Monday Morning Quarterback

Monday Morning Quarterback
(Monday, October 3, 2022)

REO and auction investors are on the frontlines of the housing market, repeatedly selling into the retail market properties that they purchased roughly six months ago and have since renovated. This repeating cycle keeps them in tune with the latest shifts in retail buyer behavior and motivates them to shift their own buying strategies at foreclosure auctions (i.e. trustee’ sales and sheriff sales) in anticipation of what the retail market landscape will look like in the next six to 12 months. As such, the rising risk of a housing correction is a common view among auction buyers in 2022, according to a recent survey of more than 250 Auction.com investors. More than half of those surveyed (55 percent) described their local housing market as “overvalued with a correction possible,” up from 40 percent who described their local market that way in the first quarter of 2021. That investor sentiment has translated into more conservative behavior at foreclosure auctions according to data from Auction.com (which handles more than one-third of all foreclosure auctions nationwide). According to Auction.com, investors are more aggressively buying in Kentucky, Alabama, Oklahoma, Georgia, South Carolina, Wisconsin, Arizona and Arkansas. The foreclosure auction sales rate (the percentage of properties available at auction that sell to a third-party buyer rather than reverting back to the foreclosing lender as real estate owned) increased in those states between February and August, counter to the national trend. On the other hand, the foreclosure auction sales rate decreased at more than three times the national average in California (our state is well known for its extreme boom-bust cycles). Other states with above-average declines in the foreclosure auction sales include Pennsylvania, Minnesota, Tennessee, Texas, and Maryland. The bottom line is that it’s hard to find deals in California right now. So I teach students to find deals in other states … more landlord-friendly states. For example, Arizona, Tennessee, the Carolinas and Georgia are states that are less likely to see a slowdown in the near future. The sunbelt states will stay hotter longer. Maybe that’s why it’s called the ”sunbelt.”

New Home Sales Surge In August. U.S. new home sales surged 28.8% to a seasonally-adjusted annualized rate of 685,000 in August, from a revised 532,000 in the prior month, the Commerce Department reports. That’s the second-biggest jump on record for new home sales. The pace of sales is a sharp reversal of a drop of 8.6% in July. Yet the sales of new homes are still below a peak of 1.04 million in August 2020. For the record, the new home sales data are volatile month-on-month and are often revised. The median sales price of new homes sold in August was $436,800, down from the record $458,200 in April. The supply of new homes for sale dropped by 22.1% between July and August, equating to a 8.1-month supply. The sales gain anomaly might reflect homebuyers rushing to complete purchases before mortgage rates move any higher. Even if rates are inching towards 7%, uncertainty about a worsening macroeconomic environment is pushing people to act, instead of hoping for prices to fall before jumping in. For instance, mortgage applications increased last week, as buyers worry about rates rising even further in the coming weeks and months. What are economists saying? Most economists are writing off the jump in sales in August as an anomaly. Just don’t expect the August pace of sales to be sustained in the months ahead, as the rise in mortgage rates will take an added toll on homebuying affordability. 

Case-Shiller 20-City Home Price Index Fell This Summer. The S&P CoreLogic Case-Shiller 20-city “House Price Index” rise slowed to 16.1% year-over-year in July, a lower rise than the 18.7% jump in the previous month. In the month of July (the most recent data for Case-Shiller), the 20-city index fell a seasonally adjusted 0.4% down from a rise of 0.4% in June. That’s the first time since March 2012 that the 20-city index fell. The rate of price rises has sharply slowed since reaching a peak of 21.2% in April. A broader measure of home prices, the National Index, fell a seasonally adjusted 0.2% in July from June. July’s monthly fall was the first time the National Index fell on a monthly basis since February 2012. All 20 cities reported lower home price increases year-over-year. Tampa, Miami, and Dallas reported the highest year-over-year gains among the 20 cities in July. Price growth was strongest in the South and Southeast, by over 26% year-over-year. The usual culprits, San Francisco, Seattle, and San Diego reported home prices falling the most month over month. Economists have stressed that price rises have decelerated considerably and will speed up in the months ahead. A big part of the deceleration that continues from earlier this year is obviously due to higher mortgage rates. The average on the 30-year fixed-rate mortgage was at 6.29% last Thursday, according to Freddie Mac. Last year around the same time, that rate was at 3.41%. The market’s also affected by economic uncertainty, with buyers looking to wait and sellers hoping to sell before demand falls further. The fall in year-over-year price rises between June and July was the largest deceleration in the history of the Case-Shiller Index. The Index further indicates that prices will likely continue to decelerate given mortgage rates are inching towards 7% and with prices continuing to be elevated, causing affordability challenges.

California Allows Affordable Housing In Some Commercial Properties. In a historic deal between affordable housing groups and labor unions, Gov. Newsom signed two major bills Wednesday to convert under-utilized and vacant commercial buildings into housing. Senate Bill 6 and Assembly Bill 2011 incentivize housing projects in commercial corridors otherwise zoned for large retail and office buildings as a way to help California fill a multimillion-unit shortage in its housing supply. Both bills guarantee union-scale wages and promise an expedited construction process, while keeping development close to city centers to help the state meet its environmental goals and avoid sprawl. Newsom said the two laws will help California address the state’s “original sin” of housing affordability. Gridlock among several opposing forces in the Capitol (where unions, developers and affordable housing groups regularly stall legislation over disputed labor standards) nearly capsized this year’s historic deal. The powerful State Building and Construction Trades Council of California backed SB 6, along with builders and business groups, while the California Conference of Carpenters and the Service Employees International Union of California broke from other labor groups to support AB 2011. The two bills offer developers options to convert underutilized and vacant commercial spaces such as big-box stores, strip malls and office buildings into much-needed housing. SB 6 will certainly help rural communities recover from a big chain store exodus that left behind a trail of vacant buildings and parking lots. Housing advocates are particularly excited about AB 2011. An August analysis by UrbanFootprint, a software platform that analyzes city data for urban planners and local governments, found that the new law could produce 1.6 million to 2.4 million new housing units, depending on market conditions, including hundreds of thousands of affordable units.

Mortgage Rates Reach Highest Level Since 2007. Don’t look now, but mortgage rates continue to march towards 7%, pressuring potential homeowners looking to buy a home. The 30-year fixed-rate mortgage averaged 6.7% according to data released by Freddie Mac. Mortgage rates are up as the Federal Reserve pushed key interest rates up to deal with the worst inflation our country has seen in 40 years. That’s up 41 basis points from the previous week (one basis point is equal to one hundredth of a percentage point, or 1% of 1%). The rise in rates is bad news for prospective buyers and investors, as it potentially adds hundreds of dollars to mortgage payments. In fact, mortgage rates are now at highs last seen since mid-2007. To put the latest rate in perspective: A year ago, the 30-year was at 3.01%. How does that affect investors? Consider this, a $2,500 monthly mortgage payment (with 20% down) would have gotten you a $758,000 property last year. This year? You’d get a lot less house! With $2,500 per month, you’d only be able to afford a $476,000 house. Similarly, the average rate on the 15-year mortgage also rose over the past week to 5.96%. The adjustable-rate mortgage averaged 5.3%, also up from the prior week. Meanwhile, mortgage applications fell in the latest week, as cautious buyers continue to pull back as rates march towards 7%. The yield on the 10-year Treasury note rose slightly above 3.8% on Friday.

California, New Jersey and Illinois Dominate Most Vulnerable Housing Markets. ATTOM data services released a “Special Housing Risk” Report spotlighting county-level housing markets around the United States that are most vulnerable to declines, based on home affordability, unemployment and other measures. The report shows that New Jersey, New York, Illinois and inland California continued to have the highest concentrations of the most-at-risk markets – with the biggest clusters in the New York City and Chicago areas. Southern and midwestern states remained less exposed. The second-quarter patterns – based on gaps in home affordability, underwater mortgages, foreclosures and unemployment – reveals that New Jersey, Illinois and California have 33 of the 50 counties most vulnerable to potential declines. The 50 most at-risk included nine in and around New York City, six in the Chicago metropolitan area, and 13 spread through northern, central and southern California. Counties were considered more at risk based on the percentage of homes facing possible foreclosure, the portion with mortgage balances that exceeded estimated property values, the percentage of average local wages required to pay for major home ownership expenses on median-priced single-family homes, and local unemployment rates. The ongoing wide disparities in risks throughout the country comes during a time when the U.S. housing market faces headwinds that threaten to slow down or end an 11-year surge in home prices. Our own California had 13 counties in the top 50 list: Butte County (Chico), Humboldt County (Eureka), Shasta County (Redding) and Solano County (outside Sacramento) in the northern part of the state; Fresno County, Kings County (outside Fresno), Madera County (outside Fresno), Merced County (outside Modesto), San Joaquin County (Stockton) and Tulare County (outside Fresno) in central California, and Kern County (Bakersfield), Riverside County and San Bernardino County in the southern part of the state.

A Cougar Passage Rises Over A Deadly Southern California Freeway. Chalk one up for the cougars. When conservationists first announced plans to raise $30 million for a wildlife crossing over a deadly 10-lane stretch of the 101 Ventura Freeway in Agoura Hills, critics snickered and said “good luck.” Now, 10 years later, the dream of building a bridge that would help mountain lions escape an “extinction vortex” by providing them safe passage to food and mates is becoming a reality. On Earth Day, hundreds of conservationists and legislators gathered with joy and a sense of triumph on a weedy hill overlooking the Liberty Canyon Road exit to break ground on the Wallis Annenberg Wildlife Crossing. With completion scheduled for 2025, the wildlife crossing ranks among the most ambitious apolitical campaigns ever waged in Southern California. More than 5,000 individuals, foundations, agencies and businesses from around the world contributed expertise and donations that, as of Friday, totaled more than $87 million (including a $25-million challenge grant from Wallis Annenberg and the Annenberg Foundation). Partners include the National Wildlife Federation, the National Park Service, Caltrans, Mountains Recreation and Conservation Authority, the California Department of Fish and Wildlife, the Santa Monica Mountains Conservancy, the Resource Conservation District of the Santa Monica Mountains, and the architectural firm Living Habitats LLC, among many others. Because the project spans an interstate, Caltrans will oversee design and construction — but the transportation agency is not providing funding. The 200-foot-long, 165-foot-wide bridge will be the largest of its kind in the world and will serve as a lifeline for small, isolated populations of cougars in the Santa Monica Mountains to the south, and in the Simi Hills and Santa Susana Mountains to the north. As envisioned by architects and Caltrans, cougars will move (unseen by motorists) over a reinforced concrete-and-steel crossing landscaped with irrigated native vegetation, including oak and willow trees. Sound walls and light deflectors will dampen the noise and headlights of the thousands of vehicles that pass through the area daily. How, you ask, will the cougars know where to cross? They will read the posted signs, of course.

The Vatican’s One-Man Cycling Team. A special shout out to Rien Shuurhuis. Rien is the captain of the Vatican’s Cycling Team. Actually, Rein is the only member of the Vatican’s cycling team. What? You didn’t know that the Vatican had a cycling team. Right, neither did I – until I heard about Rein Shuurhuis. In fact, when Rien rolls up to the start of this weekend’s world championship road race, he’ll be wearing a curious jersey that no one in the Peloton has ever seen before. That’s because the crisp white-and-yellow on his back will represent the sport’s newest, and certainly smallest, racing nation. On Sunday in Wollongong, Australia (against the likes of powerhouses France, Belgium, and Italy) our man Schuurhuis is set to be the one-man cycling team of the Vatican. He knows he isn’t exactly the “holy roller” you might expect the Vatican to put on a bike. For one thing, Schuurhuis is a 40-year-old Dutchman. But in one sense at least, he is among the rarest representatives the Vatican has ever sent out into the world. Pope Francis has canonized more than 90 individual saints during his pontificate. But he has given his blessing to just one Vatican bike racer. In truth, Schuurhuis’s list of professional achievements isn’t that impressive. He has participated in lower-classified stage races in Asia and Oceania and his best result at the national championship level was only finishing 40th out of 48 competitors in the time-trial in his native Netherlands. So how then did Schuurhuis become the Vatican’s first and only representative at the cycling world championships? The answer is quite literally a matter of international diplomacy. And in this case, the diplomat is his wife. Schuurhuis is married to Chiara Porro, Australia’s ambassador to the Vatican, which qualified him for consideration under the rules of the Vatican’s sports association, Athletica Vaticana. (Yes, the Vatican even has a sports association. Who knew?) Cycling, the Pontiff says, “highlights certain virtues such as enduring fatigue (in the long and difficult climbs), courage (in attempting a breakaway or in facing a sprint), integrity (in respecting the rules), altruism and a sense of team.” BTW, at 165.8 miles, Sunday’s world championship course is the equivalent of pedaling around the entire Vatican 78.5 times. You go Rein!

The Best Part of “Don’t Worry Darling” Is the Architecture. Based on early reviews of Olivia Wilde’s new movie, Don’t Worry Darling, there’s more drama surrounding the actors than the actual film. But watching the film, which is out in theaters now, it’s easy to get swept up in the sets, which are a homage to mid-century Palm Springs. In fact, I believe the sets are, by far, the best part of the movie. As in many movies set in the mid-century suburbs, the illusion of a perfect life comes unraveled in sinister ways, and the glamorous desert modernism houses on the cul-de-sac, shot impeccably, play a central role. The Canyon View Estates, the very real Palm Springs neighborhood designed and built by William Krisel in 1965 is where Don’t Worry Darling was filmed. Before mid-century modernism became in vogue again (thanks to a glut of Amazon and West Elm knockoffs), it was a radical movement. Designers like Krisel (who defined desert modernism and popularized the butterfly roof), Albert Frey, Richard Neutra, and Charles and Ray Eames believed that our homes and the objects we fill them with should look good, work well, and, most important, be affordable. (Krisel’s Palm Springs tract homes originally sold for less than $30,000, but now go for over $1 million.) In an early scene, Frank (Chris Pine) hosts a dinner party at his home, which was filmed at Richard Neutra's Kaufmann Desert House (a coup for Wilde, since it’s the first time a production has ever been allowed to shoot there.) While most of the exterior shots are real locations in and around Palm Springs, the interiors were all built on sets from the ground up. To create a captivating “dream world,” the movie uses pastels and idyllic exteriors mixed with dark and dreamy interiors. In particular, look for the secretive office of the Victory Project. It was filmed at the very-real Volcano House, designed by noted architect Harold Bissner Jr. in 1968 for Vard Wallace, a wealthy engineer who was obsessed with the architecture of the San Onofre nuclear power plant and wanted his home to be built in its image. And yes, this white-domed house sitting atop a lone mountain in the sprawling desert looks just as mystifying in real life as it does onscreen.

3^rd Annual Los Angeles Real Estate Grand Expo. Our 3^rd Annual Grand Expo returns on Saturday, October 22, 2022, 9:00 am to 6:00 pm. This year we’ve taken over the entire Iman Cultural Center – it’s all ours for the day! The north hall, the south hall, and the parking lot in the middle (with tents and food trucks). One entire day celebrating real estate investing. The theme of this year’s Grand Expo is “How to Invest in a Pre-Recessionary Market.” There will be 12 national speakers in breakout sessions, and over 70+ vendors in the North Exhibition Hall. Keynote speaker will be Rick Sharga, the number #1 authority on real estate economics. The Grand Expo is a joint presentation of the Los Angeles County Real Estate Investors Association, Sam’s Real Estate Club, Ventura County Real Estate Investors Association, and Realty 411. Best of all, the Grand Expo is FREE to attend. Street parking is free and metered, and valet parking will also be available. But please RSVP at www.LAGrandExpo.com.

Basic Training Boot Camp. Saturday, October 29, 2022, 9:00 am to 6:00 pm, will be our semi-annual Real Estate Basic Training Boot Camp. Everything you ever wanted to know about real estate investing but were afraid to ask. Location: Iman Cultural Center, South Hall, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034 (it’s really Culver City, but don’t tell anyone). The cost of the Boot Camp is $149.00 per person, if paid before October 21. Thereafter, the price jumps to $1 million per person. So don’t wait to register. Gold Members (and former Boot Campers) can attend for FREE. You can register at LARealEstateInvestors.com.

New “LARealEstateInvestors.com” Podcast. We are so very excited to announce our new podcast, "LARealEstateInvestors.com" (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. Plus he is an expert on probates and so many other strategies. 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. Because of the Jewish high holidays, Bill's podcast will not return until Tuesday, October 11th.

This Week. Going forward, investors are hoping for more specific guidance from the Fed on the pace of future rate hikes and bond portfolio reduction. The Institute for Supply Management’s National Manufacturing Index will come out today (10/3) and their National Services Index on Wednesday (10/5). The key Employment report by the Bureau of Labor Statistics will be released on Friday (10/7), and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month.

Weekly Changes:

10-year Treasuries:            Rose  005 bps

Dow Jones Average:          Fell    400 points

NASDAQ:                           Fell    100 points

Calendar:

Monday (10/3):                    ISM Manufacturing

Wednesday (10/5):              ISM Services

Friday (10/7):                       Employment  

For further information, comments, and questions:

Lloyd Segal
President
Los Angeles County Real Estate Investors Association, LLC
www.LARealEstateInvestors.com

310-409-8310