Economic Update (Monday, September 14, 2020)

[Lloyd Segal]

Economic Update
(Monday, September 14, 2020)

A majority of Los Angeles households face serious financial problems due to the COVID-19 pandemic, with Latinos and Black residents bearing the brunt of the economic pain, according to a new poll conducted by the Robert Wood Johnson Foundation for the Harvard School of Public Health. These people were already living paycheck to paycheck before the pandemic. Now it’s only worse, with 56% of households polled having financial troubles, lacking proper medical care and child care, including 64% of households with annual incomes below $100,000. The survey offers further proof that the heaviest effect of the outbreak has been felt by Black and Latino households, with 52% and 71%, respectively, in Los Angeles reporting “serious financial problems,” compared with only 37% of white households. Latinos and Blacks disproportionately have been casualties of this virus because their communities have limited access to testing and the simple fact that many of them work in essential and high-risk settings, and frequently lack proper protective equipment (i.e. masks, shields). As such, we can no longer turn a blind eye to these disparities. This pandemic underscores the need to fix these structural inequities. With this harsh reality as a backdrop, let’s wash our hands, put on our face masks, social distance, and get under the hood…

Consumer Price Index. The Consumer Price Index (CPI) rose 0.4% in August, amazingly up 1.3% from a year ago. Over the past three months, consumer prices are up at a 6.3% annualized rate, the fastest three-month pace of inflation since 2008! The typically volatile food and energy categories both rose in August. Energy prices rose 0.9%, due mostly to a 2.0% increase in the price of gasoline, which more than offset declining costs for electricity and natural gas. The 0.1% increase in food prices was driven by the “food-away-from-home” category, which rose 0.3%, as Americans continue to shift away from grocery stores and back towards restaurants for their meals. One of the biggest drivers in August was used cars and trucks, where prices rose 5.4%. Why? Because dealers have lower inventory levels due to fewer trade-ins during the pandemic while they’re also experiencing a surge in buyer demand. Some other contributors in July were apparel (0.6%), air fare (1.2%), and motor vehicle insurance (0.5%). Economists (not me) expect inflation will continue to rise in the months ahead toward the 2% - 3% annual pace of inflation that was in effect before the Coronavirus wreaked havoc on global economies. Ironically, the Coronavirus pandemic is the first recession on record where personal income has actually risen, thanks to government stimulus checks and boosted unemployment insurance payments that are now, unfortunately, long lost memories. That said, it's clear that our economic recovery has begun, the worst economic quarter in the post-World War II era is behind us, and the question now shifts to how quickly we recover.

Grocery Spending. Despite the increasing CPI, grocery shoppers are dramatically cutting back on spending, a sign that Americans are hurting for cash. The emerging shift in food spending comes after the $600 weekly unemployment stimulus checks expired in July. It has also prompted grocery stores to bring back something customers haven’t seen much of during the pandemic: DISCOUNTS! Lump-sum stimulus checks consumers received in the spring and the extra unemployment money for people who lost their jobs in the coronavirus pandemic helped shore up supermarkets amid widespread shutdowns and millions of workers claiming unemployment. Consumers are nervous about their finances and job security in the absence of stimulus aid, leading to cutbacks in spending. Analysts predict that a broad pullback on grocery spending could also mean lower sales in the future for more discretionary items such as clothes and cars. Retailers also expect consumer spending to be tempered in the months ahead by economic uncertainty and the continued disruption of sporting events, restaurant dining and other facets of pre-pandemic life. While sales of groceries, such as frozen dinners, cereal, soup and coffee, are still higher than they were a year ago, sales growth has slowed compared with earlier months in the pandemic. Sales growth of frozen dinners, for instance, averaged about 9% for the last three weeks compared with 17% for the previous months. Cereal sales, meanwhile, averaged a 2% increase the last three weeks compared with 6% average growth the prior two months. Would someone please explain to me why you’re eating less frozen dinners and cereal? Meanwhile, grocery prices were broadly consistent with prior weeks, and restaurant dining held steady during that time, indicating that neither was a significant factor in the slowed grocery spending. This is further evidence that the halted unemployment stimulus was a driving factor. Fewer trips to grocery stores, along with smaller receipts per visit, are typical patterns during a recession. Which is what we’re now seeing. So as consumers gravitate toward value, supermarkets say they have no choice but to offer discounts that will eat into margins and intensify competition. Some consumers already started buying their groceries at cheaper markets. Plus newly “price-sensitive” shoppers are buying more store-branded items (which are often less expensive). As a result, sales of private-label store brands are outpacing national brands.


Unemployment rate. On Friday, the Bureau for Labor Statistics released their Employment Report for August 2020. The big surprise was that the unemployment rate fell to 8.4%, a full percent lower than what many analysts had forecasted earlier in the week. Though it is tough to look at this as great news when millions of Americans are still without work, the number of unemployed is currently much lower than most experts had projected it would be just a few months ago. During the Great Depression, the unemployment rate was over 20% for four consecutive years (1932 – 1935). During the Great Recession, the unemployment rate was at 9% or greater for thirty consecutive months (April 2009 – October 2011). This April, the rate jumped to 14.7%, but has fallen each month since. Most economists believe the current rate will continue to fall monthly as the economy regains its strength. But the outcome will ultimately be determined by how quickly we can contain the virus. In their last Economic Forecasting Survey, the Wall Street Journal reported the economists surveyed believe the annual unemployment rates will be 6.6% in 2021 and 5.5% in 2022. Though that will still be greater than the 3.5% rate that we saw earlier this year, it is lower than the annual rate reported in 2011 (8.5%), 2012 (7.9%), and 2013 (6.7%). The unemployment situation did not get as bad as many had predicted, and the recovery is taking place faster than most thought would happen. Nevertheless, don’t forget that there are still millions of Americans unemployed and struggling to survive through this economic downturn.

Mortgage Rates Hit Record Low. Freddie Mac just released its Primary Mortgage Market Survey showing that the 30-year fixed-rate mortgage averaged 2.86 percent, the lowest rate in the Survey’s 49-year history (dating back to 1971)! Mortgage rates hit this historic low despite a late summer slowdown in the economic recovery. These low rates ignited robust purchase activity, which is up 25% from a year ago and has been growing at double digit amounts for four consecutive months. However, heading into the fall it will be difficult to sustain that momentum in purchases because the lack of supply is already exhibiting a constraint on sales activity. The eye-popping 2.86 percent for the week ending September 10, 2020 is down from last week when it averaged 2.93 percent. A year ago at this time, the 30-year mortgages averaged 3.56 percent. 15-year fixed-rate mortgage averages 2.37 percent, down from last week when it averaged 2.42 percent. A year ago at this time, the 15-year mortgages averaged 3.09 percent. 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averages 3.11 percent, up from last week when it averaged 2.93 percent. A year ago at this time, the 5-year ARM averaged 3.36 percent. The Survey is focused on conventional, conforming, fully-amortizing home purchase loans for borrowers who put 20 percent down and have good credit.

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Los Angeles Airports Stalled. Domestic air travel has been slowly increasing at L.A.-area airports. But international air traffic remains grounded as foreign travelers are steering clear of the coronavirus threat in Southern California. That’s the emerging picture from air passenger data released by the four airports serving Los Angeles County. This is terrible news for the already-walloped tourism industry in L.A. County. Los Angeles World Airports, the city agency that runs LAX, reports that only 192,000 international passengers went through LAX’s gates in July, down 92.4% from July 2019! Travel restrictions to the United States imposed by foreign governments have been a major culprit behind the anemic international travel figures. Those restrictions have remained in place because California experienced surges in coronavirus cases in July. The lack of any significant recovery in international air traffic at our local airports spells more trouble for the already battered local tourism economy. International travelers to our region tend to spend much more than their domestic counterparts. According to figures from the Los Angeles Tourism and Convention Board, in 2019 international visitors to L.A. County made up only 15% of the 50 million visitors to our county but represented 49% of total tourist spending! Think about that the next time you walk by a tourist and hear them speaking a foreign language. In a bid to get international travel back on the upswing, the Agency is trying to set up additional Covid-19 testing to convince officials at other major airports around the world that it’s safe for passengers to pass through LAX. Good Luck with that!


Santa Monica Pier in Peril. The iconic Ferris Wheel, along with the nearby rollercoaster and the rest of the pier’s historic rides, have yet to get a green light to welcome guests under Gov. Gavin Newsom’s recently announced four-tier reopening system. Oklahoma-based Premier Parks, which operates Pacific Park, as well as other businesses on the 111-year-old pier are trying to make the best of the pandemic, which left the pier completely shuttered from March 15 to June 24 (when the pier was allowed to reopen). During that time, there was no takeout dining and no foot traffic, just business owners and city officials working on a plan to reopen safely. The new protocols call for closure of the pier bridge at Ocean and Colorado avenues (the main entrance) and only a single point of entry and exit on Ocean Front Walk (which nobody knows exist!). Masks and social distancing are mandatory, and the city is limiting the number of guests on the pier to 3,000 at any one time. The handful of restaurants on the pier are open and offering wonderful al fresco seating on the pier’s deck. But sales are not even close to last year’s levels. Since re-opening there has been a sharp decline in foot traffic and they are doing only 30% of their normal revenue (for this time of the year). Pier businesses are hoping legislators will consider “decoupling” the pier from the rest of the amusement park industry since it’s an “open air, free access” venue. Pacific Park’s revenue is at 2% of what they would normally be doing this time of year. During a normal high summer, the Pier and Pacific Park would typically have over 500 employees working. Right now they have less than 50 people back to work.

Housing Market. This year’s real estate market will certainly be one to remember, continuing to break records and challenge what many investors thought possible in the housing market. Here’s a look at four key areas that are fundamentally defining the market:

1. Housing Market Recovery. The economy was intentionally put on pause this spring in response to the COVID-19 health crisis. Many aspects of the common real estate transaction were placed on hold at the same time. Thankfully, technology and innovation helped the industry power forward, and business gradually ramped back up as shelter-in-place orders were lifted. The result? Total transformation of the market from rock-bottom lows to exceptional highs.

2. Record-Breaking Mortgage Rates. Historically low mortgage rates are another 2020 game-changer. The average rate reached an all-time low on multiple occasions this summer, and continues to hover in record-low territory. Today’s low rates are one of the big motivating factors bringing buyers back into the market.

3. Continued Home Price Appreciation. One of the key drivers of home price appreciation this year is historically low inventory. Although sellers are slowly making their way back into the game, buyers are scooping up homes faster than they’re coming up for sale. This is a classic supply and demand scenario, forcing home prices to rise.

4. Increasing Affordability. Even as home prices continue to rise, affordability is working in favor of today’s homebuyers. Rates this low are off-setting rising home prices, which increases buyer purchasing power – an opportunity not to be missed for investors.

Bottom Line. With mortgage rates hitting historic lows, home prices appreciating, affordability rising, and the market recovering like no other, 2020 has been quite a year for real estate investors– one we’ve never seen before and perhaps may never see again.

Opportunity Zones. A new report by Attom Data Solutions highlights areas for real estate investors to take advantage of tax benefits by reviving distressed neighborhoods. The report highlights eleven specific Opportunity Zones in the United States with the greatest potential for tax benefits while rehabbing densely packed, low-income communities. The report identified these particular areas as places where investors have the most to gain from these tax benefits. The eleven neighborhoods that are the best candidates for Opportunity Zone investments include:

1. Anacostia — Washington, DC

2. South Shore — Chicago, Illinois

3. City Heights — San Diego, California

4. Mid-City — Los Angeles, California

5. Parramore — Orlando, Florida

6. Central District — Seattle, Washington

7. West Colfax — Denver, Colorado

8. Spartan Keyes — San Jose, California

9. North End/New Center — Detroit, Michigan

10. Buckman/Kerns — Portland, Oregon

11. Hilltop — Tacoma, Washington

Although most of these neighborhoods have significantly lower income and educational levels (as well as higher percentages of renters than homeowners), most of these areas have property values that exceed the national median home price. This data tells us that although these zones tend to be older construction, investors should nevertheless invest in these neighborhoods because they have an immense amount of upside potential, plus significant tax benefits aimed at realizing that potential. All 11 neighborhoods have poverty levels higher than the national rate of 13.1 percent, ranging from 16.3 percent in the Mid-City neighborhood of Los Angeles to 49.4 percent in San Diego’s City Heights neighborhood. Although overall economic distress levels remain relatively high in these neighborhoods, in eight out of 11 of these areas (including Mid-City LA), the typical home sells for more than the national median price, which is very appealing to investors.

California City Fraud. KPCC-FM news reporter Emily Guerin has created an incredible podcast about an outrageous land scheme in California City. I don’t normally report on podcasts, but Emily’s is special. Unfortunately, it is too long to present the entire story in this Economic Update, so I will break it up into seven weekly segments. Here is the first segment. Please follow along and don’t forget to breath. Four years ago, while reporting a story about the drought, Emily received a tantalizing tip: In a small town in the Mojave Desert, salespeople were making tens of millions of dollars hawking empty desert land to unsuspecting buyers by convincing them the area would boom one day — and if they got in now, they could get rich, very rich. It seemed like such an anachronism, a relic of Southern California post-war hubris, or maybe even Gold Rush-style boosterism. How could this still be happening in the 21st century? But it was! It started in the mid-1950s, when a Czechoslovakian immigrant had a cockeyed vision to build a city from scratch in the desert. The developer, Nat Mendelsohn, began buying tons of land in the Mojave Desert, 100 miles north of Los Angeles. He envisioned building a city of 200 square miles in this otherwise desolate spot. He built hundreds of miles of roads through the empty desert. There would be a golf course, a university, a mall, a massive park and an airport. There would be half a million residents living along winding city streets that were cleverly curved to slow down traffic. Like many urban planners at the time, Mendelsohn thought major cities like Los Angeles were overcrowded, polluted and dangerous. People needed a place to go, to start over. California City would be that place. As Mendelsohn saw it, city folks could come and buy an empty lot — for cheap. They could build a house, or just hold onto the land and sell it in the future. It was supposed to be a great investment. He ultimately sold land to tens of thousands of people. But today, most of the roads are abandoned. The parcels are mostly undeveloped, and the landowners live everywhere in the world EXCEPT California City. What went wrong? [Part 2: next week].

Los Angeles Billionaires. Just about now you’re probably wondering who are the wealthiest people in Los Angeles? Right? Well, Los Angeles Business Journal has done the work for you and has the answer. Despite a global pandemic and one of the most tumultuous economic environments in modern history, this group of Angelenos has done surprisingly well in the past year, reflected in the Journal’s “2020 list of Wealthiest Angelenos.” Together, the 50 billionaires who comprise this year’s group registered an estimated net worth of $288 billion, a whopping 30% increase over the 2019 total of $221 billion. And who is number one? Yes, you guessed it. Elon Musk tops the Wealthiest List for the second consecutive year, following an eye-popping surge that saw his personal fortune explode to $75 billion as of Aug. 17. That’s an incredible 232% jump from his $22.6 billion mark in 2019. Musk heads a range of technology businesses from Tesla Inc. to Space Exploration Technologies Corp. Other big winners on this year’s list include biotech innovator and newest owner of the Los Angeles Times, Dr. Patrick Soon-Shiong, who saw his fortune jump 14% to $21.8 billion, thanks largely to gains by his medical companies. That was good for the No. 2 spot on the 2020 ranking. Number 3 is Sean Parker who you may remember founded Napster in 1999 and later was the primary investor in Spotify. Longtime entertainment icon and noted philanthropist David Geffen, No. 4 on this year’s list, saw a jump in his personal fortune of 28% to $11.8 billion, fueled by his large stake in Apple Inc. The 2020 list is also notable because two high-profile and longtime members of the Los Angeles billionaires’ club are no longer included. Sumner Redstone, who built an entertainment empire that included brands such as Viacom, CBS, Paramount and MTV, died last month at the age of 97. He ranked No. 19 on the 2019 list with $3.7 billion. Tamara Hughes Gustavson, the largest shareholder in Public Storage Co., officially decamped her Malibu residence for her horse farm in Kentucky. For the record, if you read their profiles, you will see that all of these billionaires are heavily invested in Los Angeles real estate (see below).

Monday Morning Quarterback. One asset class that many of the people on the Business Journal’s Wealthiest Angelenos list (see story above) have in common is substantial real estate holdings. But this year, that isn’t necessarily a good thing. The historically strong real estate market in Los Angeles has faltered during the Covid-19 pandemic, with a wide spectrum of results. On the positive side of the spectrum, L.A.’s single-family home prices in 2020 are up 4.4% compared to the same period last year, according to research from CoreLogic. L.A.’s residential sector may not be hit as hard as the national market because of the city’s tight housing supply. If there’s a standout category for L.A., though, it’s industrial real estate. In Southern California, industrial properties are doing gangbusters. Both domestic and offshore investors recognize this, and a lot of them have industrial at the top of their shopping list. Many members of the Wealthiest List also have substantial multifamily real estate holdings, which are fortunately holding their own despite eviction moratoriums. The office market, meanwhile, is more uncertain because investors wants to know what demand (and rents) will be post-Covid, which is of course unknown. As businesses expand work-from-home scenarios and de-densify workspace, investors anticipate declines in the office market. Core office portfolios are already off 15% to 20% from where they were pre-Covid. On the negative side of the spectrum is hospitality, which is really suffering. Many hotels are either closed or operating at low occupancy. The hotel market, along with the retail market, provides us with one clear indicator of private-sector economic health. By this measure, a promising recovery has begun to plateau due to the resurgence of the virus in parts of the U.S. Hotels react the fastest to economic changes because they can fill up or empty out overnight, and hotels are hurting! Hotels, like other related industries, need a vaccine to emerge in order for conditions to return to normal. In addition, most hotels specialize in serving business travelers and groups. But those travelers won’t return en masse until job growth resumes, business and consumer confidence perks up, and infection rates are on a sustained decline. In the otherwise troubled retail sector, the only winner during this pandemic is grocery stores. Food- and drug-anchored deals are still doing really well. After all, everyone has to eat. Overall, for property owners that can weather the storm, Covid may be a short-term hiccup to real estate portfolios that will hold their value in the long term, while some great assets may come available at discounted prices.

Magic Mountain Pranksters. [Here’s one of those stories I love to report.] A pair of 19 year-olds had a brilliant idea; why not “roof-topping” at Magic Mountain. What is roof-topping you may ask. I will answer. Roof-topping is the less awesome offshoot of BASE jumping, in which adrenaline junkies climb towers, antennas, and other tall things, minus the parachutes, in order to create social media posts. These knuckleheads figured with California’s amusement parks shuttered due to the pandemic, they could break into Six Flags Magic Mountain in Valencia, climb its 300-foot-tall Sky Tower attraction, and get into a little mischief. On August 12, two gents who will go nameless. Oh, okay; Riley Birchfield of Saugus and Dylan Godoy of Valencia—busted into Magic Mountain and scaled the Sky Tower. Once they reached the perch, they celebrated by filming themselves spraying the inside of the observation deck with fire extinguishers, dangling from its edge, pouring gallons of paint on the Sky Tower’s midways, and tossing objects to the ground 30 stories below. Yahoo! Erected in 1970, and launched when the park originally opened in ’71, Sky Tower has been closed to the public for several years. But that didn’t stop our boys. Nope, not these wizards. They videoed their roof-topping and loaded the video on TikTok, where they believed they would get millions and millions of views, making them internet legends. Just one problem, TikTok quickly pulled the video because it violated the platforms’ community standards (which raises the question: does TikTok even have standards?). Oh, and one more slight problem, these numbskulls didn’t consider. Santa Clarita Valley sheriff’s deputies arrested the infamous duo for felony vandalism costing them $3,000 and a night of roof-topping in jail.

This Week. Looking ahead, investors will remain focused on medical advances to fight the coronavirus. Beyond that, the next Fed meeting will take place this Wednesday (9/16), and investors will be looking for more details about the Fed's recently announced changes to its policy on inflation goals. Retail Sales also will be released on Wednesday (9/16). Since consumer spending accounts for over two-thirds of all economic activity in the US, the retail sales data is a key indicator of growth. For dedicated real estate investors, Housing Starts will come out on Thursday (9/17).

Calendar:
Wednesday, 9/16: Fed Meeting
Wednesday, 9/16: Retail Sales
Thursday, 9/17: Housing Starts

Weekly Changes:
10-year Treasuries: Fell 0.03 points
Dow Jones: Fell 500 points
NASDAQ: Fell 350 points