Monday Morning Quarterback

Written by Lloyd Segal Posted On Monday, 27 March 2023 00:00

State: Alabama
SOLD: 2

Monday Morning Quarterback

(Monday, March 27, 2023)

The best investment advice I ever read was from Howard Marks, the master of profiting from distressed assets, and the author of “The Most Important Thing” and “Mastering the Market Cycle.” Marks says “In bad times, securities can often be bought for prices that understate their merits. And in good times, securities can be sold at prices that overstate their potential. And yet, most people do the exact opposite, they are impelled to buy euphorically when the cycle drives prices up and to sell in panic when it drives prices down.” In the current cycle let’s not make that mistake. If the current turmoil in the banking sector spreads and negatively affects real estate values, it will be time to buy, not sell. In other real estate news, let’s get under the hood…

Nearly 190 Smaller Banks Would Collapse If Hit By Depositor Runs. With the recent turmoil in the banking sector, it is important for investors to keep in mind that regional banks have been a crucial source of real estate loans, especially for construction. In fact, regional banks are responsible for about 70% of all U.S. construction and land development loans, according to the Wall Street Journal. Yet, despite recent stabilization efforts by both the public and private sector alike, smaller banks may still be at risk of suffering the same fate as Silicon Valley Bank (SVB”). Nearly 190 banks would be insolvent if even half of their uninsured deposits were withdrawn, according to a study published March 13 on the Social Science Research Network. The banks' fragile state is due to the decline in value of their long-term investments, namely government bonds and mortgage-backed securities. Though SVB was an outlier in how much of its deposits were uninsured by the Federal Deposit Insurance Corp., 10% of banks registered with the FDIC are shockingly less well-capitalized than SVB, the study found. A separate 10% of banks have experienced deeper losses of value on their investments than SVB had (which prompted the initial concern by startup CEOs and venture investors that led to the fateful bank run). Though the study did not name the 186 banks it identified as at risk of a run-induced collapse, it categorized them as smaller or regional banks with a total of $300M in FDIC-insured deposits between them. The current tension in the financial system has likely driven property values down further, meaning banks and real estate could be in a negative value decline without further intervention. Their conclusion: Should the value of long-term government bonds and mortgage-backed securities decrease further, more than just the 186 banks would be in jeopardy.

Housing Starts Rise By 9.8% In February. New home construction bounced back in February for the first time in six months, led by apartment buildings. But it’s unclear if the bounce translates into a recovery for the housing market. Construction on new U.S. homes rose 9.8% in February to 1.45 million, Census Bureau reports. The numbers are seasonally adjusted. The rise in construction of homes follows a decline in January, when housing starts fell by 2%. New home construction is up for the first time in six months. Building permits for new homes surged 13.8% to 1.52 million in February. The construction pace of single-family homes rose 1.1% in February and apartments jumped 24.1%. Single-family construction in the West led the jump with a 28.5% increase. The Midwest and South regions reported a drop in single-family construction. Permits for single-family homes rose 7.6% in February, while permits in buildings with at least five units rose by 24.3%. Nevertheless, housing starts are still down year-over-year. The annual rate of total housing starts fell from 18.4% from the previous year. The better-than-expected housing starts data was due to a boom in apartment construction and with the U.S. facing a housing deficit, the addition of multi-family units is likely to boost affordability. Yet mortgage rates remain volatile, so buyers are getting mixed signals from the U.S. economy as well as the housing market.

Existing-Home Sales Rise In February For First Time In 13 Months. A brief drop in mortgage rates has boosted U.S. home sales, but with economic uncertainty and elevated rates, the recovery may be short-lived. U.S. existing-home sales jumped 14.5% to an annualized rate of 4.58 million in February, the National Association of Realtors reports. The surge in sales reverses 12 months of losses in existing-home sales. The increase of 14.5% is the largest since July 2020, during the pandemic. Back then, sales rose by 22.4%. Single-family home sales in particular are at the highest ever since the NAR began tracking the number since 1999. The median price for an existing home fell slightly to $363,000 in February. It’s the first drop in over a decade. The number of homes on the market stayed flat at 980,000 units in February. Expressed in terms of the months-supply metric, there was a 2.6-month supply of homes for sale in February, down from January. Before the pandemic, a four or five-month supply was more the norm. Homes remained on the market for 34 days on average, up from 33 days in January. Pre-pandemic, the average time for homes to remain on the market was a month. All-cash transactions made up 28% of all transactions. About 27% of homes were sold to first-time home buyers, a drop from the previous month. The share of individual investors like you and me, and second-home buyers, rose from 16% in January to 18% in February. There’s clearly a ton of pent-up demand in the housing market, as seen by February’s jump in home sales. A dip in mortgage rates may have propelled home buyers to jump on purchasing a home, boosting sales.

CPI shows little progress on cooling off high inflation. Inflation is slowing, but it's still high. Consumer prices rose 0.4% in February and the annual rate of inflation slowed again, potentially giving the Federal Reserve leeway to approve a smaller 25% increase in interest rates last week (as it gauges the fallout from the failure of Silicon Valley Bank). The annual rate of inflation, meanwhile, slowed to 6% from 6.4%. That’s the lowest level since September 2021. Yet the so-called “core rate” of inflation, which omits food and energy, rose a sharper 0.5%. The Fed views the core rate as a more accurate predictor of future inflation trends. The increase in the core rate over the past 12 months dipped to 5.5% from 5.6%, but that’s not enough progress to give the Fed room to ease up on its fight against inflation. Rising costs of renting and homeownership accounted for more than 70% of the increase in consumer prices last month. Housing is the single biggest category of the CPI. Rents jumped 0.8% in February, pushing the increase over the past year to a 42-year high of 8.8%. More recent surveys of rents and home prices point to a slowdown or partial reversal in 2023 due to high mortgage rates and a weaker economy. But far these trends are not showing up in the consumer-price index. The cost of recreation, plane tickets, auto insurance and furniture also rose sharply. Prices of used vehicles, an early contributor to the runup in U.S. inflation, fell for the fourth month in a row. The cost of energy, including gas and natural gas, declined in February. Grocery prices rose 0.3% to mark the smallest increase in 21 months. They are still up 10.2% in the past year, however. The cost of eggs sank almost 7% after a huge runup since last fall. High egg prices have become a big sore spot for U.S. households. Fed officials worry a surge in wages could keep price pressures high and make it harder to get inflation back down to the central bank’s 2% annual target.

Ten Housing Markets Where Sellers Are Sitting Pretty. The housing market might be in flux, but there still are pockets in the country where investors are seeing their homes not just closing fast but also commanding higher prices than they did last year. In fact, while time spent on the market increased year-over-year for most cities, that time decreased in five cities. On average, homes spent a couple of days short of 10 weeks on the market in February. That’s up from February 2022, when homes spent about six and a half weeks on the market. As buyers and sellers gear up for the upcoming spring market, sellers who list their homes a bit earlier will have an advantage. This year the timeline for sales has moved up. Here’s where homes are selling faster than in most of the country and where the price per square foot has risen the most annually, according to the report. The list is limited to just one metro per state to ensure geographic diversity.

1. Davenport, Iowa

February median list price: $208,700

Year-over-year increase in price per square foot: +38.4%

2. Montgomery, Alabama

February median list price: $301,165

Year-over-year increase in price per square foot: +26.5%

3. Wichita, Kansas

February median list price: $319,995

Year-over-year increase in price per square foot: +19.8%

4. Tulsa, Oklahoma

February median list price: $354,262

Year-over-year increase in price per square foot: +18.5%

5. Youngstown, Ohio

February median list price: $151,575

Year-over-year increase in price per square foot: +18.1%

6. Minneapolis, Minnesota

February median list price: $434,950

Year-over-year increase in price per square foot: +17.1%

7. McAllen, Texas

February median list price: $283,000

Year-over-year increase in price per square foot: +16.4%

8. Harrisburg, Pennsylvania

February median list price: $322,400

Year-over-year increase in price per square foot: +16.1%

9. Little Rock, Arkansas

February median list price: $304,245

Year-over-year increase in price per square foot: +15.9%

0. Knoxville, Tennessee

February median list price: $457,116

Year-over-year increase in price per square foot: +13.0%

Rooftop Decks Prove Draw at Homes Without Backyards. Los Angeles Business Journal reports that local developers are increasingly turning to rooftop space as a way to maximize real estate square footage at a time when high land costs are making backyards increasingly a luxury amenity in Los Angeles. The economic incentives of adding the additional square footage to the roof are compelling, said John Mulville, vice president of consulting at Irvine’s Real Estate Economics. Average land values in the L.A. area have risen from about $186,000 in 2000 to about $484,000 last year – an increase of 160 percent, according to data from the Lincoln Institute of Land Policy in Cambridge, Mass. According to the report, buyers are willing to pay $50,000 to $75,000 extra for a home with a rooftop deck. In order to make it work with higher construction costs and higher land prices, you need to build a denser product in the urban infill locations. Developer La Terra built 63 three-story townhomes in Silver Lake that opened in 2015, all of which include rooftop decks with views of the Los Angeles River and the Glendale hills. Those views from the deck also come with a premium of 5 percent to 10 percent, or $50,000 to $100,000. The firm is about to start construction on 24 more townhomes in San Pedro with rooftop decks and have more planned in Orange County. Century City’s Canfield Development builds rooftop decks for almost all their small-lot subdivision homes: multiple two- or three-story single-family homes built on a single parcel subdivided into several lots. They resemble townhomes but don’t share a common wall. But adding livable space on the rooftop can be expensive because the roof has to withstand weather and weight, according to industry professionals. Developers are picky about where to build them, because some markets don’t support the extra cost. For example, it costs a developer on average an additional $20,000 to build a rooftop deck on a $900,000 home for which it charges buyers $30,000 to $40,000. According to developers, the roof deck sells the whole package.

Skid Row’s “Governor” Livid After City Demolishes Her Tent Home. If you wandered onto the corner of 5th and San Pedro Streets in Downtown L.A.’s Skid Row neighborhood about 10 days ago, you couldn’t have missed “The White House,” a glammed-out tent structure replete with a queen bed, jacuzzi (with shower), and gas stove. The tent’s owner, Stephanie Arnold Williams, had been meticulously building and maintaining the structure over the last decade while living on Skid Row. She even put the tent on a wheeled wooden platform, to clean underneath it regularly. Recently, word of Williams’ White House quickly swept the neighborhood (and via a viral video and tweet, the internet) causing a stir in the community. Unfortunately, on Feb. 13, the White House was demolished during an LAPD-accompanied early morning Sanitation & Environment sweep—one that the department has called a “routine cleanup.” “They targeted me,” says Williams. “They came straight to me with bulldozers. That’s not a routine cleanup to come with a bulldozer,” Williams told LAMag this week. “They didn’t offer me housing. They didn’t offer me anything. They took my blankets, my contact lenses, all my food. They threw away pots and pans and cups and things I needed to eat.” Williams said that she spent most of the 30-minute notice she was given to vacate begging an attending LAPD officer for an alternative solution (either to move the structure around the block or to at least give her some time to sort out her situation). The people living in the tents located across the street from The White House were given two weeks’ notice to vacate. Born in Indianapolis, Williams arrived in L.A. in 2013 to pursue a career in fashion, leaving behind her three adult children in Indiana. At first, the grandmother of eight found herself living in an emergency services shelter for six months before she landed on Skid Row, where roughly 8000 residents make up one of the largest stable populations of unhoused people in the nation. She used her sewing skills to make special pillows and perform alterations. She said that over the years, she’s watched others obtain housing and move off Skid Row. Some asked her to join them. But she decided to stay after witnessing the inequity and conditions on Skid Row. She’s since become a vocal advocate for the community. Now Williams is a key Skid Row personality. Area residents and other community activists dropped by to greet her over the course of our interview. Our interview is interrupted by the arrival of Jarvis Emerson, a representative from the Mayor’s Office of City Homelessness. Emerson told Williams he was in shock and “had nothing to do with” the demolition. Since her home was destroyed, Williams is temporarily staying in a hotel.

Vegas to SoCal Rail Project Gains Speed. OK gamblers, are you ready? The Las Vegas express train is two steps closer to reality. Brightline West, the developer of the $10 billion, 218-mile high-speed rail project between Las Vegas and Southern California, inked a pair of key agreements involving constituencies that could otherwise try to stop the project. LA Business Journal reports that on Feb. 15, Brightline West reached agreement with the California Department of Fish and Wildlife for the rail developer to design and construct three wildlife crossings over Interstate 15. The highway/rail line overcrossings were a key concession to environmental groups that had expressed concerns about the rail project, specifically about the proposed 6-foot high concrete barriers on either side of the rail line to prevent trains colliding with vehicles. Those barriers, the groups contend, would act as an additional impediment to desert wildlife attempting to cross the highway. According to Brightline West, two of the three planned wildlife overcrossings would be on either side of the town of Baker and the third would be near the Nevada state line. The agreement announcement said the parties intend to fund the overcrossings using a mix of California Department of Transportation and Fish and Wildlife funds and Brightline West capital resources. The parties will also seek federal dollars. On Feb. 21, Brightline West reached an agreement with 13 rail unions representing more than 160,000 workers to use union labor for the operations and maintenance of the high-speed rail line. This month, Brightline is expecting word from the Federal Railroad Administration regarding approval of the environmental assessment for the Victorville-to-Rancho Cucamonga segment. (The agency had previously approved the longer Las Vegas-to-Victorville segment.) And by April, Brightline must submit an application for grant funding under the bipartisan infrastructure bill passed by Congress and signed into law in late 2021.

“Wholesaling” When it comes to wholesaling, there is only one guy you need to learn from. His name is Cliff Gager. Cliff has not only wholesaled hundreds of properties, he has written books about wholesaling and has traveled the country preaching the virtues of wholesaling. Cliff will be our special guest speaker at our April general meeting. Don’t miss Cliff’s workshop. Thursday night, April 13, 2023, 6:30 to 9:30 pm. Plus, come early and enjoy our Vendors Expo. Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034. FREE Admission. (Parking: see below.) RSVP: LARealEstateInvestors.com.

Vendors Expo Returns! Attend our super-duper world-famous "Real Estate Vendors Expo." Thursday night, April 13, 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 you invest in real estate. And stick around after for our featured speaker. Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, CA 90034. FREE Admission. (Parking: see below.) Please RSVP at www.LARealEstateInvestors.com.

Parking (Iman Cultural Center). Recently attendees have complained about the lack of parking. But fear not. If there is no available street parking when you arrive, there are two FREE parking structures just two blocks away. The first structure is at the northeast corner of Motor and Palms. The second structure is at the northeast corner of Motor and National. From either lot it is short two block walk to the Iman.

LARealEstateInvestors.com Podcast. We are very excited about our weekly 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. Each 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, Zoom, and Google.

This Week. Investors will be keeping a close eye on the banking sector to see if troubles spread to other institutions. They will also monitor if Fed officials elaborate on their plans for future monetary policy. It will be a light week for economic reports. Consumer Confidence will come out tomorrow (3/28). Personal Income and the core PCE price index, the inflation indicator favored by the Fed, will be released on Friday (3/31).

Weekly Changes:

10-year Treasuries: Fell 010 bps

Dow Jones average: Rose 100 points

NASDAQ: Rose 100 points

Calendar:

Tuesday (3/28): Consumer Confidence

Friday (3/31): Core PCE Price Index

Friday (3/31): Personal Income