Monday Morning Quarterback

(Monday, February 26, 2024)

The creativity of local architects never ceases to amaze me. Take for example this spectacular new home in Brentwood. Meticulously crafted over a five-year span, this newly constructed 2024-built view residence stands as a defining statement in Modern Architecture. Designed by the award-winning firm Rockefeller Kempel A.I.A, this awe-inspiring entertainer’s showplace boasts rooftop ocean views and is nestled up a private road above a coveted Lower Mandeville Canyon cul-de-sac in Brentwood. Every detail has been curated with the utmost precision. Privatized with the planting of 150 trees and abundant greenery, this gated home features a sweeping driveway accommodating parking for 15+ cars. Location: 1835 Old Orchard Road, Los Angeles 90049. Asking price: $17,750,000. Living area: 6 bedrooms, 9 bathrooms. Features: Whole house water filtration system; panic room; climate-controlled glass wine enclosure; heated floors; exterior water feature; Dolby home theatre; pool house; rooftop deck with ocean views; elevator; outdoor kitchen and BBQ; pool and spa; parking garage for 4+ cars. But if you want this beauty don’t call me. Contact Hilton & Hyland. I bet they’d love to hear from you. In other real estate news, lets get down into the weeds…

The Ávila Adobe. Let’s now go from the newest house in Los Angeles to the oldest. Built in 1818 (206 years ago) by Francisco Avila, this house is the oldest standing residence in the city of Los Angeles. The Avila Adobe is located in the paseo of historic Olvera Street, a part of the Los Angeles Plaza Historic District, a California State Historic Park. The building itself is registered as California Historical Landmark #145, while the entire historic district is both listed on the National Register of Historic Places and as a Los Angeles Historic-Cultural Monument. The Plaza is the third location of the original Spanish settlement El Pueblo de Nuestra Senora la Reina de Los Angeles sobre el Rio Porciuncula, the first two having been washed out by flooding from the swollen Río Porciúncula (Los Angeles River). The Avila Adobe was one of the settlement's first houses to share street frontage in the Pueblo de Los Angeles of Spanish colonial Alta California. The walls of the Avila Adobe are 2.5–3 feet thick and are built with sunbaked adobe bricks. The original ceilings are 15 feet high and supported by beams of cottonwood (which was available then along the banks of the Los Angeles River). Though the roof appears slanted today, the original roof was flat. Tar (Spanish: brea) was brought up from the La Brea Tar Pits, located near the north boundary line of Avila's Rancho Las Cienegas. The tar was mixed with rocks and horsehair, a common binder in exterior building materials, and applied to beams of the roof as a sealant from inclement weather. The original floor of the Avila adobe was hard-as-concrete compacted earth, which was swept several times a day to keep the surface smooth and free from loose soil. (Dirt floors were common among most early adobes.) In later years, varnished wood planks were used as flooring. But obviously no indoor plumbing or electricity. The original structure was nearly twice as long as it now appears and was L-shaped, with a wing that extended nearly to the center of Olvera Street. The rear of the house had a long porch facing the patio. Francisco tended a garden and a vineyard in the rear courtyard. The nearby Zanja Madre (literally "Mother Ditch") was a main water aqueduct and irrigation ditch that brought water down to the Pueblo from the Los Angeles River and was close enough to the adobe for Francisco Avila to avail himself. Avila eventually added a wooden veranda and steps to the front of the adobe.

Housing Starts Post Sharpest Drop Since April 2020. Despite the current housing crisis, construction of new U.S. homes fell 14.8% last month as home builders scaled back new projects. The pace of construction slowed as builders curtailed their activity amid wintry weather in the U.S. in January. Housing starts fell to a 1.33 million annualized pace from 1.56 million in December, the government reports. That’s how many houses would be built over an entire year if construction took place at the same rate every month as it did in January. The drop in January was the sharpest since April 2020 (during the coronavirus pandemic), when starts still fell by nearly 27%. Not including that pandemic drop, housing starts fell by the most since 2015. Both single-family and multi-family construction fell in January, with the latter registering a nearly 36% drop. Nevertheless, in a recent survey in January, builders were upbeat about future sales of new homes and optimistic about demand, as they expect interest rates to fall through the rest of the year. Meanwhile, builders continue to benefit from the tailwind that is the persistent shortage of previously owned homes. While new homes only formed a tenth of overall sales historically, that share has jumped to 30%, the National Association of Home Builders reports. “Housing starts fell by the largest amount since April 2020 in January, led by a huge drop in multi-family starts. We suspect the multi-family sector will continue to be a drag on new development this year, given the huge number of multi-family units already under construction,” Thomas Ryan, property economist at Capital Economics, wrote in a note. Meanwhile, building permits, a sign of future construction, fell 1.5% to a 1.47 million rate. Permits for single-family homes rose 1.6% in January, while apartment permits fell 9%.

Seven Percent Mortgage Rates Make A Comeback. U.S. mortgage applications plunged last week as mortgage rates rose over 7% (as hopes fade for a near term interest rate cut by the Federal Reserve). With consumer prices rising faster than expected, the market pushed back expectations on when the Fed will first cut interest rates this year. That in turn pressured the 30-year mortgage rate back up over 7%, the highest level since mid-December, dimming both buying and refinancing demand. The overall market composite index (a measure of mortgage application volume) fell in the last week, according to the Mortgage Bankers Association. The market index fell 10.6% to 181.6 for the week ending February 16 from a week ago. A year ago, the index stood at 199.4. The purchase index (which measures mortgage applications for the purchase of a home) fell 10.1% from a week ago. The refinance index fell 11.4%, as homeowners found little incentive to do so. The average contract rate for the 30-year mortgage for homes sold for $766,550 or less was 7.06% for the week ending February 16. That’s up from 6.87% from the week before. The rate for jumbo loans (the 30-year mortgage for homes sold for over $766,550), was 7.16%, up from 7% the previous week. The 15-year rose to 6.61% from 6.53% from the previous week. The rate for adjustable-rate mortgages rose to 6.37% from last week’s 6.3%. With a March rate cut by the Fed looking unlikely, the market has pushed mortgage rates up to 7%, which is the highest level in two months. The increase in rates will likely chill the housing market once more as higher rates make it more expensive to buy a home with a mortgage. 

Foreclosure Activity Increases in January. ATTOM real estate database released its January 2024 “U.S. Foreclosure Market Report,” which shows there were a total of 33,270 U.S. properties with foreclosure filings (i.e. default notices, scheduled auctions or bank repossessions) up 5 percent from a year ago, and up 10 percent from the prior month. Lenders repossessed 3,954 properties through completed foreclosures (REOs) in January 2024, up 1 percent from a year ago and up 13 percent from last month – the first month-over-month increase in completed foreclosures since July 2023. Nationwide one in every 4,236 housing units had a foreclosure filing in January 2024. States with the highest foreclosure rates were Delaware (one in every 2,269 housing units with a foreclosure filing); Nevada (one in every 2,272 housing units); Indiana (one in every 2,499 housing units); Maryland (one in every 2,588 housing units); and New Jersey (one in every 2,647 housing units). Those major metropolitan statistical areas (MSAs) with a population greater than 200,000, with the highest foreclosure rates in January were Spartanburg, SC (one in every 1,579 housing units with a foreclosure filing); Columbia, SC (one in every 1,651 housing units); Cleveland, OH (one in every 1,742 housing units); Detroit, MI (one in every 1,799 housing units); and Las Vegas, NV (one in every 1,923 housing units). Among those major metropolitan statistical areas with a population of at least 200,000, those with the greatest number of foreclosure starts in January 2024, included: New York, NY (1,470 foreclosure starts); Houston, TX (1,015 foreclosure starts); Los Angeles, CA (817 foreclosure starts); Miami, FL (804 foreclosure starts); and Chicago, IL (763 foreclosure starts).

Investors Bought 26% of the Most Affordable Homes Last Quarter. Real estate investors bought 26.1% of low-priced U.S. homes that sold in the fourth quarter. That’s the highest share on record and is up from 24% a year earlier. By comparison, investors purchased 13.6% of mid-priced homes that sold (vs 14.3% a year earlier) and 15.9% of high-priced homes that sold (vs 15.4% a year earlier). This is according to a Redfin analysis of county home purchase records across 39 of the most populous U.S. metropolitan areas. Redfin defines an investor as any individual or business that purchases residential real estate. Redfin divides home purchases into three buckets: low-priced, mid-priced and high-priced. Low-priced homes are those that fall into the bottom tercile of local sale prices, while mid-priced are those in the middle tercile and high-priced are those in the top tercile. Investors are drawn to  affordable homes for the same reason as other homebuyers: They cost less, which is especially attractive when home prices and borrowing costs remain elevated. And when housing affordability is this strained, there could be more potential for value increases in the lower price tier, meaning more potential for building equity. “I get tons of emails every day from investors looking for properties. But of course, they only want homes that are under market value, which are hard to come by. When they find those properties, they pile in,” said Carrie Caruthers, a Redfin Premier real estate agent in Riverside County. “I’ve recently seen an uptick in foreclosures, which investors are interested in because they often sell at a discount. I just sold one foreclosed house to an investor for $400,000. It probably would’ve sold for around $500,000 if it hadn’t been a foreclosure. But the investor got a great deal because foreclosure purchases come with risks.” The total supply of homes for sale in the U.S. fell 5.1% year-over-year in December and remained far below pre-pandemic levels as most homeowners stayed put to avoid losing the rock-bottom mortgage rate they scored during the pandemic. The typical home purchased by investors in the fourth quarter cost $453,271, up slightly from $426,573 a year earlier, as U.S. home prices ticked up. Overall, investors bought $32.3 billion worth of U.S. homes, down just slightly from $33.6 billion a year earlier. 

Why Economists Doubt A ‘Doom Loop’ Will Hit Office Real Estate. A panel of experts last Thursday said that it was an overstatement to say that the office segment of the commercial real-estate market was in “a doom loop.” True, downtown office buildings in many cities have dropped in value with shifts in work behavior. Values of office buildings already have fallen an estimated 35% since peak pandemic levels. Further, fears of rising defaults on loans tied to the properties are also rising, causing stress on banks. But experts on a panel at the National Association for Business Economics Conference in Washington, D.C., stopped short of saying this would result in a systemic financial crisis, or even a “doom loop” that makes it difficult for neighborhoods to overcome. “There is quite a bit of capital in the system. The distribution of CRE loans is not just concentrated in banks,” they insisted. Several other mitigating factors also appear to be overlooked by doomsayers. Aaron Klein, a senior fellow in economic studies at the Brookings Institution, said that a combination of too much leverage and a fundamental mispricing of assets is needed to cause a financial crisis. He noted that commercial real estate doesn’t meet that criteria because it isn’t clear that assets are very mispriced. Office use is also now growing again, as the pandemic-era move toward working from home is reversing, he added. “It seems as if things are flipping back after COVID,” Klein said, noting how the economists were gathering in person for a convention in Washington. Life is returning to pre-COVID norms and “people are returning to work, generally,” he said. And even though many people are now only working in the office three days a week or less, that won’t necessarily cause a disaster. “Commercial real estate doesn’t care how often you’re there — as long as you sign the lease,” Klein added. In addition, banks “don’t want the keys back” to problem buildings and are working on ways to create value so that office real estate can remain on the books.

From Boardrooms to Bedrooms. Despite the fear of “doom loop” (see above), our cities are riding a wave of change that’s been building up for the last four years. The urban landscape is getting a makeover, shifting from corporate to community. Office buildings, once the epicenters of the 9-to-5 grind, are being transformed into the new homes of urbanites, in a pandemic-driven remote-work new reality. Over the last four years, we've seen extraordinary growth in the conversion of office buildings into living spaces. Back in 2021, a modest 12,100 apartments were crafted out of old office spaces. By 2022, that number had nearly doubled to 23,100. The climb continued as 2023 saw an increase to 45,200, and now, as we step into 2024, the pipeline has reached an impressive 55,300. That's more than a fourfold increase since the trend began. It's a testament to how our cities are transforming for a new generation that wants to live where they used to work. Behind this shift lies a crucial factor: the $150 billion in office mortgages due by 2024. As residential space demand surges, developers are leaping at the chance to repurpose these aging giants. Currently, office conversions represent a staggering 38% of the 147,000 apartments in future adaptive reuse projects, outpacing any other building type. That's not just the largest slice of the redevelopment pie—it's a record high since 2020. Clearly, the buzz of business is giving way to the hum of home life, right where the city's heartbeat used to be. Los Angeles, for example, is embracing this architectural evolution, with 2,442 units transitioning from office spaces to apartments, accounting for 36.7% of the metro's conversions and marking a 6% increase from last year. The largest project at 695 South Vermont Avenue is set to offer 255 apartments, blending LA's vibrant urban lifestyle with new residential opportunities.

Chicago Rat Hole. If you’re heading to Chicago, don’t miss the “rat hole.” What is the rat hole? Glad you asked. The infamous Chicago landmark is a hole shaped like a rat in the sidewalk of West Roscoe Street in the Roscoe Village neighborhood of Chicago. After existing for decades, it became a viral phenomenon on social media (mainly Twitter) in January, attracting tourists to the site. An apparent example of accidental life casting, the hole was described “tongue in cheek” by The New York Times as "Chicago's Stonehenge", as its origins are unknown. The hole gained worldwide attention on January 6, 2024, via a tweet by Chicago-based comedian and writer Winslow Dumaine. The post quickly became viral, compelling many Chicago residents to visit the hole—in what has been described as a "pilgrimage"—and to make offerings to it, such as coins, flowers, candles, cheese, cigarettes, alcohol, children's toys, foodstuffs, and estradiol pills. One group of visitors took shots of Chicago specialty Malort beside the hole, before leaving the bottle as an oblation. The Riot Fest Historical Society also dedicated a plaque at the site of the hole. Despite its newfound attention in 2024, the hole has existed for at least 20 to 30 years, according to locals. In fact, a local softball team has been using the rat as its unofficial mascot since around 2018. The hole was filled in with plaster or cement by an unknown party on January 19, 2024. City officials later confirmed they had not filled in the hole. Local residents attempted to excavate the hole, using their hands and implements such as ice scrapers and license. Eventually, a woman cleaned out the hole and restored it to its original condition. Shortly after the restoration, an engagement and a gay marriage ceremony took place at the hole. Some residents of West Roscoe Street have expressed frustration with the hole's newfound viral status, with some locals citing public nuisance, vandalism, and accumulation of garbage on the sidewalk. On January 11, 2024, the Lakeview Roscoe Village's Chamber of Commerce started receiving suggestions of names for the rat hole, accepting submissions until January 18, 2024. On January 19, 2024, submissions had narrowed down to five finalists, which residents had until January 21 to vote on: "Lil' Stucky," "Splatatouille," "Splat," "Roscoe Road-dent" and "Dibs." The winning name was "Splatatouille."

"Fixing and Flipping in 2024." Join us on March 14, 2024, as Jeremy Ruben will be visiting us from the central coast. Jeremy is a veteran flipper who will discuss the current state of the flipping business in Southern California. Join us as Jeremy shows us the how to fix and flip in 2024. Thursday night, March 14, 2024, 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.

Vendors Expo Returns! Our world-famous, super-duper "Vendors Expo" returns on Thursday night, March 14, 2024. The Vendor Expo opens starting at 6:30 pm. We'll have 30+ 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. For economic reports, New Home Sales will be released on Monday from the Census Bureau. Personal Income and the PCE Price Index, the inflation indicator favored by the Fed, will come out on Thursday from the U.S. Bureau of Economic Analysis. The ISM National Manufacturing Index will come out on Friday from the Institute For Supply Management.

Weekly Changes:

10-Year Treasuries:            Flat    000 bps

Dow Jones Average:          Rose  600 points

NASDAQ:                           Rose  300 points

Calendar:

Monday (2/26):                    New Home Sales

Thursday (2/29):                  Core PCE

Friday (3/1):                         ISM Manufacturing

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