Economic Update (August 24-28, 2020)

[Lloyd Segal]

                                                          Economic Update
                                                    (Monday, August 24, 2020)

Its going to take years for our economy to fully heal from the economic disaster brought about by COVID-19 and the government-mandated shutdowns which continue to limit economic activity across our great country. When we talk about a full recovery, we don’t simply mean getting real GDP back where it was in late 2019; a full recovery comes when the unemployment rate gets back below 4%, and I really don’t see that happening until at least 2023. But it was a good week for real estate data. With that in mind, let’s wash our hands, put on our facemasks (yes, you!), social distance, and get under the hood…


Existing Home Sales (National). Sales of existing homes soared 24.7% in July from June, according to the National Association of Realtors. Amazingly, that’s the strongest monthly gain in the history of the survey, going back to 1968, and the highest sales pace since December 2006! The increase in sales came as supply fell, prices rose and mortgage rates stayed low. The supply of existing homes plummeted 21.1% annually, with just 1.5 million homes available for sale at the end of July. This represents a 3.1-month supply at the current sales pace, down from a 4.2-month supply a year earlier. It’s the lowest July supply in the history of the inventory survey, which has been tracking single-family supply data since 1982. That shortage drove the median price of a home sold in July up 8.5% annually to $304,100. This is a record high price but also the highest price when adjusted for inflation. When adjusted, it is 3.4% higher than the bubble high set in 2006, when mortgage lending was loose and borrowers could buy a home with no down payment and little to no financial documentation. Of course, low interest rates are adding fuel to home prices, as they give buyers more purchasing power. Mortgage rates spiked briefly at the start of June but then fell back quickly. The average rate on the 30-year fixed mortgage hovered just above 3% for most of June before then falling below that in July.

Existing Homes Sales (Southland). Across the six-county region, sales of previously owned single-family houses, townhouses and condos rose 27.7% in July from June, an increase of 2.5% from the pre-pandemic days of July 2019. The July numbers are the latest evidence of a housing market rebound from spring (when stay-at-home orders and fears over the coronavirus put a freeze on buying). Real estate agents are seeing more demand to purchase a home even though there are no signs the pandemic is coming to an end and unemployment in California is still over 15%. The reality is that the economic downturn has disproportionately hit low-wage sectors such as retail and hospitality where fewer people tend to have the money to purchase a home in the first place. In stark contrast, many well-paid white-collar workers, working from home, want out of a cramped apartment or home, especially when the average rate for a 30-year fixed mortgage is just under 3%. In Los Angeles County, sales rose 34.6% from June, but were down 2.3% from a year earlier. The median home price rose 5.5% from a year earlier to $670,000. In Ventura County, sales rose 27.5% from June and 2.6% from a year earlier. The median home price rose 6.7% from a year earlier to $635,000. It’s unclear how much of the increase in sales can be attributed to new demand versus sales that might have happened anyway absent strict stay-at-home orders that all but shut down the typically busy spring buying season. Suburban neighborhoods priced in the $600,000 to $700,000 range are white hot, in part because people from Los Angeles are looking to those neighborhoods where houses are cheaper and, for now, they don’t have to be near their work on the Westside or in downtown Los Angeles. But with the economy the way it is, aren’t we going to run out of people who still have jobs who can afford to buy houses?


Jobless claims. As I have often said, weekly jobless claims is the best leading indicator of the direction of our economy. And this week, this indicator once again bears me out. New applications for unemployment benefits, a rough gauge of layoffs, climbed to 1.11 million from 971,000 in the prior week, the Labor Department reports. These weekly claims potentially point to an increase in layoffs after a summer surge in the coronavirus epidemic. Or, perhaps, the disruption in federal $600 unemployment benefits may also be influencing new U.S. jobless claims. These seasonally adjusted figures reflect applications filed the traditional way through state unemployment offices. But the seasonally adjusted estimates typically expected by Wall Street have become distorted by the pandemic and appear to overstate new claims at times. Nevertheless, unemployment is still extremely high by any measure. Jobless claims are almost five times higher now than they were before the pandemic struck! Earlier in the year they were running in the low 200,000s per week and stood near a 50-year low. Further, the number of “Continuing Claims” (people still receiving traditional jobless benefits through the states), fell by a seasonally adjusted 636,000 in the week ended Aug. 8 to a new pandemic low of 14.84 million. To be clear, that’s 14,840,000 people unemployed and looking for work!


Fed Minutes. Here’s some haunting news about our economy. Anyone who paid attention to the Fed’s statement and Chairman Jerome Powell’s press conference three weeks ago would have known that officials were very concerned about our economy. Initially, they were confident they had done enough to kick-start the recovery after our economy had fallen off a cliff. But to the extent there was any “new” news in the minutes (released last week), it was that the optimism of Fed officials and staff economists was predicated on the erroneous assumption that Congress and the White House would have agreed to a new fiscal package to replace the expiring provisions of the Cares Act. At the Fed’s July 28-29 meeting, according to the Fed’s Open Market Committee’s minutes, staff economists presented a forecast that was based upon the erroneous assumption of further government support (shared by Fed officials), who believed that “with some provisions of the Cares Act set to expire shortly against the backdrop of a still-weak labor market, additional fiscal aid would likely be important for supporting vulnerable families, and thus the economy more broadly, in the period ahead.” Similarly, the minutes show, they thought that “strong fiscal policy support would be necessary to encourage expeditious improvements in labor market conditions.” But as you know, that didn’t happen! There hasn’t been a deal, and likely won’t be one until September, if at all. As a reminder, the Bureau of Economic Analysis estimates that the Paycheck Protection Program and the Pandemic Unemployment Compensation payments boosted labor income by over 9% in June relative to what it otherwise would have been. In their minutes, the Fed cautioned that unless that money is replaced, it would eventually lead to lower spending, fewer jobs, and a weaker economy! But was anyone listening?


California Moratoriums Lifted. California's top justices voted over-whelmingly last Thursday to lift emergency rules meant to halt evictions and foreclosures during the COVID-19 pandemic, saying any extension of those moratoriums must be passed by the state's lawmakers. "The judicial branch cannot usurp the responsibility of the other two branches on a long-term basis to deal with the myriad impacts of the pandemic," Chief Justice Tani Cantil-Sakauye said in a statement. "The duty of the judicial branch is to resolve disputes under the law and not to legislate." In the absence of a new law, most evictions and foreclosures could resume as soon as September 2. But California lawmakers have thus far been unable to reach a deal on a legislative moratorium. Earlier in August, Senate Pro Tem Toni Atkins and Assembly Speaker Anthony Rendon pleaded with the Judicial Council for more time, warning of "chaos" should evictions resume. California's Assembly and Senate have both taken up legislation for a state-wide eviction moratorium, but the bills clash on how to compensate landlords. Nevertheless, some California renters are protected by a hodgepodge of local eviction protections, but those are set to expire too. Should that happen, as many as 365,000 California households could be at risk of eviction, UCLA's Luskin Institute reports. In Los Angeles, for example, a county-wide moratorium is scheduled to be lifted on September 30.


How Strong is the Housing Recovery? The residential real estate market has been the shining light in our country’s current economic situation. All-time low mortgage rates coupled with a new appreciation of what a home truly means during a quarantine has caused the housing market to push forward through this pandemic. Let’s look at two measures that explain the resilience of our real estate market; (1) purchase loans, and (2) pending contracts. Purchase Mortgages. The number of buyers getting a mortgage to purchase a home is a strong indicator of the strength of a housing market. As reported by the Mortgage Bankers’ Association, the number dropped dramatically in March and mid-April when the economy was shut down in response to COVID. But it increased substantially from later in April through the middle of June. The strong increase in May and June was the result of the pent-up demand from earlier in the spring along with the normal sales that would have been done during that time. Since July, the market remains consistent on a weekly basis, but still reflects a double-digit increase from the levels one year ago. MBA’s August Report shows a whopping 22% increase over last year. Pending Contracts. Like purchase mortgages, pending contracts are also a powerful indicator of the strength of the real estate market. Zillow reports each week on the percent change in the number of homes going into contract. The data shows a drop in early spring followed by a strong recovery in late spring and early summer. Then, in July, it settles into a consistent level of deals. That level, like the one for purchase mortgages, is well ahead of the level seen last year. In fact, the latest Zillow Report reveals that pending deals are 16.9% greater than the same time last year. Bottom Line; both indicators prove the housing market recovered quickly from early setbacks caused by the shelter-in-home orders. They also demonstrate that Americans have realized the importance of their homes during this crisis and are buying more houses than they did prior to the pandemic.


Housing Starts. Housing starts increased 22.6% in July to a 1.496 million annual rate, up 23.4% versus a year ago. The increase in starts in July was with both single-family and multi-residential properties. In the past year, single-family starts are up 7.4% while multi-unit starts are up 65.0%. As you can see, home building continues to be a bright spot for our economy in July, posting the largest monthly gain since 2016 and easily beating even the most optimistic forecast by any economics group. Housing starts fell 40.4% in April from the February pre-pandemic level. However, following three consecutive monthly double-digit percentage gains in a row, housing starts are now just shy of a full V-shaped recovery (sitting only 4.5% below February levels). The recent rebound in starts is even more impressive considering that builders are dealing with multiple challenges to construction. First, while construction workers have been classified as "essential workers" in most areas of the country, regulations still require fewer people per crew, dragging out completion times. Second, the construction industry is suffering from an ongoing shortage of workers, with job openings remaining near pre-pandemic levels. In other words, there are still lots of unfilled construction jobs that, if filled, would promote a sharper rebound in new construction. Finally, supply chains have been disrupted and deliveries are struggling to keep up with the pace of new construction, causing higher material prices. For example, if you tried buying lumber at Home Depot lately, you already know that lumber prices are up nearly 60% from the beginning of 2020. The good news is that builders have begun to adapt to these challenges, with the pace of new home completions trending upwards for the first time this year. A continued rebound in construction is likely in the months ahead if the NAHB Index (a gauge of homebuilder sentiment) is anything to go by. (See below.)


Homebuilder Sentiment. Builder confidence in the newly built, single-family home market jumped 6 points to 78 in August on the National Association of Home Builders/Wells Fargo Housing Market Index. (Anything above 50 is considered positive sentiment.) Why the optimism? Because potential buyers are flooding into model homes across the nation. That has builders feeling better about their business than at any time over the past 20 years. The Index is now at the highest level in the 35-year history of the monthly series and matches the record set in December 1998. Builder sentiment plunged to 30 in April, when the coronavirus pandemic shut down our economy, but it recovered quickly as consumers suddenly sought more space in less urban areas. Of the Index’s three components, (1) current sale conditions rose 6 points to 84. (2) Sales expectations (in the next six months) increased 3 points to 78, and (3) buyer traffic jumped 8 points to 65, its highest level in the history of the survey. Builders are clearly benefiting from the severe shortage of existing homes for sale. There were too few homes to meet demand even before the pandemic struck, and now because of Covid-19 fewer homeowners are willing to list their homes for sale. Single-family construction is benefiting from low interest rates and a noticeable shift in housing demand to the suburbs, exurbs and rural markets as renters and buyers seek out more affordable, lower density markets. But rising lumber prices could sap the market’s momentum this fall. The cost of lumber is soaring not only because of increased demand but because mills shut down in April and May and did not expect to see the kind of strong demand they’re seeing now. There has also been on-going issues with transportation and labor.


Foreclosures. So we’re in a pandemic and recession, right? So where are all the foreclosures? Where is that “wave of foreclosures” we keep hearing about? What’s happening? Thankfully, research shows the number of foreclosures is expected to be much lower than what this country experienced during the last recession. Why? First, because foreclosure moratoriums have been granted to borrowers with loans insured by Fannie Mae or Freddie Mac. Second, many states have also granted foreclosure moratoriums (as well as eviction moratoriums) during the pandemic. Third, over 4,208,000 homeowners negotiated forbearance agreements with their lenders. Of that number, those still in active forebearance agreements has been leveling-off over the past month. Borrowers have either started to pay their mortgages again, paid off their home loans, or never went delinquent on their payments in the first place. The housing market, and homeowners, therefore, are in a much better position than you may think. Much of that has to do with the fact that today’s homeowners have more equity. For example, over 42% of homes are owned free and clear, meaning they are not tied to a mortgage at all. Of the remaining 58%, the average homeowner has $177,000in equity, which is higher than its ever been! While ATTOM Data Solutions indicates that there is a potential for foreclosures to increase in the months ahead, it’s important to understand why foreclosures won’t rock the housing market this time around. Today’s active number is 74,860 loans in foreclosure. That number may sound massive, but it is actually much smaller than it seems at first glance. That’s over 7.5x lower than the number of foreclosures the country saw at the peak of the housing crash in 2009. It’s clear that even if the number of foreclosures today doubles, they will only reach what historically-speaking is a normalized range, far below what up-ended the housing market roughly 10 years ago. Equity is growing, jobs are returning, and the economy is slowly recovering, so the perfect storm for a wave of foreclosures is not realistically in the housing market forecast. Listen, I wrote a book (“Stop Foreclosure Now”) to help distressed homeowners, so my heart goes out to anyone who may end up in foreclosure as a result of this crisis. But fortunately today’s homeowners have more options than they did during the Great Recession, over 10 years ago. For some, it may mean selling their house and downsizing with that equity, which is a far better outcome than foreclosure.


SoFi Stadium. SoFi Stadium, the largest stadium built in Los Angeles County in nearly a century, officially arrives this month after years of construction. The massive sports and entertainment venue — the new home for the Los Angeles Rams and the Los Angeles Chargers — is set to receive its Certificate of Occupancy from the city of Inglewood this week. At an estimated cost of $5 billion, it’s the most expensive stadium ever built in the United States. The venue, developed by billionaire Rams owner Stan Kroenke, will also host major sporting events such as the 2022 Super Bowl, college football’s 2023 national championship game, possibly the 2026 FIFA World Cup, and half of the opening and closing ceremonies of the 2028 Summer Olympic Games. The stadium is intended as a centerpiece for a massive entertainment, retail, commercial and residential development on the nearly 300 acres owned by Kroenke at the former site of Hollywood Park racetrack. San Francisco-based Social Finance Inc. (“SoFi”) secured naming rights for the venue in September with a 20-year deal reportedly worth $400 million. (Hmmm, I wonder if SoFi would be interested in the naming rights for a certain Economic Update I know about?) With football game seating capacity of 72,000, it will be the third-largest stadium in the county, behind the 92,542-seat Rose Bowl in Pasadena (that opened in October 1922) and the 93,607-seat Coliseum (that opened in June 1923). SoFi Stadium represents a new generation of sports stadiums and arenas, full of the latest video technology, executive suites, fancy restaurants and clubs, and an adjoining entertainment/retail complex. The most prominent example of this new technology is the giant videoboard that will be the dominant feature fans will see once they are allowed inside the stadium. The videoboard is 120 yards long and 75 yards wide — larger than the football field below! It hangs suspended over the field, affording every seat in the house a magnificent view. With stadium construction now complete, the main missing ingredient will be fans. But, alas, it could be next year before any fans set foot inside.


Golden Girl’s Golden House. After less than a month on the market, the L.A. house used for exterior shots on The Golden Girls has a new owner. After a bidding war involving at least 20 interested parties, the home sold for $4 million – a million dollars more than the original asking price! Members of the family that purchased the home say they would like to remain anonymous, but admit they’re big fans of the house’s distinctive mid-century modern architecture. One thing they admit they’re not really fans of? The Golden Girls TV Show. While the series took place in Miami Beach, the real-life house, built in 1955, is right here in L.A. During the sitcom’s seasons, this house at 245 N. Saltair Avenue, Brentwood, was used for establishing shots of the Girls’ dwelling. In real life, the property was designed by Hawaiian architecture firm Johnson and Perkins who built it as the custom “dream home” of the original owners. The interior (which was not used on the show), has an airy, modern appearance, influenced by Japanese design–and a kitchen that has a kitschy-cute retro style. BTW, the four-bedroom home had a price tag of $2,999,999, which certainly isn’t affordable for four ladies on fixed incomes.

Beating the Heat. During these dog days of summer, as people continue to work from home (some while also caring for their kids), keeping homes cool and comfortable can sometimes be a challenge. Follow these easy ways to help your body, room, and home stay cool during this heat wave:

1. Ceiling Fans. Adjust your ceiling fan to turn counter-clockwise during the summer to help circulate the cool air downward. BTW, be sure to turn off your ceiling fan when leaving the room because fans cool people, not rooms.

2. Block the Sun. Don't let the sun overheat your home. Tilt your blinds up. Also close drapes and shades on windows that receive direct sunlight. If you're outside, make the most out of awnings, trees and shrubs for shade.

3. DIY Mini Air- Conditioner. You'll need a pan or bowl. Fill it with ice in front of a fan. Then turn your fan on high. The breeze from your fan will pick up the ice's surface as it melts and will create a cooling mist for you. Brilliant, right!

4. Take a Bath or Shower. Taking a bath or shower can help your body cool down. Here’s why. The warmth of the water sends a rush of blood to your hands and feet, where the veins are right under your skin. This lets off extra heat and cools your bloodstream. Also, let your hair air-dry to help extend the cooling period of your body and maximize the cool and clean feeling of a shower.

5. Don’t Use Your Stove. Consider using your microwave or grill to cook and prepare food. It’ll help keep your kitchen (and connecting rooms) cooler and save energy as well. You can also consider ordering take-out from a local restaurant (help them during this pandemic) to avoid getting hot in the kitchen.


This Week. Looking ahead, investors will continue watching for news about medical advances, vaccine developments, government stimulus programs, Fed monetary policy changes, and further plans for reopening the economy. Beyond that, New Home Sales will be released tomorrow (8/25). Durable goods will be released on Wednesday (8/26). The core PCE price index, the inflation indicator favored by the Fed, will come out on Friday (8/28).

Calendar:
Tuesday, 8/25: New Home Sales
Wednesday, 8/26: Durable Orders
Friday, 8/28: Core PCE

Weekly Changes:
10-year Treasurys: Fell 0.05
Dow: Fell 100 points
NASDAQ: Rose 300 points