Monday Morning Quarterback

Monday Morning Quarterback

(Monday, November 21, 2022)

After I finished law school and was waiting for my bar results (approx. 4-5 months), I thought I would use my equestrian talents and tryout as a knight jousting at Medieval Times in Buena Park, Orange County. But I had second thoughts after I rode the horses, saw the working conditions, and talked to the staff. I was horrified! I observed humiliations of workers, depravations of horses, heavy outdated costumes, and even heavier weapons of steel, and I began to comprehend the dreadful conditions of the Medieval Times actor. (Think Charles Dicken’s description of child laborers in 1800s London.) Consider this: these people perform 16 shows a week under grueling conditions! Which means neither the knights nor the horses have time to properly rest. Worse, they are short on stable hands which means they don’t have time to do all of the safety checks that are required, like ensuring that the saddles are tight and don’t fall off in the midst of a joust. In other words, this place was a disaster waiting to happen! And of course, there’s the money. Why do Medieval actors only receive $21.00 an hour while Disneyland and Knotts actors receive $33.00 an hour? The actors and staff can no longer wait for their bosses at the Dallas-based corporation to offer them the kind of protections afforded their colleagues in other skilled, live performance situations (i.e. Disneyland and Knotts Berry Farm). Fortunately, this troupe of courageous Orange County performers are fighting back. They are finally exercising their right to unionize, demanding that wages and protection for workers advance at least as far as the 19th Century. Last Friday, the venue’s 50 knights, queens, squires, horsemen and stable hands voted 27 to 18 to form a union and joined the American Guild of Variety Artists (“AGVA”). Bravo! The horses didn’t vote, but would have certainly supported better conditions. Unionization will hopefully lead to better wages and improved working conditions (for both performers and horses). In other news, let’s get down into the weeds…

Housing Starts Fall Again. Construction of new houses fell 4.2% in October as high mortgage rates scared off buyers and forced builders to scale back. A situation that’s likely to continue through 2023. By the numbers, housing starts slowed to an annualized pace of 1.43 million last month from 1.49 million in September. (That figure reflects how many homes would be built in 2022 if construction took place at same rate over the entire year as it did in October.)  The number of permits, meanwhile, slipped 2.4% to a rate of 1.53 million, down sharply from a record 1.9 million last December. As you know, permits foreshadow how many houses are likely to be built in the months ahead, assuming a stable real estate market. But a major increase in mortgage rates this year has depressed demand and forced builders to scale back plans. Single-family home construction fell 6.1% to an annualized rate of only 855,000 in October. Projects with five units or more registered only a 556,000 rate, little changed from the prior month. Overall, housing starts are down 9% from a year ago (when mortgage rates briefly dipped below 3%). Similarly, permits have fallen 10% from a year earlier. The highest mortgage rates in decades have stifled new construction and are likely to do so through next year and longer. While the U.S. has an acute need for more housing, fewer people can now afford to buy a home because of higher mortgage rates. 

Existing Home Sales Retreat For Record Ninth Straight Month. Existing-home sales fell 5.9% to a seasonally adjusted annualized rate of 4.43 million in October, the National Association of Realtors reports. Compared with October 2021, home sales are down 28.4%! The level of sales is the lowest since December 2011 (excluding the 2020 pandemic). This is also the ninth straight monthly decline in sales, the longest streak on record. The national median price for an existing home was $379,100 up 6.6% from October 2021. But price gains are decelerating. Why? Because prices are a lagging indicator. They are last to decline. Prices were up over 20% on a year-on-year basis earlier this year. Housing inventory fell 0.8% to 1.22 million units in October. Unsold inventory sits at a 3.3-month supply at the current sales pace, up from 3.1 months in September and 2.4 months a year ago. (A 6-month supply of homes is generally viewed as indicative of a balanced market.) Home sales have dropped as mortgage rates have risen sharply and affordability has dropped. Softer inflation data in October have led to a slight drop in mortgage rates, which could lead for a floor on sales. At the same time, Federal Reserve officials may pencil in a “peak” interest rate above 5% at the policy meeting next month. 

Foreclosure Activity Increased In October. ATTOM data services released its October 2022 “U.S. Foreclosure Market Report,” which shows there were a total of 32,376 properties with foreclosure filings (i.e. default notices, scheduled auctions or bank repossessions) up 57 percent from a year ago! Nationwide one in every 4,339 housing units had a foreclosure filing in October. States with the highest foreclosure rates were Illinois (one in every 1,779 housing units with a foreclosure filing); Delaware (one in every 2,178 housing units); New Jersey (one in every 2,305 housing units); South Carolina (one in every 2,711 housing units); and Nevada (one in every 2,755 housing units). Among the 223 metropolitan statistical areas with a population of at least 200,000, those with the highest foreclosure rates in October 2022 were Fayetteville, NC (one in every 1,135 housing units with a foreclosure filing); St. Louis, MO (one in every 1,177 housing units); Jacksonville, NC (one in every 1,203 housing units); Cleveland, OH (one in every 1,624 housing units); and Spartanburg, SC (one in every 1,729 housing units). Those metropolitan areas with a population greater than 1 million, with the worst foreclosure rates in October 2022 were: Las Vegas, NV (one in every 2,062 housing units); Riverside, CA (one in every 2,127 housing units); and Chicago, IL (one in every 2,154 housing units). Those major metropolitan areas with a population greater than 1 million that had the greatest number of foreclosure starts in October 2022 included: New York, NY (1,655 foreclosure starts); Chicago, IL (1,107 foreclosure starts); Los Angeles, CA (816 foreclosure starts); Philadelphia, PA (788 foreclosure starts); and Miami, FL (583 foreclosure starts).

California’s Hit Hard by Decline in Luxury Home Sales. The pandemic-induced high-end real estate bubble has been broken, especially in California, according to new data provided by the Wall Street Journal. After riding high following the pandemic (when selling an upscale house nationwide suddenly meant fierce bidding wars and astronomical selling prices), the high-end market has fallen off a cliff. Some of the reason for the downswing include inflation, recession wariness, and rising interest rates. A new report by real-estate brokerage Redfin reveals that in the months from August through October of this year, sales of luxury homes (defined as the top five percent of homes based on estimated market value) declined 28.1 percent nationwide compared to the same period last year. That represents the largest decline since 2012 (when Redfin began recording such info), and is an even deeper drop than the 23.2 percent decrease seen during the arrival of the pandemic in 2020. High-end California residences did particularly poorly, according to Redfin’s data. In Oakland, the number of home sales dove by almost 64 percent while San Jose and San Diego were hit by declines of over 55 percent. In our own Los Angeles, the number of home sales fell by 44 percent! In L.A., the new “mega-mansion tax” (a ballot measure that will increase the tax on the sale of multimillion-dollar properties to help pay for housing the homeless) has real estate investors squaring off against the bill’s backers, the grassroots group United to House L.A. (see story below).

What Could the ‘Mansion Tax’ Mean for Mansions (and the Homeless)? Tax the rich, and give to the poor? It’s not a novel idea, but a Los Angeles ballot measure known as Measure ULA (better known yet as the “mansion tax”) passed in a city awash in mansions (however they may be defined—in this case, by price) while simultaneously staggering under the problem of a large homeless population and unaffordable housing. As of last week’s Election, tallying of the ballots, 54.12 percent voted yes, and 45.88 percent voted no. The initiative could produce about $900 million a year for housing subsidies and for protections for tenants, Bloomberg reports. It could “preserve affordable homes, guarantee counsel to tenants in eviction court, and subsidize other progressive priorities,” like helping seniors stay in their homes. Backed by the advocacy coalition United to House L.A., Measure ULA would work by increasing the transfer-tax rate on the sale of LA residential and commercial properties of $5 million to $10 million to 4 percent, and those valued at $10 million or more would be charged at a 5.5 percent rate, both up considerably from the current .45 percent. The money, according to Bloomberg, is separated into 70 percent for affordable housing (including “construction, subsidies, and preservation” of affordable housing) and 30 percent for homelessness prevention (including access to legal representation and advice for tenants to maintain their housing and defend against harassment, eviction and other aggressive measures by landlords). The Los Angeles Homeless Services Authority, which coordinates the annual count for most of the county, found that the region’s homeless population grew by 4.1 percent from 66,436 in 2020 to 69,144 in 2022.

Four Million Renters At Risk Of Eviction Amid Surge In Housing Costs. Tenants and landlords across the country are bracing for a likely flood of evictions as a perfect storm of factors has pushed rental rates to historic highs. More than 8 million people were behind on their rent at the end of October, and nearly half of those residents say they are “somewhat or very likely” to be forced out of their homes in the new year, according to the Census Bureau. That’s the highest number ever recorded since this data has been calculated. This comes as the median rent in the U.S. hit a record-breaking $2K a month. Inflationary pressures and extremely low vacancy rates are behind the surge, creating an environment where more than 30 million people have seen their rent increase over the past 12 months, per Yahoo News. The Federal Reserve’s efforts to curb inflation by pushing up interest rates is also putting pressure on the multi-family industry as once-aspiring homeowners find themselves no longer able to afford a mortgage and forced to rent. At the same time, evictions are on the rise as assistance doled out by the federal government during the pandemic dries up. Data from the Eviction Lab at Princeton University found evictions are 52% higher than average. Curbing evictions is essential to maintaining the health of our economy during the best of times, but especially during a downturn. Dwindling rental income could render mom and pop property owners unable to pay their mortgages and finding new tenants is more difficult during a recession. Policy changes and initiatives outlined in the Biden Administration’s “Housing Supply Action Plan” are intended to tackle affordability, but many depend on cooperation from Congress. In the meantime, millions of renters need financial assistance for housing, according to the Center for American Progress. There is currently a shortage of more than 7 million affordable homes for the close to 11 million families considered extremely low income in the U.S., per data from the National Low Income Housing Coalition. And, of course, this further leads to homelessness.

Meet Me by the Fountain: An Inside History of the Mall, by Alexandra Lange. “Malls have been dying for the past forty years,” writes design historian and critic Alexandra Lange in her new book, Meet Me by the Fountain. But what really was the mall? To its mid-century inventor Victor Gruen, it was a kind of urban utopia. To Joan Didion, it was “toy garden cities in which no one lives but everyone consumes.” In her book, Lange unpacks the uniquely American fixation with malls, looking at them through the lens of architectural history and cultural observation. In several case studies that analyze dozens of malls, Lange attempts to find out what separates the good ones from the bad ones, and how they reflect society and consumerism back to us. Lange also warns we shouldn’t be so quick to write them off: “Every decade rewrites the obituary in its own terms.” But Lange writes that malls will be back in a new form not yet discovered. $9.00 at Amazon.

Ten Sunniest Cities in the U.S. Are you craving more vitamin D or investing where the sun shines? Well, you’re not alone. More and more people are looking to move to sunnier cities throughout our country. In fact, sunny, relatively affordable metro areas have been some of the most popular migration destinations during the pandemic. So put your money where the sun shines. Before diving into the sunniest cities, let’s define what sunny weather means. “Sunniness” is defined as less than 1/8^th of the sky is covered with clouds. US News and World Report compiled a list of the sunniest cities in the U.S. The ranking of the top ten sunniest U.S. cities (with over 100,000 residents) based on their annual number of sunny days are: 

1. Yuma, Arizona, 242 sunny days per year. Officially the sunniest city in the world, Yuma, receives over 4,000 sunlight hours per year, along with extremely low humidity. In other words, an “oven”! During the summer months, it averages more than 13 hours of sunlight per day, mainly due to its location in the Sonoran Desert. Because of this, summers are sweltering, with temperatures typically in the 110-degree range throughout July and August. But you can use those sunny days to take advantage of all the outdoor activities the city has to offer, assuming you’re crazy enough to venture outdoors. From rafting on the Colorado River to exploring the nearby Imperial Sand Dunes, there’s something for everyone in Yuma. In town, you can see the historic city center or visit one of the many local boutiques. I sound like the chamber of commerce, don’t I. Don’t answer that. Anyway, if you’re considering investing in Yuma, you’ll find that the median home sale price is $317,000 (below the national average). And if you’re planning on renting out that house, the average monthly rent you’ll receive for that two-bedroom house to be around $1,500. The other nine sunniest cities are:

2. Phoenix, Arizona, 211 sunny days per year

3. Las Vegas, Nevada, 210 sunny days per year

4. Fresno, California, 194 sunny days per year

5. El Paso, Texas, 193 sunny days per year

6. Bakersfield, California, 191 sunny days per year

7. Sacramento, California, 188 sunny days per year

8. Los Angeles, California, 186 sunny days per year

9. Stockton, California, 184 sunny days per year

10. Albuquerque, New Mexico, 167 sunny days per year

“Creative Financing Techniques” As investors, we’ve seen mortgage rates rising above 7% for the first time in decades. The answer to high mortgage rates is to simply NOT deal with institutional lenders. Instead, the solution is to utilize creative financing techniques for your deals. And the person to show how to use techniques like seller-financing, subject to, lease options, and similar techniques is Bill Tan. Bill will be our special guest at our December Christmas meeting. Bring your deals with you because Bill is famous for analyzing them on the spot during his presentation. The title of Bill’s presentation is “Creative Financing Techniques in a Changing Real Estate Market.” Thursday night, December 8, 2022, 6:30 to 9:30 pm. Come early and enjoy our Vendors Expo. Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034. FREE Admission. Metered street parking (but don’t come “fashionably late” or you’ll be forced to park in Long Beach and take an Uber!). RSVP: LARealEstateInvestors.com.

Vendors Expo Returns! Our world-famous super-duper "Vendors Expo" returns on Thursday night, December 8, 2022. The Vendor Expo opens 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. Our Vendor Expo will be held at the 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.

LAC-REIA Benefits Program. If you’re looking to save money during this inflationary economy, we’ve got the solution for you. Our new Benefits Program offers free services, plus thousands of discounts on groceries, restaurants, prescriptions, gasoline, and travel. Save hundreds of dollars every month. The cost is only $14.97 per month. And here’s the best news of all. You can sign-up for the first 30-days for FREE. Yes absolutely FREE! So you have nothing to lose, everything to gain, and money to save! Register at www.LacreiaBenefitsProgram.com. (Enjoy the 30-day free trial by using code “LACREIA30” when you register.)  

New “LARealEstateInvestors.com” Podcast. We are so very excited about our podcast, "LARealEstateInvestors.com" (cleverly 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. Every week, Bill interviews real estate professionals sharing their insights and advice for real estate investors. Every Tuesday live at 3:00 pm, and anytime thereafter on YouTube, Facebook, and Google.

This Week. Investors will be hoping for more specific Fed guidance on the pace of future rate hikes and bond portfolio reduction. New Home Sales will be released by the U.S. Census Bureau on Wednesday (11/23). The Core PCE Price Index, the inflation indicator favored by the Fed, will come out on Thursday (12/1) by the Bureau of Economic Analysis. Finally, the key Employment report will be released by the Bureau of Labor Statistics on Friday (12/2). Markets will be closed on Thursday and will close early on Friday in observance of Thanksgiving. 

Weekly Changes:

10-year Treasuries:            Flat    000 bps

Dow Jones Average:          Fell    100 points

NASDAQ:                           Fell    100 points

Calendar:

Wednesday (11/23):           New Home Sales

Thursday (12/1)                  Core PCE

Friday (12/2):                      Employment               

For further information, comments, and questions:

Lloyd Segal

President

Los Angeles County Real Estate Investors Association, LLC

www.LARealEstateInvestors.com

310-409-8310