Monday Morning Quarterback

(Monday, April 29, 2024)

Investors take heart. The high U.S. home investor share seen over the past two years nudged up higher to close out 2023. In December, the share of single-family purchases that were made by investors hit 28.7%, an all-time high in CoreLogic’s data that dates to 2010. This was a clear rise over the Fall share and raises the possibility that the share could rise above 30% in 2024. In 2019 and 2020, the investor share never went above 20%, but in 2021 this share leaped up, and investors have made roughly a quarter of all single-family purchases in each year since. Though the investor surge began in the low interest rate environment, it has persisted through-out all interest rate increases, and is not showing anything that would indicate it will return drop back below 20% soon. The large drop in owner-occupied purchases, down about 200,000 purchases a month from the levels seen from 2020 to 2022 is also worth noting. This is our earliest snapshot of how different types of buyers might react to rates above 7% and shows an early sign that investors may be the more resilient group. Small investors make up most of the market. Though we are seeing an uptick in investor share, this is masking what is really a cold market. As you are probably aware, flippers are buying at rates that are well below pre-pandemic levels, and large/mega-investors have stopped their spending sprees. Small investors are gradually regaining their market share, but still are only buying at their pre-pandemic levels. Interestingly, the low rates of 2020-22 might be bringing new ‘Mom and Pop’ investors into the market. The low rates of this period let a huge number of existing homeowners to refinance their mortgages to more favorable terms, raising the chances that they rent out their existing homes when they move, rather than sell. Of course, this is happening while rising rates and prices push potential first time buyers (who cannot make a down payment) back into the rental market. Meanwhile, back at the ranch…

Freddie Mac Wants Into The Home Equity Market. Federal regulators have proposed to start buying up second-lien mortgages, a popular product among cash-strapped U.S. homeowners (looking to tap the equity in their properties), especially after mortgage rates shot up in the wake of the pandemic. The aim is for Freddie Mac to start buying fixed-rate second liens potentially by this summer, giving borrowers a way to tap an estimated $32 trillion of equity built up in U.S. homes in recent years. If approved, it would open the door for more borrowers to extract cash from their homes, without having to refinance at current 30-year fixed mortgage rates of about 7.2%. Freddie Mac, Fannie Mae and other government-sponsored housing agencies already have a roughly $9.1 trillion stake in the estimated $13 trillion U.S. residential-mortgage market. While they don’t make loans, they buy up 30-year fixed-rate mortgages that conform to higher lending standards put in place after the late-2000s subprime-mortgage crisis. These lower-risk loans often end up bundled into bond deals with government guarantees that primarily are owned by the Federal Reserve and banks, among other investors. Because of these guarantees, investors consider the bonds to be a Treasury surrogate. A hitch to Freddie’s proposal would be that it only buys second liens on homes where it already financed the first mortgage. Importantly, the proposal aims to limit how much homeowners can borrow in total against their homes. Freddie said it plans to keep a borrower’s loan-to-value ratio at less than 80% when looking at both first and second-lien mortgages on a home, keeping an equity cushion in place in times of stress. 

New-Home Sales Post Biggest Jump Since December 2022. Sales of newly built homes in the U.S. rose in March, posting the biggest increase since December 2022. Home buyers snapped up new homes, pushing sales to the highest level since September 2023 (just before the 30-year mortgage rate began its trek to 7%). U.S. new-home sales rose 8.8% to an annualized rate of 693,000 in March, the Commerce Department reports. (The number is seasonally adjusted and refers to how many homes would be built over an entire year if builders continued at the same pace each month.) Overall, sales of new homes are up 8.3% compared to last year. Looking at the big picture, home builders continue to enjoy strong demand from home buyers, driven by an ongoing lack of home listings due to the “lock-in effect.” But with 7% mortgage rates making a comeback, it’s unclear how long this strength will last. And builders, anticipating weaker demand, have already begun to scale back on constructing new homes in March, possibly due to higher borrowing costs for both buyers and their businesses. Nonetheless, builders are still relatively confident about the market, since the U.S. is still facing a shortfall of homes due to the lock-in effect that’s keeping a lid on home-resale activity. And builders, unlike current homeowners, have various additional tools at their disposal that could help offset high rates and keep potential new home buyers interested. These include sales incentives, like cutting home prices, or offering “mortgage-rate buydowns.” That’s an arrangement where the builder uses their money to temporarily or permanently pay more to the mortgage company to bring the rate down.

Existing Home Sales Declined in March. Existing home sales took a widely expected breather in March following the largest monthly gain in a year in February. While sales activity has finally bottomed it looks like any significant recovery is still facing headwinds from mortgage rates that remain above 7%. Mortgage rates had been dropping in early 2024, but that trend has recently reversed. The culprit, as you know, is a recent string of bad inflation reports that have cast doubts on the Federal Reserve following through with rate cuts this year. Meanwhile, home prices appear to be rising again, although modestly, with the median price of an existing home up 4.8% from a year ago. The result is that affordability is still a big concern for buyers. 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 34% 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. The other major headwind for sales has been that many existing homeowners are reluctant to sell due to a “mortgage lock-in” phenomenon, after buying or refinancing at much lower rates before 2022. This continues to limit future existing sales (and inventories). However, there are signs of progress with inventories rising 14.4% in the past year. That said, the months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) was 3.2 in March, well below the benchmark of 5.0 that the National Association of Realtors uses to denote a normal market. The tight inventory of existing homes means that while the pace of sales looks like 2008, we aren’t seeing that translate to a decline in prices. Putting this together, economists expect a modest recovery in sales in 2024.  

The REAL Reason NAR Settled. The National Association of Realtors (“NAR”) could have appealed. But they settled. Why? Why would the NAR settle and pay millions rather than continuing the fight? Realtor Alexa Grace Kern has a theory. According to Kern, NAR settled to consolidate other nationwide copycat lawsuits by 1) expanding the class status and 2) making DOJ happy enough that they a) don't object to the settlement like they did in Nosalek and b) leave NAR alone and don't continue investigations and cases (this has already failed). The U.S. Department of Justice appears focused on bringing down NAR and putting the MLS out of business. They want to ban sellers from paying buyer agent commissions and are going after the NAR rules requiring Realtors to list all homes they market in MLS. As soon as that happens, this will allow other players to get agents and sellers to directly list homes with them instead of MLS, and syndicate them together with their IDX feed from MLS. The NAR settlement removing commission sharing from MLS will ultimately phase out the MLS. If the DOJ bans sellers from paying buyer agent’s commissions, this will happen faster. In 7-9 years, we'll end up with an oligopoly of Zillow, CoStar (via Homes.com), and Redfin, replacing regionally distributed MLS with a single centralized database of homes for sale. They'll syndicate listings among the three, and whatever is left of the MLS will then need an IDX feed from them. Agents will then list with them instead of MLS and increasingly have sellers list directly with them, ultimately working towards an eBay-like marketplace of homes within 13-15 years, and maybe sooner. They will try to eliminate the need for agents again on both sides, with condition grading, prescribed valuations, and an insurance-like buyer protection/warranty program that addresses conditions and risks for the unrepresented buyer. CoStar has already invested the first billion towards making this a reality. When the new upcoming FCC rules take effect, it will significantly hamper the referral business - which is why Zillow is getting rid of Premier Agent leads and transitioning everything to Zillow Flex teams only. For those who think this is a consumer-friendly thing, think again. Zillow and CoStar will ultimately be able to charge whatever they want, probably with an enormous profit margin. There will then be an impossible barrier to entry for any new player not already under their syndication agreement. So you'll have traded one "cartel" for another. A much stronger, even more profitable cartel.

Meet the Homeless Immigrants Who Built a DIY Home in Highland Park. Teetering on a thin slice of land between the 110 Freeway and the Arroyo Seco flood channel, the “home” (not a house in the conventional sense) is framed under a stand of trees by a white lattice fence and window shutters. The yellow and white rectangular shelter and adjoining structures appear above the channel like a costal menagerie, and a sign hangs near the entrance: “Ponte trucha,” or “Stay sharp.” The walls consist of discarded fencing and wood paneling repurposed, a tarp serves as a roof, and the front yard is the industrial backdrop of a city’s flood channel. The L.A. Times reports that though Cesar Augusto’s shelter along the Arroyo Seco is relatively simple, he cherishes the objects that make it feel like a home. He has repurposed items and materials he’s found on streets or in trash bins, such as rope, fencing, window shutters and buckets for cleaning dishes. A set of French doors cover the entrance next to a red refrigerator powered by a solar panel and a battery that are just strong enough to keep a carton of almond milk chilled. The channel below serves as a sink for people in the community, who use the murky water to wash their hands and clothes. A gnarled tree branch functions as a clothesline. Between shelters is a rope hammock and a drum set for a video game, but no TV or gaming console to play it on. The shelter appears above the flood wash like a broken down seaside cottage plucked from a coastal town. Augusto, 43, arrived in Los Angeles roughly 20 years ago from Guatemala. For 15 years he worked as a house painter throughout Los Angeles County, but he struggled to find jobs after his employer died five years ago. As other primitive dwellings have sprouted up along the channel, reporters visit daily, but Augusto doesn’t understand what all the fuss is about. He’s just trying to keep a roof over his head. Augusto’s shelter has stood for at least four years. But he lives in constant fear of city inspectors visiting, although he has not had any issues with officials trying to move him out of his spot. Still, he knows that other unhoused residents lost their temporary shelters when the city conducted encampment sweeps. Augusto’s makeshift shelter is another example of the extreme measures taken by many Angelenos struggling to find a place to live in one of the most expensive housing markets in our country. The unhoused in Los Angeles sleep on the street, in tents, in government-built tiny home villages or in converted hotels. Those with construction skills and a bit of ingenuity (like Augusto) build their own shelters on whatever strip of unused or discarded land they can commandeer, highlighting the ingenuity of Augusto’s encampment amid an ongoing homelessness crisis.

'Seagull Boy' Wins European Screeching Competition. As you may appreciate, Seagulls (aka “Segals”) are near and dear to my heart. And if you’ve ever been to the beach, you know that Segals…oops, I mean Seagulls, have a very distinctive screech. Sure enough, in the Belgium coast town of De Panne, there is the annual “EC Gull Screeching Competition.” This year it is unique because a nine-year-old British boy won the European championship with his uncanny impression of my uncle. Cooper, from Chesterfield in Derbyshire, travelled to the Belgian coastal town to compete in the screeching competition. He originally started doing seagull impressions after being nipped by one while he was eating a tuna sandwich on the beach. Cooper wants to become "Seagull Boy", like when Peter Parker became Spider-Man after being bitten by a spider. "I feel like they are a really nice animal, I like them because of their noise," says Cooper. "Sometimes they can be a bit scary and I'm still a bit wary of eating at the beach, so that's why I now only eat in a small tent. The last meal I had at the beach was an ice cream." Cooper's mum, Lauren, said it was initially annoying when he started doing seagull impressions, but then they realized he was really good at it. "People would start to turn around and look for the seagull," she says. The family heard about the competition from a random man who overheard Cooper doing impressions at a soft-play center and suggested Cooper could compete. And the random man was right! Cooper scored 92 points out of a possible 100, which meant he won the juvenile category and also had the highest points score in the adult competition. His parents and grandparents were there to support him, as was his sister Shelby, who had a big cone of chips made from foam. Jan Seys, a marine biologist, and one of the judges, was impressed with Cooper, “He managed to include several call types in his performance and each of them resembled a real seagull call in the most impressive way. Timbre, rhythm, as well as variation were uncanny.” Cooper took his lucky mascot with him - a small model seagull which he calls “Steven Seagal.”

Brazilian Woman Takes Dead Man to Withdraw Bank Loan. Security camera video shows Érika de Souza Vieira Nunes, 42, arriving at Itau Bank in Rio de Janeiro by taxi, with her motionless uncle, Paulo Roberto Braga, 68. Surveillance video then shows Nunes in a parking lot removing Braga from the passenger seat. The driver helps her pull him out and into the wheelchair, where the uncle slumps with his head tilted to the right. At one point, a man walks by and does a double-take. Nunes then wheels Braga into an elevator, before another CCTV camera captures her making her way along a hallway. Surveillance then shows Nunes at the counter of the bank, propping up the head of the elderly man in the wheelchair and trying to get his hand to clasp a pen. According to police, she was attempting to take out a loan equivalent to $3,000, which had already been approved by the bank but still needed the elderly man’s sign-off. But Braga (filmed by a bank attendant) remains unresponsive. His arm is limp and his head keeps falling back as she talks to him. Uncle, are you listening?” she asks him. “You need to sign. If you don’t sign, there’s no way. I can’t sign for you, it has to be you. What I can do.” “Sign it so you don’t give me any more headaches, having to go to the registry office. I can’t take it anymore,” the woman continues. At that point, one of the bank attendants says, “I think he isn’t feeling well,” while a second attendant agrees. “He is like that. He doesn’t ever say anything,” Nunes responds. Frankly, at that point it should have been a dead giveaway. Anyway, bank attendants called an ambulance. When paramedics arrived, they conclude that the man had been dead for hours and must have already been dead when he arrived at the bank. Last Tuesday, Nunes was arrested on charges of theft by fraud and desecration of a corpse. During an interview with police, the woman told officers she routinely cared for her uncle, who was debilitated. Rio de Janeiro Civil Police chief Fabio Luis Souza, who heads the 34th Police Station in Rio, said the victim had likely been dead for at least two hours. Sure enough, Braga’s autopsy found that he died between 11:30 am and 2:30 pm local time, with his cause of death determined as respiratory aspiration of stomach contents and heart failure.

Vendors Expo Returns! Our world-famous, super-duper "Vendors Expo" returns on Thursday night, May 9, 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.

You Go Girl! Meet Women Who Rock Real Estate.  Join us on Thursday night, May 9, 2024, when we have a very special panel on women investors. Our moderator will be Deborah Razo, President of the Women’s Real Estate Network (“WREN”). Deborah is an all-star investor, including fixing and flipping houses, residential construction, and multi-residential properties in the U.S. and Puerto Rico. The panel will feature Cindy Coleman discussing note investing, Angela Sillmon discussing short-term rentals, and Jen Maldonado discussing raising capital for your projects. The women will be discussing how they started investing and challenges they confronted along the way. If you’re a woman investor, DO NOT miss these talented women! (men, you can attend - but at your own risk!) Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034 (Culver City adjacent). FREE Admission. Metered street parking. RSVP at www.LARealEstateInvestors.com.

Cash Flow Chronicles Podcast. We are so very excited about our weekly podcast, "Cash Flow Chronicles" 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. The next Fed meeting will take place on Wednesday, but forget about rates going down for the foreseeable future. No change in rates is expected, and investors will look for Fed officials to elaborate on their plans for future monetary policy. For economic reports, the ISM National Manufacturing Index will come out on Wednesday and the National Services Sector Index on Friday, both by the Institute for Supply Management. The key Employment report also will be released on Friday by the Bureau of Labor Statistics, and these figures on the number of jobs, the unemployment rate, and wage inflation will be some of the most highly anticipated economic data of the month.

Weekly Changes:

10-Year Treasuries:            Flat    000 bps

Dow Jones Average:          Rose  200 points

NASDAQ:                           Rose  500 points

Calendar:

Wednesday (5/1):                 Fed Meeting

Friday (5/3):                          Employment

Friday (5/3):                          ISM Services

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