Economic Update (Monday, July 13, 2020)

[Lloyd Segal]

Economic Update
(Monday, July 13, 2020)

Not since the 1960s has the United States experienced social upheaval like it is experiencing today. We have protests, an upcoming national election, and a massively divided political landscape. On top of that, we have an infectious virus that is spreading across the country, creating fear and historic economic shutdowns. Those expecting a "V-shaped" recovery for our economy are now disappointed. The first few months looked like a V, but then things slowed down and will likely continue slowing (unless we get a widely distributed vaccine). Worse, we may not see 4% or lower unemployment rates again until 2023. Maybe longer. But day-by-day, week-by-week, month-by-month, progress will be made. I remain hopeful; you should too. We have history on our side. Companies, like the rest of us, are adapting. We will all emerge stronger when this storm has passed. Let’s dig deeper…

Weekly Jobless Claims. The number of initial jobless claims fell by almost 100,000 last week to a four-month low 1.31 million, according to the Labor Department. Initial jobless claims are a rough gauge of layoffs, and the pace of layoffs is still quite high and appears to be bogging down as coronavirus cases increase. An additional 1.04 million people applied for benefits last week through a temporary federal-relief program, pushing the combined total for the week to 2.35 million. New jobless claims were the highest in California, Arizona, Texas, New York, Florida and Georgia. The same states that have been hit hardest by the coronavirus and have struggled to process a deluge of new jobless claims. New reports from California suggest that up to 2 million claims are still outstanding. More than 50 million new claims have been filed since mid-March! (Before the crisis the states processed fewer than 225,000 claims a week.) Pent-up demand and the return of millions of workers to their jobs in May and early June gave a big jolt of adrenaline to the economy. But a renewed rise in coronavirus cases in most states has robbed the recovery of its momentum. Worse, we could see increased filings in coming weeks in response to a surge in new cases and related closures of businesses.

Emergency Renters Assistance Program. Landlords (and tenants) listen up! An estimated 50,000 households in Los Angeles are about to get a little bit of rent relief. The Emergency Renters Assistance Program will provide subsidies up to $2,000 to help at-risk Angelenos stay in their homes. Most of the money for the program— described as the largest pandemic rent assistance program anywhere in the country—will come from federal CARES Act funds. To qualify for the subsidies, a tenant must have already met the HUD standard of "low to moderate income" before the pandemic began, and now also be financially impacted by the COVID-19 pandemic. That household income standard ranges from $58,450 for one person living alone to $110,250 for a family of eight. Residents are eligible for the program regardless of immigration status. Rent assistance subsidies of up to $1,000 per month, and $2,000 in total, will be paid directly to landlords. But if you, as the landlord, accepts the funds, you commit to NOT charge interest or late fees on rent that was owed by the tenant, to NOT evict the tenant for six months after the local emergency order ultimately expires, and to NOT impose a rent increase for a year after the order expires. Realistically, a $103 million program will only be able to help a small fraction of L.A. residents in dire economic need as the pandemic and economic crisis continues. As a result, demand will be high and serve as a reminder that the federal government must offer billions more in housing assistance if we are going to help all who need assistance to remain in their homes/apartments during this pandemic and get landlords paid.

Shrinking Affordability Homes. The supply of affordable homes in the US continues to shrink. The jump in prices of affordable homes is tied to a shortage in the number of affordable homes on the market—an issue that has plagued house hunters since 2012 and is showing no signs of letting up. Nationwide, there was a weekly average of about 322,000 homes for sale in the bottom price tier during the 12 weeks ending May 31, down from 332,000 in February. During any economic downturn, buyers tend to flock to more affordable homes, reducing inventory and driving up prices in that segment of the market. Today, this trend is being intensified by low mortgage rates, which are attracting a rising share of first-time homebuyers, who tend to purchase homes on the less expensive end of the spectrum. Many Americans—especially millennials—were already toying with the idea of buying their first house before the pandemic. Now they’re actually taking the plunge because mortgage rates are so low and it’s less attractive to live in a small apartment right next to the office (during a pandemic). Prices will likely continue to grow faster in the affordable segment of the market for at least the next few years given this lack of supply. Fortunately, mortgage payments are actually lower now than they were a year ago, despite the growth in home prices, because interest rates have dropped so much. For example, the median monthly payment on a home listed in June fell to $1,170 compared to $1,225 during the same period last year, despite an average $18,000 rise in asking prices.

Demand Slows for Luxury Homes. In nearly every metro in the United States the top price tier grew at a slower rate than the bottom price tier during the 12 weeks ending May 31. Three metros even saw prices in the top tier decline. These markets were Dallas, Houston and Chicago, where prices in this segment dropped 2%, 1% and 0.4%, respectively. Demand for expensive homes has dwindled since the pandemic started. Why? Because buyers who are still searching in the high end of the market seem to be a bit more patient for several reasons. First, they can afford to wait for their dream home, whereas people with tighter budgets want to buy now in order to take advantage of record-low mortgage rates. Second, the relatively slow price growth at the high end of the market may also be tied to the fact that people are now purchasing less expensive high-end homes. For example, a high-end buyer may now be in the market for an $800,000 home, whereas before the pandemic, their budget may have been closer to $1 million. Another factor contributing to the slowdown at the high end of the market is the ongoing credit crunch. Although mortgage rates are at historic lows, many buyers have found it difficult to secure jumbo loans because banks have tightened their lending standards for these loans during the pandemic.

ISM Non-Manufacturing Index. The Institute of Supply Management (“ISM”) Non-Manufacturing index rose to 57.1 in June (levels above 50 signal expansion; levels below signal contraction.) The major measures of activity were mostly higher in June. The business activity index surged to 66.0 from 41.0 in May, while the new orders index jumped to 61.6 from 41.9. The employment index increased to 43.1 from 31.8 in May. The supplier deliveries index declined to 57.5 from 67.0. The prices paid index rose to 62.4 from 55.6 in May. A strong surprise to the upside from the service sector, as the ISM Non-Manufacturing Index recorded its largest single-month increase (by far) in the series history dating back to 1997. The 11.7 point jump in the overall index brought the service sector reading comfortably back into growth territory at 57.1 (remember, readings above 50 signal expansion). In total, fourteen of eighteen companies reported growth in June, while three reported contraction (one reported no change). And the underlying indices showed improvement across the board. The one index that declined – supplier deliveries – increases when companies report longer delivery delays (typically a sign of more demand than companies can fill in a timely manner), so the continued decline in June means fewer delays. The two most forward-looking indices – business activity and new orders – both saw massive improvements in June. Activity rose 25.0 points, the largest monthly increase in the index's history! The new orders index followed suit, up 19.7 points (also a record for the series), to a healthy reading of 61.6. On the inflation front, the prices paid index rose to 62.4 from 55.6 in May. Rising costs for meats, cleaning products, and medical supplies (like N95 masks) lead the index higher. The ISM data will likely remain volatile over the weeks and months ahead as the virus – and state responses – impact the ability of companies to operate.

Senior Housing. The silver tsunami triggered by the aging of America is driving increased demand for senior housing, even in the face of a pandemic. For real estate investors, the opportunities presented by senior housing have made this sector very appealing. Senior housing, which encompasses everything from independent living to memory care facilities, attracted $17 billion of investment in 2019, according to a CBRE Group Inc. report on senior housing. Nursing homes aren’t doing well, but senior living communities are in demand. They did a much better job protecting their residents and the spread of Covid. It remains a bright spot as an asset class, especially in Los Angeles where we are so underbuilt. Investors are targeting areas people drive by on their way to other places, close to hospitals and medical facilities, and in areas with aging populations. New facilities have high-end amenities and lots of common space, creating a resort-like atmosphere. This is the new generation of senior living. Most existing L.A. facilities were built in the ’70s or ’80s, meaning there’s a need for new product. But building is not easy for these types of properties, and there are a few reasons why L.A. is so undersupplied. In past years, the same piece of land could sell for a higher price for multifamily structures, so senior housing investors were getting outbid. There can also be a negative stigma around senior housing facilities, which can make it harder to get projects approved. L.A. has only seen two new assisted living buildings opened since 2012. In Denver, which has one-sixth of L.A.’s senior population, nine facilities have opened during that time. As boomers get older, they are going to need facilities to age in. If we don’t start building now to catch up with the demand, we are going to feel it. Covid-19 has made people pickier about their location. Now, senior buyers are looking for high-end facilities and great locations. Senior housing is a great opportunity for real estate investors.

Quibi. Have you tried Quibi? Heck, have you even heard of Quibi? When Quibi debuted at number three on Apple’s App Store in April (try saying that five times), industry insiders thought Jeffery Katzenberg may have once again struck gold. The former Disney studio boss and DreamWorks founder (along with partner Meg Whitman) envisioned a streamer that would lure millions of young subscribers with “snackable,” ten-minutes-or-less productions viewable only on phones. Initially, at least, people bit. But with the $1.75 billion company’s ranking plunging to 284th place by mid-June and its free 90-day test drives set to begin expiring this month, many are wondering what went wrong. While Quibi, like most streamers, does not release viewership numbers, even the casual observer will note the lack of buzz. The company was branded Quibi (Quick Bites), but it sounds more like a “quinoa-based doggy snack,” or worse, “the cry of an attacking Ewok.” Besides, was there ever really a strong demand for a subscription-based streamer doling out bite-sized bits of entertainment? Really? The company is betting on people’s leftovers. “If we have a show that’s going to be a huge hit, you pitch to Netflix or HBO,” a famous producer told New York magazine. “If it doesn’t get traction, you pitch to Quibi.” Others wonder why a pair of 60-something billionaires would think to run an entertainment company whose entire existence is banking on the mercurial whims of smart phone addicts between the ages of 25 and 30? Sounds like a bad idea with poor “reception.”

Washington Redskins. Do you have a suggestion for a new name for the NFL’s Washington Redskins football team? If yes, call Dan Snyder, the owner, right away! The team announced Friday it would finally change its name. Just in time too, because more and more retailers are joining Nike and Amazon in pulling Washington Redskins merchandise from their online shops. Sports fans and team owners have grappled with the idea that some names and imagery associated with franchises like the Cleveland Indians and Washington Redskins are offensive to Native Americans. The latest push comes amid social justice efforts that are gaining traction following nationwide protests in response to the death of George Floyd in police custody. FedEx, which holds the naming rights to the Washington Redskin’s NFL stadium through 2025, also asked the team to change its name. Multiple outlets reported late last week that Washington Redskins merchandise was no longer visible on Nike’s official site. The NFL’s official online store is probably next. The team, citing recent events and feedback from its community, is having discussions with the league in recent weeks. “This process allows the team to take into account not only the proud tradition and history of the franchise but also input from our alumni, the organization, sponsors, the National Football League and the local community we are proud to represent on and off the field,” Snyder said in a news release. Transaction: We are changing our name; we just don’t know what it is yet?

Billionaires. Are you a billionaire yet? In the U.S., it takes an annual income of $538,926 to rank in the top 1% of earners, according to 24/7 Wall St. The top 1% of earners in the U.S. account for approximately 20% of the nation's total annual income. Maybe Bernie Sanders was right after all. The roughly 1.4 million U.S. taxpayers that comprise the top 1% generate an average annual income of around $1.7 million. The number of billionaires worldwide rose 8.5% year-over-year to a record 2,825 individuals in 2019, according to a report just released by Wealth-X. The combined wealth of the world's billionaires increased 10.3% to $9.4 trillion. The report noted that 153 individuals had wealth in excess of $10 billion and they controlled 35% of total billionaire net worth in 2019. Yikes! The city with the most billionaires was New York (113), followed by Hong Kong (96) and San Francisco (77). Los Angeles? 44 billionaires and counting…

Hotel for Sale. Here’s a deal. Boutique hotel, convenient to Hollywood. 116 rooms, rooftop pool, jet-setting clientele. Previous owner spent $40 million on renovations before becoming an international fugitive. Asking price: $100+ million. Interested? If that sounds like a steal — even in the middle of a global pandemic that has nearly ground travel to a halt — the infamous , 9291 Burton Way, Beverly Hills, could be yours. Prosecutors seized the hotel in 2016 as part of a long-running investigation into one of the biggest foreign bribery and kleptocracy cases in history: the looting of more than $2.5 billion from a Malaysian sovereign wealth fund. The property was seized from Jho Low, a financier turned fugitive whom authorities in the United States and Malaysia described as the architect of a brazen scheme that also ensnared its prime minister and one of Wall Street’s most powerful banks, Goldman Sachs. Some of the cash helped finance the movie “The Wolf of Wall Street,” which earned Leonardo DiCaprio a Golden Globe. But Mr. Low’s nefarious activities make the “Wolf of Wall Street” look like Sesame Street. Mr. Low acquired the Viceroy L’Ermitage for about $40 million in 2010, and later spent the same amount on renovations. Now the hotel — the last of Mr. Low’s marquee properties to be sold by federal authorities — is being auctioned off by Michael M. Eidelman, a Chicago bankruptcy lawyer hired as the special master to conduct the auction. The auction is expected to be completed sometime this summer, and the government has the right to reject any prospective bidder after a background check. If interested, you should contact Mr. Eidelman directly. 

This Week.  The primary focus this week will continue to be news about medical advances, vaccine developments, plans for reopening the economy, government stimulus programs, and Fed monetary actions. Beyond that, the Consumer Price Index (CPI) will come out tomorrow, Tuesday (7/14). CPI is a widely followed monthly inflation report that looks at the price change for goods and services. Retail Sales will be released this Thursday (7/16). Since consumer spending accounts for about 70% of all economic activity in the US, the retail sales data is a key indicator of the strength of our economy. In addition, the next European Central Bank meeting will also take place on Thursday (7/16). Finally, Housing Starts will come out on Friday (7/17).

LA County Round-Up:
Total houses sold: 3,167 (down 52% from last year)
Median days on market: 44 days (down 4% from last year)
Median sales price: $635,000 (up 1% from last year)
Median price per sq. ft: $433 (up 3% from last year)
Sold above listing price: 39% (up 1% from last year)
Inventory supply: 4.4 months (up 47% from last month)

Calendar:
Tuesday, July 14: Consumer Price Index
Thursday, July 16: Retail Sales
Friday, July 17: Housing starts

Weekly Change:
10-year Treasury: fell 0.05
Dow Jones: rose 100 points
NASDAQ: rose 300 points