact that they aren't is a testament to the impacts of the Federal Reserve’s actions to tamp down inflation. “There are just very stringent requirements now for lending, and it's really a bit of a damper and constraining further market growth potential,” Casillas says. “That is not indicative of the will of the occupier or the will of the investor-developer across the industrial landscape.” Some developers are banking land with the intent to eventually develop it when conditions improve.

But There Is Some Good News for Renters in 2024. (And bad news for landlords.) If you’re a renter and had “save more money” on your 2024 New Year’s resolution list, there’s good news for you. According to industry experts, less aggressive rent hikes (a trend that began in 2023) are expected to continue into 2024. “The rental market is stabilizing after the wild fluctuations we’ve seen in recent years,” says Emily McDonald, Zillow’s rental trends expert. “It seems both tenants and housing providers are adjusting to a more balanced market, where rent growth is consistent but not as aggressive as before.” Last year, cities across the US saw either slight dips or relatively small increases in rent thanks to more new builds and a greater supply of available units, making it harder for landlords to raise prices. According to the Wall Street Journal, that same driver will likely keep rent from jumping too much these next 12 months as well, with many data companies and real estate firms projecting total rent growth to be in the low single digits in 2024. “This is definitely in line with what we’re seeing in Zillow’s data,” McDonald adds. “Our latest rent report shows a trend toward modest rent increases, mostly in the low single digits.” For many renters, this is a welcome relief after two taxing years of rent spikes. According to Apartment List (an online marketplace for apartment listings), rent prices surged in both 2021 and 2022, peaking with just under 18% year-over-year growth in late 2021. In contrast, national rent averages were slightly cheaper at the end of 2023 compared to the same time the previous year, with average year-over-year rent growth standing at negative 1.1%. However, according to their data, the national median rent is still $250 per month higher than it was three years ago. In short: Though rent prices may not be as low as they once were, landlords no longer hold the economic power to jack up rents.

Why Buying Houses Is Still Financially Beneficial. Even with sky-high prices and interest rates, investors take heart. Buying houses is still a great investment. Why? Part of the reason is your net worth as an investor increases as your house’s value rises, and that’s gone up significantly from 2019 to 2023. As a result, it’s becoming harder to enter the U.S. housing market. But for those who have managed to invest, the benefits have often been huge. Economists have long said that one of the best reasons to buy real estate is that it keeps more of its value than other investments (i.e. stocks), when inflation kicks in. That’s certainly been true during the inflation spike of the last two years. The Federal Reserve reports that the median value of a house (meaning the value of the house minus loans against it) jumped 44% between 2019 and 2023. Largely for that reason, the median net worth of U.S. homeowners was $396,000 at the end of 2022, compared to $10,000 for renters. “In a low-growth, high-inflationary environment, real estate is a very, very strong investment,” said Jamie Battmer. He is the chief investment officer at Creative Planning, a wealth management and financial advice firm. He adds that even in a backdrop like today’s, where growth is solid and inflation is elevated (but not as high as it was a year ago), real estate does better compared to stocks and bonds. The steep increase in values also means the housing market is becoming a bigger and bigger contributor to wealth inequality. Real estate is such a powerful tool for creating wealth, even in bad times, that financial experts tell NBC News they’re advising clients to strongly consider buying real estate even though prices are at all-time highs and mortgage rates at two-decade highs. After all, lower interest rates are inevitable because the Fed knows our economy requires it in order to achieve growth. “When rates come down, you have the ability to refinance at a much lower rate,” Battmer says. Moral of this story: Don’t wait to buy real estate. Buy real estate and wait!

Ocean Discovery May End the 86-Year Search for Amelia Earhart. Bulletin! Bulletin! The world has searched for the famous pilot’s missing plane for 86 years. Now, ocean archaeologists believe they’ve located it at last—and they have the evidence. Deep Sea Vision, a South Carolina-base ocean exploration team, says its most advanced unmanned underwater drone scanned more than 5,200 square miles “before finding what could be the legendary American aviator’s Lockheed 10-E Electra.” If true, this discovery would put a cap on one of history’s most enduring tales of adventure and enigma—the fateful disappearance of Amelia Earhart and her navigator, Fred Noonan, while attempting an ambitious flight around the globe. On July 2, 1937, the pair took off from Papa New Guinea on the latter stages of their daring journey, but were never seen again, vanishing without a trace. Jorge Romeo, a former U.S. Air Force intelligence officer, led a 16-member team using the advanced Kongsberg Discovery HUGIN 6000 unmanned underwater drone. Over 90 days, they meticulously scanned the Pacific Ocean west of Earhart’s anticipated landing site. Each sonar dive spanned nearly 48 hours, amassing several terabytes of data. When they combed through the gathered information, they were shocked with an image that Romeo describes as a “surreal moment.” The image reveals “contours that mirror the unique dual tails and scale” of Amelia Earhart’s plane. According to Romeo, the object’s shape in the sonar images closely resembles the Lockheed Electra, and the discovery’s location aligns with the “Date Line Theory.” This theory, crafted by Liz Smith, a former NASA staffer and hobbyist pilot, posits that after a 17-hour flight, Fred Noonan failed to account for crossing the International Date Line, which would have required adjusting the date from July 3 back to July 2, leading to a 60-mile navigational mistake and causing he and Earhart to miss Howland Island. Indeed, this oversight would have resulted in Earhart’s plane crashing into the ocean. Until Deep Sea Vision took on the task, the region and scenario outlined by Smith’s theory had remained unexplored. The mysterious final flight of Amelia Earhart captured the world’s imagination in 1937, just as it continues to today. Earhart and Noonan were six weeks and 20,000 miles into their global journey when they failed to make their scheduled landing at Howland Island, located approximately 1,700 miles southwest of Honolulu.

Happy New Year: Let’s Get a Divorce. Sadly, the new year brings an increase in divorce filings. In fact, many divorce attorneys have come to refer to January and February as “Divorce Months.” Rebecca Miller, a family law attorney in Nevada, notes that divorce is an unfortunate new year’s resolution she sees every year. “In my 37 years of family law practice,” she says, “I’ve seen that most people like to avoid what they assume will be a negative experience during the holidays and want to start the new year beginning a new chapter in their lives.” A University of Washington report confirms the anecdotal evidence. Most divorce filings happen in February and March. Further, one in three divorce filings in 2024 will occur to people over the age of 50. It’s a phenomenon known as “Gray Divorce.” There are at least six key reasons for Gray Divorces:

·        An increased acceptance of divorce in our society. Older adults will continue to be more accepting of divorce in the future as either they or people around them experience divorce.

·        A growing share of older adults are in second or third marriages, which are likelier to end in divorce than first marriages. While about 45% of first marriages fail, that number rises to the mid-60% level for second marriages and even higher for third marriages.

·        The increase in gray divorce is due to the increased participation of women in the workforce. Divorce is a more feasible option when women have the economic freedom to support themselves outside of marriage.

·        Increased life expectancy decreases the likelihood that marriages will end because of death and increases the exposure to the risk of divorce. If you’re in a marriage where your goals and dreams show little sign of developing or potentially flourishing, you might be encouraged to get out while you’ve still got time. If you’re 60 years old, in excellent health and have a reasonable expectation of living to at least 80, you’ve got at least a quarter of your life left and might want to make the most of it.

·        The nest is empty. For couples who've avoided getting divorced for the sake of the children, that reason diminishes when the kids go away to college.

How to Invest in Airbnb Short-Term Rentals. Matt Floyd and Craig Gerulski started just like you. They attended the San Diego’s Outback RE meetup back in 2020 and decided to work together. Since then they have built a seven-figure short-term rental business with a portfolio of 30 properties under management, 5 rental arbitrage units and six short-term rental properties in San Diego, Nashville and Scottsdale. And they continue to grow, now negotiating to leverage their expertise to acquire hotels around the country. And the best news of all is that you can do it too! Don’t miss Matt and Craig's presentation. Thursday night, February 8, 2024, 6:30 to 9:30 pm. Plus, come early and enjoy our Vendors Expo. Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034. FREE Admission. RSVP: LARealEstateInvestors.com. 

Vendors Expo Returns! Our world-famous, super-duper "Vendors Expo" returns on Thursday night, February 8, 2024. The Vendor Expo opens starting 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. Stick around after and enjoy our guest speaker. 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.

This Week. Investors will continue to watch for Fed officials to elaborate on their plans for future monetary policy. It will be a very light week for economic reports. The ISM national services sector index will be released on Monday and the Trade Deficit on Wednesday. Treasury auctions on Wednesday and Thursday also might influence mortgage markets. 

Weekly Changes:

10-Year Treasuries:             Fell    010 bps

Dow Jones Average:           Rose  300 points

NASDAQ:                            Rose  050 points

Calendar:

Monday (2/5):                       ISM Services

Wednesday (2/7):                Trade Deficit

Thursday (2/8):                    Jobless Claims

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