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Economic Update
(Monday, November 9, 2020)
The election is finally over. Now we can return to controlling the virus and re-building our economy. We now must have a renewed sense of purpose and resolve. As some of us continue working remotely from home and all of us practice social distancing, I am reminded that the great philosopher Albert Camus once said that “our character is shaped not by how we handle life when things are going well, but rather how we handle life during difficult times” [i.e. pandemic]. In fact, at this difficult moment in time, life offers us both opportunity and challenge. In every crisis lies opportunity. So how are we going to handle this crisis? Are we going to sit back in boredom, or will we rise to the challenge? This pandemic is an extraordinary opportunity for you. A once in a lifetime opportunity to step back and strategize. An opportunity to envision your life, your purpose, your investment goals, and your strategy to succeed in this rapidly shifting environment. Because I assure you, this pandemic will end. And when it ends, and we emerge on the other side, will you be proud of what you accomplished during the pandemic or complain that you got nothing done? And so, with a renewed sense of purpose, let’s wash our hands, put on our face masks (yes, you!), social distance, and get into the weeds…
Employment. The Bureau of Labor Statistics reports the U.S. regained 638,000 jobs in October, reflecting a surprising show of strength for our economy (even as coronavirus cases are escalating to record highs). The better-than-expected employment report suggests the economic recovery is growing deeper roots, giving the next occupant of the White House some breathing room when he takes office in January. The increase in hiring last month was largely concentrated in professional businesses, leisure and hospitality, and retail. Construction jobs also increased by 84,000. Construction has been booming amid a surge in demand for new homes as families flee dense urban areas for more space and security from the pandemic. Record low mortgage rates have also helped. But some 11 million of the 22 million jobs that were lost early in the pandemic still haven’t been recovered. What’s more, a record increase in coronavirus cases, ongoing government restrictions and a collapse in travel are also likely to keep a lid on hiring in the months ahead. Businesses won’t be able to return to normal until the virus fades or a vaccine is discovered. The unemployment rate sank to a pandemic low of 6.9% as more people went back to work. But this official rate understates the true level of joblessness. Most economists believe the true level of unemployment is higher. They rely on a broader measure known as “U6” which is a more realistic 12.1%. Often called the “real” unemployment rate, the U6 includes discouraged jobseekers and those who can only find part-time work. Also missing from the official unemployment rate are roughly 3.5 million workers who’ve dropped out of the labor force. The jobless rate had soared to a record 14.7% in April before receding.
Mortgage Rates. Once again, mortgage rates dropped to all-time historical lows. The 30-year fixed-rate mortgage averaged 2.78% for the week ending Nov. 5, falling three basis points from the week prior, Freddie Mac reports. During this same time in 2019, these loans had an average rate of 3.69%. This was the 12th week in which mortgage rates set a new low since Freddie Mac began tracking them in 1971. On average, rates have fallen to record lows roughly once every four weeks this year. The 15-year fixed-rate mortgage meanwhile held steady at an average of 2.32%, while the 5-year Treasury-indexed hybrid adjustable-rate mortgage rose one basis point to 2.89%. The drop in the 30-year mortgage rate this week reflects concerns on the part of investors about how the presidential election will affect U.S. policy. As you know, mortgage rates roughly track the direction of long-term bond yields, including the 10-year Treasury note, which fell sharply in the wake of last Tuesday’s election. Where mortgage rates will go from here is not clear. A new report from NerdWallet found that mortgage rates move unpredictably following presidential elections. In three of the last five presidential elections, mortgage rates moved more than half a percentage up or down points afterward. So we’ll have to wait and see. But as an investor, keep in mind that while mortgage rates continue to fall (good news), the savings for buyers are quickly dwindling as lack of inventory is pushing listing prices higher, affecting affordability (bad news).
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Fed Holds Interest Rates Steady. The Federal Reserve held short-term borrowing rates near zero in a decision Thursday that characterizes our economy as growing but not near where it was before the coronavirus pandemic hit. As expected, the Fed kept its benchmark interest rate anchored in a range between 0%-0.25%, where it has been since an emergency cut seven months ago (in the early days of the coronavirus pandemic). The Fed’s decision to hold steady comes amid concerns over the direction of our economy as Covid-19 cases accelerate and public officials contemplate restrictions on activities that could hamper growth. The economy has recovered 11.4 million of the 22 million jobs lost in March and April, but payroll growth has slowed in recent months. The Fed has sought to use accommodative policy to stimulate growth, though officials have warned in recent months that more needs to be done on the fiscal side. The Fed’s decision was unanimous at this meeting, though that wasn’t the case in September, when two members objected to its new approach to inflation that would see the FOMC hold off on rate hikes until inflation was comfortably above the 2% target. But a key element of the new approach is a pledge not to hike rates even if unemployment falls sharply, which in the past had been taken as a key sign that inflation would be rising.
Weekly Housing Trends. According to Realtor.com, frustrated buyers have now faced 11 consecutive weeks of double-digit growth in asking prices. The price of the typical home for sale in the U.S. has now reached $350,000. As temperatures drop around the country, October typically sees prices ease but that hasn’t been the case this year. But, of course, everything is out of whack in 2020. The number of properties with price reductions is moving toward more seasonal normals, suggesting price gains may begin to ease in the coming weeks. The inflow of sellers and new listings increased compared to earlier in the year and continues to move in the right direction. This time of the year normally sees a rapid decline in the number of newly listed properties, but seller activity has held up better than usual, bringing more options for buyers. Nevertheless, the total number of homes available for sale (i.e. inventory) continues to shrink. But we’ve now seen six consecutive weeks of slowing decline. This sets up a movement toward more balanced inventories and gives buyers some hope for the future. Time on market is now 14 days faster than last year, which would be expected since there are limited homes available for sale. The relatively good news for buyers is the time on market trend does not appear to be getting worse. This means that although sellers may still have an advantage in many markets, that leverage may be starting to ease.
Home Prices in U.S. Cities. Since 2000, the average U.S. home value has jumped from $126,000 to a record high $259,000. That is a 106% increase in just two decades. Of course, the path from 2000 to 2020 was anything but linear with a financial crisis, housing bubbles in major cities, and now COVID-19, which is drastically altering market dynamics. How has the housing market evolved, on a city-by-city basis? The graph below (created by Avison Young Global, using data from Zillow), is a comprehensive look at west coast home price data over the past two decades. A number of things become apparent when looking at historical data of these U.S. cities. First, the trajectory of home prices is defined by the 2008 Financial Crisis. After prices took a steep dive in 2008, it took a full decade for the average home price to rise back up to the 2007 peak. Next, broadly speaking, the U.S. average is being “pulled up” by the hotter western markets. The majority of housing markets have seen between a 50% and 100% increase in price over the past 20 years. This is also true at the state level, where booming markets such as Hawaii saw price increases double the U.S. average. The West Coast has seen dramatic home price appreciation over the last two decades, a trend that permeated the entire region. Every single city in the west tracked in this database beat the U.S. average. California and Hawaii saw the biggest gains, with a number of cities ending up with a 200%+ increase over prices in 2000. The biggest gains in the entire country over this time period was Madera, California, located just north of Fresno. The nearby cities of San Jose and San Francisco rose by an impressive 235% and 219%, respectively. As a practical example – during the meteoric rise of Silicon Valley, average prices in the San Francisco area shot up from $364,000 to $1.12 million. In contrast, cities located in America’s “Rust Belt” saw slower home price growth. In fact, every city in the Rust Belt’s five states saw price growth below the U.S. average. At the state level, Illinois, Michigan, and Ohio were the bottom three in terms of home price appreciation overall. That said, since the value of a primary residence is a significant portion of wealth for most Americans, these price movements serve as a useful barometer of the health of the real estate market, and our economy as a whole.
Zombie Properties Diminish. ATTOM Data Solutions released its fourth-quarter 2020 “Zombie Vacant Property Report” (a current snapshot of the market in the fourth quarter) showing that 1,556,592 residential properties in the United States, representing 1.6 percent of all homes, are vacant. These are called, for lack of a better term, “Zombie Properties.” The report reveals that 200,065 of these properties are in the process of foreclosure in the fourth quarter, down 7.3 percent from the third quarter of 2020. The portion of pre-foreclosure properties that have been abandoned into zombie status has ticked up slightly, from 3.7 percent in the third quarter of 2020 to 3.8 percent this quarter. Among the nation’s stock of 99.5 million residential properties, zombie properties continue to represent just a tiny fraction – only one of every 13,100 homes. A key government moratorium remains a temporary prohibition against lenders foreclosing on government-backed mortgages. The ban, which is currently in force until December 31 and affects about 70 percent of home loans in the United States, was enacted under the CARES Act passed by Congress in March. The ban was then extended to help borrowers who have lost jobs or other sources of income during the pandemic. Some private lenders also have voluntarily offered mortgage extensions. A surprisingly strong housing market and a temporary moratorium on foreclosures continues to leave most neighborhoods without a single zombie property. Of course, all that could change in a flash when foreclosures are allowed to resume or if the Coronavirus takes a toll on the market. But for now, things are steady as they go, with the overall numbers down and the rates of zombie properties pretty much unchanged. A total of 7,612 residential properties facing possible foreclosure have been vacated by their owners nationwide in the fourth quarter of 2020. That figure comprises 3.8 percent, or one in 26, of all properties in the foreclosure process. States with the lowest rates of Zombie properties are mostly in the Northeast and West, include California (2.2 percent, or one in 46).
Housing Shortage Tied to Zoning. As housing shortages deepen across our country, single-family zoning is increasingly becoming a target of lawmakers seeking to remake neighborhoods by adding density. In recent years, some local and state governments—like Minneapolis and the state of Oregon—have essentially eliminated single-family zoning to make way for more types of housing in response to middle-class housing shortages. Other states, including Washington, Maryland, and Nebraska, also have introduced various forms of reform targeting single-family zoning. Lawmakers point to single-family zoning as perpetuating segregation and inequality, leaving first-time buyers with fewer options. For example, the majority of zoned land in California is reserved for single-family housing. That has left the state with a scarce number of lots to respond to its deficit of more than 3 million housing units. Research shows that if California eliminated single-family zoning and allowed fourplexes in more areas, then it could add at least 3 million new residences to meet the state's housing needs. However, the “not in my backyard” attitude held by existing residents has long stood as a barrier to eliminating single-family zoning. These critics say adding more housing would add traffic to neighborhoods and potentially lower property values. Accessory dwelling units (“ADUs”), which are essentially another small home added on an existing lot, are increasingly being built as a response to housing shortages. California permits the addition of ADUs on single-family lots, and that has fostered rapid expansion of this housing trend. As a result, permits and the completion of ADUs in our state have more than doubled in the last two years. But ADUs are only one piece of the puzzle to solve cities’ housing shortages. More land zoned for single-family homes needs to be freed up to build on because zoning caps out what you can build. Accordingly, we need to expand zoning. That would allow for more housing in areas near transit and job hubs, and prevent greater sprawl, long commutes that clog our freeways, the loss of farmland, and building in wildfire zones. The problem is we’re drunk on “sprawl” because it makes our lives easier. But as our population grows, sprawl can no longer be the solution.
Theo Henderson. There are over 66,000 homeless people in Los Angeles, as many as 40,000 of whom are considered “unsheltered,” living outside the shelter system in tents, informal communities, and camps. Their numbers have ballooned in recent years making L.A. the largest homeless population in the country. Among them is Theo Henderson. But Theo Henderson is different! After living on the streets of Los Angeles for seven years, Theo is attuned to each and every transformation in our urban landscape that signal the homeless are not welcome. Four years ago, Theo was stabbed, a life-threatening traumatic episode that sent him to the emergency room with a perforated colon. He survived. But when he returned to the park where he lives, the city had seized his tent, his bed and all of his worldly possessions. Last year, Theo started recording conversations with other homeless Angelenos and editing together short audio episodes on his phone that he would share on social media. These recordings evolved into a weekly podcast entitled “We the Unhouses,” as the voice of the homeless. He has since produced more than three dozen episodes, all of which close with his tagline: “Let us meet in the light of understanding.” Theo is a skilled communicator. As an interviewer and in person, he is warm and reflective, punctuating his thoughtful probing with deep, gregarious laughs. In Hollywood, where sidewalks display embedded celebrity names, his podcast has brought Theo fame of his own. His Patreon now has 600 subscribers (although he’s aiming for 1,000). He’s been featured in the Los Angeles Times, Vice, Spectrum News, has a popular Instagram comic series with cartoonist Katy Fishell, and now…this Economic Update! He’s also been flooded with requests from across the region to tell stories about the homeless experience and spends most of his time traveling throughout the city for interviews. But unlike his journalist peers, when Theo heads out to record a conversation with someone, he must incorporate a plan for where and how to shower, secure a ride, and find a place to store his belongings. Not easy in a city that demonizes the homeless. “To be homeless in L.A. is a full-time job,” says Theo, as he actively works to avoid encounters with what he calls the “unholy trinity”: LAPD officers, elected politicians including BID officials, and hostile neighbors, all of whom collude to criminalize his daily life. Theo wants you to know that the homeless experience is relentless and dangerous. When Theo started his podcast, an average of three homeless people died each and every day in L.A. County. In 2020, it’s closer to four a day!
California Wildfire Risks. When millions of people buy a home every year, they have access to a wide variety of information about everything from schools to public transit to lead paint. But what they never learn, until it’s too late, is that their homes are in areas that are increasingly prone to wildfires. None of the real estate agents, sellers, appraisers, bankers or home inspectors the buyers interact with explain in detail the risk of wildfires, because no one has to. Only two Western states require disclosure of wildfire risks, California and Oregon. But a growing body of research suggests that California’s fire disclosure laws provide information in confusing ways, or worse, give too little information too late in the homebuying process. That has led millions of people to bet their safety, their belongings and, in many cases, their financial futures on homes that could be damaged or destroyed. For example, about 4.5 million homes in the U.S. are at significant risk from wildfires. This year alone, record-setting wildfires in California destroyed more than 9,200 structures . Numbers such as those will grow as climate change makes the Earth hotter, and fires become more frequent and severe. The losses Americans suffer from wildfires extend far beyond the financial, from lives lost to the toll on people's physical and mental health that can last for years. Right now, millions of unsuspecting families don't realize they're living on the front lines of climate change and might pay heavily for it. Most people still visualize “forest” fires when they think of wildfire. But in recent years, fires have leapt from forests and into dense suburban neighborhoods where residents never considered them a threat. In the West, most landscapes are primed to burn and are becoming increasingly risky in a warming climate. But only a handful of states actually map that risk, leaving most residents in the dark. So, what if families had more information about climate hazards before they moved? Would they stop choosing to live in places that burn? California, clearly on the front lines of climate change, offers some answers, although even our disclosure laws do not effectively warn people about wildfire. In the hundreds of pages buyers receive when they buy a home, only a few sentences on a one-page form even mentions wildfires. Properties are labeled as potentially having "substantial forest fire risks and hazards." That form makes California one of only two states in the West with any legal requirements to notify buyers about the wildfire risk they're taking on. Still, for many families, the benefits of living in a wildfire-prone location outweigh the risks.
House of the Davids. If you lived in Los Angeles between the mid-1990s and 2011, you will likely remember Youngwood Court (a.k.a. “the House of the Davids”) at 410 South Muirfield Road in Hancock Park. You couldn’t drive on 3rd street without slowing down to marvel at the white mansion with the naked David statues on pedestals. The owner, Norwood Young, put 16 statues of Michelangelo’s David in his front yard (with another three on the roof). Norwood was a former Star Search contestant, successful singer, a man who seemingly had it all. Back then, Norwood was living large — spending $35,000 a month, and throwing lavish parties at his House of Davids. He had a portrait of himself at the bottom of his pool, and drove, in turns, a Rolls-Royce, a Bentley, and a Lincoln Navigator, all custom-painted in “Tequila Sunrise” yellow. But one day 24-foot juniper trees in front of his house were mysteriously chopped down. Suddenly there’s no trees, no barriers. Because the way the trees were, you didn’t even know what the house looked like. But without the trees, you drove by and all you could see were those naked statues of David. Norman was hated by his Hancock Park neighbors. Apparently, they lacked appreciation for his “decorative panache.” But it was mixed in with thinly veiled racism; after all, this was the same street where a cross was burned in Nat King Cole's yard. So the neighbors started complaining, and the complaining led to lawsuits. When the court papers went public is when the press came. Then celebrity attorney Johnny Cochran called and offered to defend him as the lawsuit from the neighbors went to court (he would end up defending and pursuing multiple lawsuits against his neighbors). Sick of the notoriety, Norwood finally had enough and sold the 5,000 square foot David-bedecked house in 2012 for $1.45 million. Why? Because, in his words, “my home had become more famous than me.” Where is Norwood Young today? Norwood moved to Bangkok, where he used his profits from the sale to open the “Hollywood Soul" Supper Club and become the “Ambassador of Soul” in Thailand. The Club has authentic soul music with authentic soul food. The exterior has an old Hollywood Art Deco-style, but no David statues out front.
World’s Tallest Building. Right about now you’re probably asking yourself “What is the tallest building in the world?” Let me answer that for you. The tallest building in the world at a staggering 2,715 feet is Dubai’s Burj Khalifa, the most popular tourist attraction in the Middle East. It’s so tall, it takes over one minute on its elevator to reach the top floor. The question now is, how much higher and further into the skies can we go? I ask this rhetorical question because Dubai’s set to outdo itself (and compete directly with the second tallest building in the world, the Shanghai Tower in China, at 2,073 feet). Dubai developers are constructing the Kingdom Tower, inspired by the Hanging Gardens of Babylon, which will incredibly break the one kilometer-high (or 0.6 mile), a height never achieved in the history of the world. Meanwhile, Saudi Arabia is planning the Jeddah Tower, which will be 167 floors and overtake the Burj Khalifa. What is the tallest building in the United States? I’m glad you asked. The tallest is One World Trade Center in New York City. Often called the “Freedom Tower,” it was built to memorialize the loss of the Twin Towers (after the September 11th, 2001 attack). It’s exactly 1,776 feet high (symbolizing the year the U.S. Declaration of Independence was adopted). The second tallest building, the brand new Central Park Tower, also in New York City, has reached its full height (1,550 feet), although the interior is still undergoing construction. BTW, the price of luxury apartments in the complex start at $7 million for a two-bedroom (just in case you had any extra change lying around). In fact, New York City holds four of the top five buildings on the continent. However, a nod also goes to the Willis Tower (formerly known as the Sears Tower) in Chicago, an imposing office building at 1,451 feet, which held the title of world’s tallest building for 25 years. Then what is the tallest building in Los Angeles? Exactly what I was wondering. Our tallest building is the 73-story Wilshire Grand Center. At 1,100 feet, the Wilshire Grand is the tallest building west of the Mississippi River. But earthquakes notwithstanding, that probably won’t last very long. Because, as they say, the skies the limit!
This Week. Looking ahead, investors will continue watching election results, COVID-19 case counts, and progress on vaccines. But it will be a light week for economic data. The JOLTS report, which measures job openings and labor turnover rates, will be released tomorrow (11/10). Markets and most federal buildings will be closed on Wednesday (11/11) in observance of Veterans Day. The Consumer Price Index (CPI) will come out on Thursday (11/12). CPI is a widely followed monthly inflation report that looks at the price change for goods and services.
Calendar:
Tuesday, 11/10: JOLTS
Thursday, 11/12: CPI
Thursday, 11/12: Jobless Claims
Weekly Changes:
10-year Treasury: Fell 0.05
DOW Jones: Rose 1.800
NASDAQ: Rose 900
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