Monday Morning Quarterback

(Monday, March 18, 2024)

The latest snapshot of consumer prices shows a hottish inflation reading in February. Why? Blame the cost of housing. Consumer prices rose 0.4% in February, marking the biggest increase since early fall. The core rate of inflation, which excludes food and energy, climbing a touch slower at 0.3%, according to economists polled by the Wall Street Journal. The Federal Reserve prefers core price measures, because they are a more accurate predictor of future inflation trends. The overall rate of inflation is seen holding steady at 3.1%, leaving it almost twice as high as it was before the pandemic. The big kahuna — and a source of controversy — is housing, which reflects 36% of the entire CPI and has had the biggest influence lately on the elevated rate of inflation. Why the controversy? Private measures of rent suggest the cost of housing is rising much more slowly now compared with a year ago. However, because of the arcane method by which the Bureau of Labor Statistics measures housing costs, rent price changes can take six months or longer to show up in the CPI. Put another way, many analysts believe the CPI housing index is overstating the increase in prices — and making inflation look higher than it is. The part of the housing index that generates the most controversy is what the government calls “Owners Equivalent Rent” (“OER”). That reflects how much a home would rent for it was, well, rented. Coming up with an estimated home-rental value is no easy thing. The OER jumped in January, raising questions about whether U.S. inflation more broadly would slow enough to justify the Federal Reserve reducing interest rates anytime soon. Since then, multiple economists have tried to explain OER and whether it’s doing a good or bad job of capturing the true rate of inflation. Yet the central bank simply can’t ignore housing, economists say. It’s a very real part of the inflation story. What’s more, the CPI is the best-known measure of inflation, and the Fed has to take that into consideration. The Fed can’t just go by its preferred measure of inflation, known as the “PCE index,” which is running cooler than the CPI. Over the past year, the CPI has risen at a 3.1% rate, compared with only 2.4% for the PCE (which is not far from the Fed’s 2% inflation target). Now that you know more about the OER that you ever thought possible, let’s get under the hood with other real estate news…

No more 6% Commissions? This is a game-changer! As I predicted months ago, major changes are coming to the real-estate industry. Last Friday, the powerful National Association of Realtors agreed to eliminate rules on commissions in order to settle multiple lawsuits. It will also pay $418 million in damages. If approved by a federal court, the settlement is likely to have a significant effect on how the real-estate industry does business. “This settlement is going to result in tremendous savings for Americans when they sell their homes.” “The days of NAR and the large corporate real-estate companies working together to establish inflated commissions are over.” Both buyers and sellers will see a change. Traditionally, in most transactions, home sellers have paid a 6% fee to their broker, while buyers have not paid anything to their agent. Under the settlement, sellers will no longer be compelled to pay commissions to both the listing agent and the buyer’s agent when selling their home. Instead, they will choose whether to pay a commission and how much. The settlement could also mean that potentially tens of millions of home sellers will be eligible to receive compensation through a consolidated class-action payout. The money will come from a fund designated for distribution, if the settlement is approved. As part of the settlement, the NAR will also implement a new rule for the Multiple Listing Service “prohibiting offers of broker compensation” on the MLS. These changes will go into effect in mid-July 2024. That practice has come under scrutiny in recent months, but the implications of the settlement are still unclear. The NAR, along with multiple real-estate brokerages, also face dozens of other lawsuits alleging price-fixing of commissions. Typically, when a home is sold today, the listing agent and the buyer’s agent each get a 3% commission, both of which are paid by the seller. With the settlement, the stage is set for the buyer’s agent to no longer automatically receive a 3% commission from the seller. The buyer’s agent will now have to negotiate their commission directly with the buyers.

La Cañada Flintridge Must Process Affordable-Housing Plans. A court ruled on Monday that La Cañada Flintridge violated the state Housing Accountability Act when it denied an application for an affordable-housing project last year. Under the ruling, the city will be forced to process the application, which was filed under a little-known but increasingly relevant provision in California housing law known as “builder’s remedy.” The provision serves as a punishment for cities that are out of compliance with housing regulations that require local governments to develop specific zoning plans to address population increases. Builder’s remedy is a massive boon for developers, allowing them to build whatever they want (even outside local zoning restrictions) so long as it has a certain number of low- or middle-income units. The proposed project in this case, located at 600 Foothill Blvd., would replace an aging Christian Science church with a five-story building that includes 80 mixed-income units and a 14-room hotel, totaling nearly 120,000 square feet, bringing density and affordable housing to a city that has very little. La Cañada is a city of single-family homes, and the average SFR value is $2.317 million, according to Zillow. It has added virtually no multifamily housing in recent years, and as a result, the population has hovered around 20,000 for the last four decades while surrounding communities swelled with residents. The court’s decision is a big win for affordable-housing advocates as well as the developers behind the project, who’ve been fighting to get the multiuse development approved for nearly half a decade. It’s a setback for officials and others in the city who have resisted the project drawing criticisms of having a “not in my backyard” attitude along the way. “La Cañada Flintridge is the latest community that has failed in their effort to override state housing laws. Today’s favorable ruling should serve as a warning to other NIMBY jurisdictions that the state will hold every community accountable in planning for their fair share of housing,” Gov. Gavin Newsom said in a statement.

Ellen DeGeneres Sells Her Montecito Flip for $32 Million. Yet another Montecito property that was given the Ellen DeGeneres treatment has sold for eight figures, per Robb Report. My favorite fix and flipper, the Emmy-winning former talk show host, who is known for her speedy, high-end real estate flips (especially in the Celebrity-favorite Santa Barbara, California, enclave) paid $22.5 million for the eight-acre Mediterranean-style estate known as Pompeiian Court last June. By mid-October, DeGeneres, along with her wife and partner in renovation, Portia de Rossi, had already put the property back on the market with a $46.5 million price tag. Although the final sale price was slashed to $32 million, it’s not too surprising that the Finding Dory star might want to move on quickly; last spring, DeGeneres said in an interview with The Riv that she enjoys the “instant gratification and the adrenaline rush” of house-flipping as opposed to starting her projects from the ground up. She has already fixed and flipped five houses in the Montecito area. During their ownership, the couple gave this six-structure compound a complete overhaul, endowing it with their trademark “spirit of Quiet luxury,” as the property listing put it. The two-bedroom, four-bathroom main home spans about 7,800 square feet. Built in 1919, the property is centered around an open-air, column-lined courtyard, equipped with a fountain and a fireplace. Cathedral ceilings, wood-burning fireplaces, ornate molding, and arched doorways are among the enviable design details found throughout the home. There are also two guest houses on the property, which offer three more bedrooms, a pool house, an art studio, and a petite staff office. In addition to the numerous buildings on the lushly landscaped compound are a full-sized tennis court, a chardonnay vineyard, a koi pond, and a swimming pool lined with tall greenery.

Maybe Westfield Isn't Done With Its American Dream After All. They were supposed to be out by now. Rocked by activist investors (including former CEOs) and battered by the pandemic, Unibail-Rodamco-Westfield (“URW”) announced plans to sell by the end of 2023 the U.S. mall business it had bought for $16B. Officially, the song remains the same. But with the date to close out its U.S. business already gone, URW remains a major player in the U.S. mall market, with 16 malls across the country. Some assets have been sold as planned. But much of the remaining portfolio doesn't look like the costly burden it appeared to be in 2020 and 2021. The question now is whether it still makes sense to dispose of a collection of malls that, as the market recovers, appear to be on the up. It’s a far cry from the picture painted in late 2020 when URW staved off a shareholder coup in part by pledging an asset disposal program to reduce leverage and shed unwanted malls. Front and center were the 24 mall assets in its U.S. portfolio, which it bought for $16B through the acquisition of the U.S. assets of Westfield, the business founded by Australian real estate legend Frank Lowy. URW declared that it wanted to exit North America by the end of 2023. URW’s retail portfolio extends from New York City to the West Coast, with over half of its malls in California. Indeed, that recovery was crystallized in February when WRW reported strong operating performance. Tenant sales were up 6.4% and foot traffic was up 4.9% year-over-year. Shopping center vacancy rates are back to 2019 levels at 5.4%. Offloading malls now would likely mean URW fails to capitalize on any further upside, and the market saw a change in emphasis when URW last year refinanced the 1.4M SF Westfield Century City mall at $925M (photo below). Morgan Stanley issued the two-year, floating-rate CMBS loan, which valued the shopping center at just less than $1.4B.

Party House Iin Beverly Hills Overrun By Squatters. Stop if you’re heard this before. Condoms and drug paraphernalia litter Beverly Grove Place outside a reported party house located on the border of Beverly Hills and Bel Air. Neighbors told KABC Eyewitness News squatters have been living at the home for months, throwing wild parties that they advertise and even charge admission for. At one point, they claimed they were raising money for the victims of the October 7 Hamas attack. "It isn't like people are showing up at 8 or 9 at night, they're showing up at 2 in the morning with loud cars, motorcycles, Ubers, they're parking everywhere, they block the streets," said a neighbor who goes by Rick. "Where we live up here, there's small one-lane roads." "There's a roaming pit bull with children around. There are people drunk and stoned, wobbling, walking in and out, and then driving the canyons. Does someone need to be killed before the police will do something?" a neighbor complains. The Los Angeles Police Department has been to the home numerous times, but the ownership status is complicated. It was owned by disgraced doctor Munir Uwaydah, who fled the United States and is reportedly living in Lebanon after he was accused of playing a role in the murder of 21-year-old model Julianna Redding, whom he had dated. Uwaydah has also been linked to an insurance fraud scheme. The company, MDRCA Properties LLC, is currently listed as the owner, but they filed for bankruptcy last year. The home is currently for sale for $4.5 million. According to neighbors and their private investigator, the squatters who live at the home had their drivers’ licenses registered to the home, which has slowed the eviction process. "They claim that they had a showing and that they were able to sign a lease for a year for $25,000, which, on its face, is just ridiculous. You don't rent that kind of house for that ... It should be $25,000 a month! We actually got a copy of the lease, and the names on the lease are fictitious. Email addresses don't exist. Phones disconnected."

Dallas Seavey Wins Record Sixth Iditarod Despite Moose-Gutting Penalty. The Iditarod covers about 1,000 miles in Alaska from Anchorage to Nome. Dallas Seavey completed the race in nine days, two hours, and 16 minutes, crossing the buried arch finish line at 5:16 p.m. local time. Seavey’s sixth win surpasses the five victories of Rick Swenson between 1977 and 1991. Seavey, 37, raced in his first Iditarod in 2005, the day after he turned 18, making him the youngest musher ever to enter. His first win came in 2012 when he was only 25, and became the youngest winner ever. He won back-to-back-to-back races in 2014 to 2016, and added his record-tying win in 2021. His father, Mitch, won the race three times, and his grandfather Dan has also participated in the race. But here is the incredible part of the story. Near the end of the Iditarod race, Seavey had to contend with a uninvited interloper along his route that can only happen in Alaska. Seavey was cruising in the race last week near Skwentna, Alaska, when his dog team became “entangled” with a moose. Sledders in the race are permitted to carry firearms and Seavey used his to shoot and kill the moose. (One of his dogs, Faloo, was critically injured in the encounter, but under-went two successful surgeries and is expected to survive.) But Seavey’s problems were not over when he shot the moose. The ethics of the Iditarod race require that when a large animal like a moose or caribou is killed during the competition, its meat must be taken and distributed. In other words, the sledder involved in the accident must stop and gut the animal, which can take forever! And, as you can imagine, it's the last thing a rider wants to do in the middle of a dog sled race. Unfortunately for him, Seavey was penalized because he did not sufficiently gut the animal after he shot it. As a result, he was assessed a two-hour penalty. Nonetheless, he overcame that setback and still won the race. Congratulations Dallas!

Why Americans Drive On The Right And The English Drive On The Left. Did you ever stop and wonder why we drive on the right while the English drive on the left? How it got that way is a winding tale, but maybe we should give credit to the Conestoga wagon. In the 1700’s, historians say there were few industrial-sized wagons in Britain, but rather small carriages and individual horse riders moving through the countryside. Horse riders preferred to stay to the left to keep their right hands toward oncoming traffic for greetings and, if needed, fighting. So the custom evolved that wagons and riders stayed to the left. In the United States, Henry Ford often gets the credit, but that’s actually wrong. It goes much further back than Ford. Not only does traffic on the right pre-date cars, it pre-dates the establishment of the United States. We need to travel to Conestoga, Pennsylvania, where those huge stagecoaches were built. According to the Conestoga Historical Society, in the early 1700’s the Conestoga wagon was used to travel west. These big wagons, with their tall, arched cloth roofs, became icons of America’s westward expansion as they carried the belongings of pioneers from the east out to the “frontier.” By the way, back then, western Pennsylvania was considered the frontier. Conestoga wagons were developed by local carpenters and blacksmiths to carry goods, including farm produce and items bartered from Native Americans on their travels west. The wagon driver could ride one of the horses or sit on a “lazy board” that slid out of the side of the wagon. But when more active control was needed, he walked alongside the horses, pulling levers and ropes. Imagine you’re walking down a long dusty trail leading a team of horses pulling this blue-painted wagon. Most people are right-handed. For just that reason, Conestoga wagons built the controls on the left side of the wagon, close to the driver’s right hand. That meant the driver was toward the middle of the road and the wagon to the right. Eventually, there was so much trade and traffic between Philadelphia (largest city in America) and Pittsburgh that America’s first major highway was created. The Philadelphia Turnpike Road opened in 1795. Among the rules written into its charter, according to the book “Ways of the World ” by M.G. Lay, was that all traffic had to stay to the right — just like the Conestoga wagons. Today, only 30% of the world’s countries mandate left-side driving while the other 70% stay to the right. Please remember that the next time you’re in London and forget to look right as you step off the curb.

An Evening With Bill Bronchick. Bill will be visiting us from Denver, Colorado. Bill is the President of the Colorado Apartment Owners Association and an expert on creative financing. The topic for Bill’s presentation will be “How to Buy Properties Without Banks, Credit, and Little or No Down Payment." A long title, but very significant subject. I saw Bill speak on this topic at the Los Angeles Apartment Owners Association in LA convention Center last summer and thought it was fantastic. So I convinced him to do it again for us. Thursday night, April 11, 2024, 6:30 to 9:30 pm. 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, April 11, 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. The next Federal Open Market Committee meeting will take place this Wednesday. No change in rates is expected (holding steady with a range of 5.25% to 5.5%), and investors will focus on the latest forecasts from officials for monetary policy and economic activity. For economic reports, the spotlight will be on the housing sector. The National Association of Home Builder’s “Housing Market Index” for March will be released on Monday. Housing Starts will be released on Tuesday by the Census Bureau. And finally, existing Home Sales will be released on Thursday by the National Association of Realtors.

Weekly Changes:

10-Year Treasuries:             Rose  020 bps

Dow Jones Average:           Rose  100 points

NASDAQ:                            Fell    100 points

Calendar:

Monday (3/18):                     Housing Market Index

Tuesday (3/19):                    Housing Starts

Wednesday (3/20):              Fed Meeting

Thursday (3/21):                  Existing Home Sales

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