Economic Update (Monday, July 27, 2020)

[Lloyd Segal]

Economic Update
(Monday, July 27, 2020)

This week is a good week for real estate investors (particularly if you have a house for sale). Existing houses sales are up, new home sales are up, inventories are down, and mortgage rates are down. Christmas in July! Nevertheless, against this backdrop of positive real estate news, investors remained focused on the troubling spread of the coronavirus in many regions of our country. So let’s wash our hands, put on our facemasks, and get under the hood…

Thought for the Day: 87% of gym members don’t even know their gym is closed.

Existing Home Sales. Sales of existing homes jumped 20.7% in June compared with May, according to the eternally optimistic National Association of Realtors. It was the largest monthly gain since the NAR began tracking the data and came after sharp declines over the previous three months due to the coronavirus pandemic. Sales were still 11.3% lower annually. BTW, this count is based only on closings, so it represents contracts signed in late April and May, before much of the national economy began to reopen (and before the most recent surge in coronavirus cases). The data shows that we are clearly seeing trends for buyers preferring homes in smaller towns and suburbs. The urban areas, with their higher density, are obviously not as exciting during this pandemic. But home sales could have been more robust had there simply been more homes for sale. The supply of existing homes available fell a remarkable 18.2% annually to just 1.57 million homes at the end of June. Based on the current sales pace, that represents only a four-month supply. As you can see, we are facing an acute inventory shortage especially at the lower price points. The inventory levels are shrinking and shrinking, which could create a bottleneck lowering home sales later. Mortgage rates are hovering near record lows and have been for several weeks. Also, this is giving buyers more purchasing power but also helping to keep home prices elevated. The median price of an existing home in the U.S. sold in June rose 3.5% annually to $295,300. Not much by LA standards, but the highest price on record! Much of the gains are likely from pent-up spring demand, but there are signs that it will continue at least through the summer. But there could be trouble on the horizon; a second lockdown, as coronavirus cases are surging in many parts of the country.


New Home Sales. Existing home sales represents 90% of the real estate sales market. New home sales represent the other 10%. Nevertheless, monitoring new home sales is important because it is a leading indicator of the economy and the condition of our real estate market. As such, June was a very good month as new single-family home sales increased 13.8% from May, to 776,000 annual rate. Sales are up 6.9% from a year ago. The recovery in new home sales continued at a break-neck pace in June, rising to the highest level since 2007. That's right, new home sales were higher in June than before COVID-19 hit the US economy. Keep in mind that sales of new homes are counted when the contracts are signed, so they represent a timelier indicator of activity than existing home sales (which are not counted until closing). Plus, there are a couple of factors that should continue to drive new home sales higher in the months ahead. First, affordability is increasing; Fed rate now sit below 3% for the first time on record. That’s right - the first time in history! Second, due to the pandemic, buyers' preferences are shifting away from denser urban environments, toward the more spacious options in the suburbs where most new single-family homes are built. However, a lack of finished new homes could be a headwind for sales going forward. The months' supply of new homes (how long it would take to sell all the homes in inventory) fell to 4.7 months in June from 5.5 months in May. The decline was due to both the faster pace of sales and a decrease in inventories (4,000 units). Given the downward pressure that social distancing regulations, shortages of labor, and supply chain issues continue to exert on new construction, do not expect an oversupply of homes anytime soon. As a result, home prices should continue to increase in the next several months.


Mortgage Rates. The average rate on the popular 30-year fixed loan just fell to another record low of 2.87%. That is about a full percentage point lower than where it was one year ago. If there is an upside to all the pandemic-induced uncertainty in our economy, it’s these rock-bottom mortgage rates. And that’s just the average. Some borrowers are getting even lower rates! There are pools of loans being sold right now with average rates of 2.625%, meaning some people are getting rates at 2.375-2.5%. While those likely involve some closing costs, that’s still nuts! As you know, mortgage rates loosely follow the yield on the 10-year U.S. Treasury, which last week fell to the lowest level since March (0.59%). It is not an exact marriage, however, as the two have diverged recently given all the crazy market conditions brought on by the coronavirus. For example, the Federal Reserve began buying more mortgage-backed bonds to keep the market afloat and at the same time instituted a mortgage bailout for borrowers hit financially by the crisis. But all this uncertainty makes lenders (and investors in mortgages) nervous. They worry that people will lose their jobs and not make their monthly payments, or that the economy will go on lockdown again, crippling the housing market in general. Mortgage rates are really based on what investors will pay for mortgage-backed bonds. Investors need some kind of yield, or they won’t buy those bonds. That is why rates can only go so low. It’s a question of whether the bonds even exist and what the demand would be for those incredibly low-rate bonds? So yes, mortgage rates are at a record low and could move even lower, especially if the U.S. economy shuts down again, unemployment rises, and investors rush even further into the bond market. But the disastrous economic conditions needed for that to occur would likely scare potential buyers away from buying homes.


Weekly Mortgage Demand. Mortgage applications to purchase a home rose 2% for the week and were a striking 19% higher than a year ago. That is the ninth straight week of annual gains and wider than in previous weeks. Add that to an already strong refinance market, and total mortgage application volume rose 4.1% last week from the previous week, according to the Mortgage Bankers Association. Borrowers today are looking for any potential savings, given the uncertainty in our economy due to the pandemic. Low rates are only adding to already strong buyer demand.


Foreclosures. ATTOM Data Solutions released its “Midyear 2020 U.S. Foreclosure Market Report” which shows there were a total of 165,530 properties with foreclosure filings (i.e. default notices, scheduled auctions or bank repossessions) in the first six months of 2020, down 44 percent from the same time period a year ago and down 54 percent from the same time period two years ago. This is good news for distressed homeowners, but bad news for real estate investors. In June of 2020, only one in every 14,798 properties in the United States had a foreclosure filing, the lowest in years. Why? Because residential foreclosures across the nation continue to decline amid a unique combination of a booming housing market and now a moratorium on foreclosures while the country struggles to overcome the crisis. Foreclosure starts and completions were already declining rapidly last year because the housing market and the economy were riding so high. Now they’re down to historic lows not seen for over 15 years as the federal government bans lenders from pursuing foreclosures (to help people weather the pandemic). ​ However, distressed property volume is almost guaranteed to ​increase significantly once the moratorium is lifted because millions of Americans ​missed their mortgage payments ​in June and will continue to do so because of unemployment. But for now, everything is on hold and the foreclosure numbers reflect that pause. Nationwide only 0.12 percent of all housing units (one in every 824) had a foreclosure filing in the first half of 2020. Metro areas with the highest foreclosure rates include the only city in California, Bakersfield (0.27 percent). States that saw an annual decrease include California (down 29 percent). There were a total of 30,656 U.S. properties with foreclosure filings in Q2 2020, down 80 percent from the previous quarter as well as a year ago to lowest quarterly total since 2006 (pre-recession average of 278,912 per quarter), making Q2 2020 the 15th consecutive quarter with foreclosure activity below pre-recession averages.


Weekly Jobless Claims. Unfortunately, the 15 consecutive weeks of declines in U.S. initial jobless claims are over. As the coronavirus spreads across our nation, some 1.4 million Americans applied for unemployment benefits last week, the Labor Dept. reports. It's an increase from the prior week, when 1.3 million applied. Another 975,000 people requested Pandemic Unemployment Assistance, a new federal program for self-employed and gig workers. That figure increased by 20,000 from the previous week. This marks the 17th week in a row that total jobless claims have been above 2 million. Claims for regular unemployment had been dropping since the last week of March, when they peaked a 6.6 million, until this past week's increase to 1.4 million from 1.3 million. The biggest jumps in unemployment applications were in Florida, Georgia, Washington, Indiana, and our very own California; the very same states that have seen sharp increases in the number of COVID-19 cases. Further, the risk from repeated business closures is that temporary job losses will become permanent. This could result in an even slower pace of recovery. To put this data in perspective, before the pandemic surge, the highest single weekly tally ever was 695,000 in 1982. Now, more than four months into the crisis, initial claims are still running at an astonishing 1.4 million per week.


Eviction Moratoriums. Los Angeles is not the only city with an eviction moratorium. Several major cities across the U.S. (and our federal government) have either issued temporary bans on evictions or are considering them as the coronavirus outbreak unfolds. The San Jose City Council approved a proposal preventing evictions amid the coronavirus emergency, and San Francisco are putting forward similar legislation. In other cities, mayors have declared states of emergency that bar evictions from moving forward. That’s the case in Miami and in Baltimore. Boston Mayor Martin Walsh asked the Massachusetts court system “to offer leniency to those facing non-essential evictions” as consumer advocates called for a ban on the practice during the infectious disease pandemic. In Washington State, which has one of the largest coronavirus clusters in the country, two major landlord groups, the Rental Housing Association of Washington and the Washington Multi-Family Housing Association, both recommend a 30-day moratorium on evictions in King County, where Seattle is located. In New York, the city’s courts have implemented a temporary moratorium on evictions. Additionally, the Real Estate Board of New York, a trade group that represents major developers and property managers in the city, voluntarily placed a three-month moratorium on evictions. Philadelphia’s mayor is encouraging landlords to recognize the extraordinary circumstances tenants are facing by not adding housing insecurity to a family’s financial or health challenges. Major trade groups representing the rental industry have also backed landlords taking steps to reduce the burden on renters, at least temporarily. But even in cities that haven’t halted them, evictions may not proceed normally because courts in many municipalities have either closed or scaled back operations during the outbreak. Avoiding evictions at a time when millions of people could lose income is also a matter of public health. This pandemic is a stark reminder that housing is health care.


Student Housing Investing. When the economy falters, one type of real estate investment usually avoids the fallout: student housing. For two reasons. First, because students always want to live near campus. Second, people see an economic downturn as motivation to pursue additional education. Once they register, they also find themselves in the market for housing close to their universities. Historically, university enrollment increases when employment declines, as we certainly have today. In fact, college enrollment has grown through every economic downturn dating back to 1929. Enrollment growth ultimately boosts the demand for student housing, typically making the sector a top performer in times of economic distress — a quality which has bolstered real estate investor interest in recent months. Despite many universities planning to hold some classes online, there will always be students looking for off-campus housing. Annual investment in student housing more than tripled nationwide to $11 billion between 2014 and 2018, according to a CBRE report. For students who do return to campus this fall, housing will look quite different. Gone are the days of stuffing as many students as possible into a dorm. Instead, many will have rooms to themselves. Student housing options were already moving away from dorm-style bathrooms and cramming several students in a room, something that the pandemic has accelerated. Some students will gladly pay extra for more space. That’s going to displace a lot of students that would have otherwise stayed on campus and now push them off campus. Accordingly, demand will likely be higher for off-campus housing as community bathrooms and kitchens go out of vogue. Top markets like Los Angeles will be desirable because there are many people, beyond just students, looking to lease in the areas surrounding campuses. For example, at USC, there could be as many as 2,000 additional students looking for off-campus housing this fall.


Deodorant Sales. As you know, people are socializing less and working from home more, causing a slump in demand for personal care items like deodorant and makeup, consumer goods giant Unilever said on Thursday. The firm, which owns Dove soap and Axe deodorant, as well as hundreds of other brands, is smelling the pain as lockdowns have led to a dramatic drop-off in sales for personal care items. Lockdowns and reduced personal care occasions (amidst restricted living), has led to lower demand for skin care, deodorants and hair care. In contrast, while deodorant sales dried-up due to social distancing, locked-down consumers have sent ice-cream sales soaring. Seriously.Unilever, which conveniently also owns Ben & Jerry’s and Magnum, announced that sales of ice cream increased by 15% in the first quarter and by 26% in the second quarter! Nevertheless, while consumer ignore how they smell, but consumed their favorite ice cream, there is heightened focus on compulsively washing our hands. As a result, sales of Unlever’s hand hygiene products (what doesn’t Unilever own) have more than doubled during the pandemic.


Chocolate Updates. Here’s some good news for the chocoholics among us; eating chocolate once a week can lower your risk of heart disease. That’s important considering Americans are buying more chocolate during the coronavirus pandemic. A new study published in the European Journal of Preventive Cardiology supports the argument that chocolate is very good for your heart. Researchers conducted an analysis of studies from the past five decades that looked for links between eating chocolate and coronary artery disease, which included data from more than 336,000 eager participants who reported their chocolate consumption. Those who ate chocolate more than once a week were associated with an 8% lower risk of blocked arteries, compared with those who indulged in chocolate less than once a week. That’s good enough for me! The study suggests that chocolate helps keep the heart’s blood vessels healthy. Why? Because chocolate contains heart healthy nutrients such as flavonoids, methylxanthines, polyphenols and stearic acid, which reduces inflammation and increase good cholesterol (high-density lipoprotein or HDL cholesterol). Consuming cocoa reduces the risk of heart attack and stroke, and lowers the risk of death by cardiovascular disease. Scientists believe that the flavonoids found in chocolate (and red wine) do this by lowering blood pressure and improving vascular function (aka how effectively your blood delivers oxygen and nutrients throughout your body), as well as carrying away waste materials. That’s good news for the many people who’ve been turning to chocolate during this pandemic. In fact, Americans spent $3.7 billion on chocolate in the 17-week period that ended June 27, which is up 6.3% from the same window last year.

What LA Eats? Have you been wondering what Los Angeles eats during a pandemic? If yes, Los Angeles Magazine has compiled a list of top grocery store items, top restaurant orders, and top fast food orders. As Southern California has a reputation as a healthy, clean-eating population, you would think that, as we sheltered in place, we would be keeping ourselves sustained by placing delivery orders for healthy salads and juice. But think again. Data from Postmates indicates that while hidden away in the privacy of our homes, our top orders were fried chicken, burgers–and, of course, the ever-essential La Croix. Here are the most popular delivery orders in Los Angeles from March to June, 2020. Top Grocery Store Items: 1. Bananas; 2. Eggs; 3. Avocados; 4. La Croix; 5. Strawberries; 6. Ben & Jerry’s Ice Cream; 7. Tomatoes; 8. Apples; 9. Lemons; and, of course, 10. Toilet paper. Top Restaurant Orders: 1. Howlin’ Ray’s hot chicken; 2. Sweetfin poke bowl; 3. Dave’s Hot Chicken, 4. HiHo Cheeseburger; 5. The Big Chill frozen yogurt; 6. Tatsu Ramen; 7. Howlin’ Ray’s wings; 8. Dave’s Hot Chicken tenders; 9. Tacos Gavilan; and 10. Fat Sal’s. Top Fast Food Orders: 1. Chipotle burrito bowl; 2. McDonald’s French fries; 3. Panda Express plate; 4. Chipotle burrito; 5. Shake Shack burger; 6. McDonald’s McChicken sandwich; 7. Jack-in-the-Box tacos; 8. Popeye’s spicy chicken sandwich; 9. Chick-fil-A nuggets; and 10. Blaze Pizza. What are you eating during this pandemic?

Looking ahead. This weekinvestors will continue watching for news about medical advances, vaccine development, government stimulus programs, and plans for reopening (or re-closing) the economy. Beyond that, the next Fed meeting will take place this Wednesday (7/29), and investors will be looking for guidance about the expected levels of monetary stimulus. Second quarter gross domestic product (GDP), the broadest measure of economic growth, will be released on Thursday (7/30), and early estimates are for a massive decline in the range of 30% to 40% due to the partial shutdown of our economy. The core PCE price index, the inflation indicator favored by the Fed, will come out on Friday (7/31). 

Calendar:
Wednesday, July 29: Fed Meeting
Thursday, July 30: Gross Domestic Product
Friday, July 31: Core PCE Index

Weekly Change:
10-year Treasury: fell 0.02%
Dow Jones: fell 100 points
NASDAQ: fell 100 points