Economic Update (Monday, November 23, 2020)

[Lloyd Segal]

Economic Update
(Monday, November 23, 2020)

When COVID-19 arrived, all of us were confronted with an unexpected pandemic that upended the plans we had for 2020. But the pandemic is only part of our story. When an event occurs (a negative event, generally, like a pandemic), it doesn’t necessarily dictate a certain, preordained outcome. Rather, your response to the pandemic is just as important, and probably more so, in determining your outcome. This simple but impactful concept is especially crucial this year. So much of what’s happening is beyond our control and we’re hit with challenges from every direction. But, as author Jack Canfield reminds us, these events don’t drive our outcomes. We do that ourselves, through our responses. Emotional maturity (connected closely to emotional intelligence) enables us to make better decisions or, in the case of a pandemic, respond to events in a more constructive way. Emotional maturity gives us the courage to adjust our mindset, adapt to the changing landscape, and help others who are counting on us. This summer, it kept our industry moving forward, albeit slowing for a time, while we all shifted to a socially distanced, more virtual approach. Each of us has made thousands of choices since COVID arrived. Did you learn a new skill or binge Tiger King? Eat more salad or more potato chips? Reach out and connect or stay in bed and isolate? Help others or complain about everything? Emotional maturity leads to better choices, and better choices generate better outcomes. And, of course, better choices includes washing our hands, wearing our masks, and social distancing…

Existing Home Sales. Existing home sales increased 4.3% in October to a 6.850 million annual rate, up 26.6% versus a year ago (the fastest pace since 2005). From February (pre-pandemic) to the bottom in May, sales collapsed 32.1%, as lockdown measures and widespread economic uncertainty took hold across the country. Since then sales have risen five months in a row, blown past the previous February high, and are now up an amazing 18.9% from pre-pandemic levels. One major contributor to the recent recovery has been the Fed's liquidity policies, which have helped push the 30-year fixed mortgage rate to record lows, boosting affordability. It also looks like the pandemic and the resulting public health measures have given potential buyers a new sense of urgency. For example, demand for existing homes was so strong in October that 72% of the homes sold were on the market less than 30 days! That said, sales face a continued headwind from the low inventory of existing homes. In fact, today's report shows that inventories were lower than any other October on record and down 19.8% versus a year ago. This is reflected in the months' supply (how long it would take to sell today's inventory at the current sales pace) of existing homes for sale, which is now only 2.5 months, the lowest reading on record going back to 1999. While lower priced homes are in short supply, inventories have increased in the past year at the upper end of the spectrum. Meanwhile, sales of properties worth $1 million and over are up 102.2% in the past year, as wealthy urban dwellers purchase properties out in the suburbs to escape pandemic-related restrictions and social unrest. In addition, the shift in the mix of homes sold toward more expensive properties has put considerable upward pressure on median prices, which are now up 15.5% in the past year. As an investor, yu can look for continued robust sales in the months ahead, although sales will inevitably slow down due to a lack of supply.

New Home Starts. U.S. builders started construction on homes at a seasonally-adjusted annual rate of 1.53 million in October, representing a 4.9% increase from the previous month’s figure, the U.S. Census Bureau reports. In addition, permits for new homes occurred at a seasonally-adjusted annual rate of 1.545 million in October, unchanged from September. The upsurge in housing starts was driven by a 6.4% rise in single-family starts. (In stark contrast, multi-family construction activity dipped once again, this time by 3.2%.) All regions except the Northeast experienced an increase in housing starts despite rising coronavirus cases across many parts of our country, led by the 12.9% increase in the South. The housing starts report coincides with last week’s release of the November “Home Builder Confidence Index” from the National Association of Home Builders. The index inched higher for the fourth consecutive month, demonstrating the upbeat outlook in the construction industry. Indeed, virtually every home builder is seeing rising sales as Americans look to leave urban areas for larger homes in the suburbs (only to find very few existing homes for sale). Demand has also been boosted by record-low mortgage rates. But there simply has not been enough supply of existing homes to meet this demand, causing the accelerating demand for newly constructed homes. Meanwhile, builders face roadblocks of their own as they attempt to ramp up production. There’s only so much skilled labor to go around, and the limited availability of buildable lots and supplies also puts constraints on the speed with which they can construct new homes. Quite frankly, home builders are walking a tightrope between increasing costs of labor, materials and land, and eager buyers seeking larger homes in suburban neighborhoods.

Retail Sales. Retail sales rose 0.3% in October, the U.S. Census Bureau reports. Although it was the sixth monthly advance in a row, it was nevertheless the smallest gain since the economy reopened in May (and could shut down in December). In truth, the only reason sales rose at all was because of a pandemic-delayed gigantic Amazon Prime Day (they delayed their annual “Prime Day” sale to October from its usual spot in mid-July). But the already-fading momentum of retail sales is in danger of softening even further amid record coronavirus outbreaks. Sales rose the fastest among so-called non-store retailers, mainly online purveyors led by Amazon (receipts jumped 3.1%). Most rival retailers such as Walmart and Best Buy also held big online sales around the same time. In general, internet sales have soared during the pandemic. The virus accelerated a long-running shift toward online buying and away from on-premise shopping at brick-and-mortar locations. For example, department stores have been losing ground for years and the pandemic has caused some to go bankrupt. Department store sales sank 4.6% in October. Sales declined at grocers, bars, restaurants, pharmacies and stores that sell hobby items and home furnishings. Nevertheless, retail sales rebounded far faster than anyone would have expected six months ago and now exceed pre-pandemic levels. But the return of cold weather and record increase in coronavirus cases poses another stiff test. The viral surge has spurred growing numbers of cities and states to re-impose restrictions on indoor dining and attendance at theaters and other entertainment venues, among other things. And colder weather limits the ability to serve customers outdoors. If the situation gets any worse, retailers are likely to face the bleakest holiday shopping season since the Great Recession more than a decade ago.

Homeless Crisis. I believe as real estate investors, we have a special responsibility to help the homeless. I trust you agree. There are now over 66,000 homeless people in Los Angeles sleeping on sidewalks, doorways, in tents, and camps. If you’ve driven on or off, under or over a freeway lately, you’ve seen their tents. Their numbers have ballooned in recent years making L.A. the largest homeless population in the country! For years, homelessness loomed over the civic culture of Los Angeles as its most intractable problem, one that defines our city and its government officials. For some voters, it comes down to the city’s inability to keep streets clean and rights-of-way clear. On the other side of the political spectrum, it’s about the plight of our most vulnerable citizens — and how the city has essentially criminalized their very existence. The problem is our local government has failed to protect the public while simultaneously failing to provide adequate shelter for those living on the streets. And the pandemic has only exacerbated the situation. It has become a humanitarian crisis. Everyone agrees that responding to homelessness is the city council’s most important priority. But here’s the problem. Until now, Los Angeles has focused on “permanent supportive housing,” which means constructing big expensive buildings. The challenge with that approach is that it takes too long to build and costs too much. I believe its finally time for a different approach, a fresh perspective. I suggest we immediately start constructing “interim housing,” as opposed to permanent housing . Interim housing is the quickest and least expensive way to achieve visible progress and demonstrate that homelessness has abated. Even if people in temporary housing (such as temporary shelters), are technically still homeless, it’s still far better than what we have now. Let’s speed up solutions including rehabbing of empty motels and abandoned buildings that could house homeless people very quickly. Further, there are tons of vacant city-owned land, maintenance yards, and foreclosed properties that can be adapted to residential use. Unused factories and warehouses in industrial areas can also be re-vamped for housing. Another tentative solution could be our convention center, which is currently empty because of the pandemic. I can assure you it’s cheaper and faster to convert empty motels and warehouses than building a whole new state-of-the-art, multi-residential complex. If you’re in LA, please write your city council person and let them know we need more affordable temporary housing NOW, focusing on helping people off the streets through the construction of cheap and efficient temporary shelters as quickly as possible. Bottom line: we can’t kick people off the streets if we don’t have a place to put them.

2021 Foreclosure Crisis? Many investors seem convinced that this year’s economic downturn will lead to another foreclosure crisis in 2021, like the one we experienced after the housing crash a little over a decade ago. However, there’s one major difference this time: robust forbearance programs. During the housing crash of 2006-2008, most lenders felt homeowners should be forced to pay their mortgages despite the economic hardships they were experiencing. There was no empathy for the challenges those households were facing. What resulted from that lack of empathy? There was a tidal wave of foreclosures. But this time it’s different. This time there was an immediate understanding that homeowners were faced with a pandemic not of their own making. The government quickly jumped in with mortgage forbearance programs that relieved the financial burden placed on many households. The programs allow borrowers to suspend their monthly mortgage payments until their economic condition improves. It was the right thing to do. But some analysts are concerned homeowners will not be able to make up the back payments once their forbearance plans expire in 2021. They’re concerned the situation will lead to an onslaught of foreclosures. But I disagree. The banks and government learned from the mistakes experienced during the last housing crash. They don’t want a surge of foreclosures again. For that reason, they’ve put in place alternative ways homeowners can pay back the money owed over an extended period of time after the moratoriums end. Another major difference is that, unlike 2006-2008, today’s distressed homeowners are sitting on a record amount of equity (after all, prices are going up, not down). That equity will enable them to sell their houses (if they elect) and walk away with cash instead of going through foreclosure. Bottom line: 2021 will not be a repeat of the foreclosure crisis of 2008.

COVID-19 Affecting Real Estate Industry. The COVID-19 pandemic has made its mark on our real estate industry—from accelerating existing trends (like the reduction of retail footprints) to spawning new ones (such as a bigger focus on social justice and health and wellness). A new report from the Urban Land Institute draws on proprietary data and insights from more than 1,600 leading real estate industry experts to highlight these evolving trends. According to the “Emerging Trends in Real Estate 2021 Report” (“Report”), COVID-19 has made lower-density areas for both residential and commercial real estate more appealing and is accelerating suburban growth. Of course, growth in the suburbs has been a consistent trend in the report for the past five years, but new work-from-home policies and increased family formation among millennials are accelerating this shift. Home buyers are looking for suburban locales with low taxes, affordable housing, job opportunities, and auto-oriented transportation. The Report also predicts cost-conscious companies will gravitate toward suburbs that also are more affordable and business-friendly with growing workforces. Our suburbs will benefit from this new growth spurred by shifting demographics and changes to living and working patterns resulting from the COVID crisis. In response to suburban flight, our cities will have an opportunity to respond by reimagining their public realm, building more resiliently, and re-inventing retail (that was already struggling before the pandemic). As an industry we have the opportunity to strengthen by truly embracing diversity and tackling the challenges faced by our communities. Most professionals, according to the Report, anticipate that overall real estate prices will fall 5% to 10% as income is curtailed for several years. Retail and hospitality are the sectors predicted to have the largest declines. However, single-family homes, industrial properties, and data centers are expected to rise in value. But the long-term outlook in the real estate sector hinges on our country’s ability to reign in COVID-19. Now, more than ever, real estate investors have the chance to take the lead in planning, development skills, and investment capital to reshape our work and lifestyle environments.

How to Bribe Los Angeles Lawmakers. If you’re looking to bribe a city councilman for approval of your next real estate project, who better to learn from than disgraced former councilman Jose Huizar. Apparently, to get started you’ll need lots of paper bags. Federal agents arrested Huizar on the morning of June 23 at his home in Boyle Heights in connection with corruption at City Hall. The U.S. Attorney alleges Huizar led a ring of aides, lobbyists, and developers who arranged bribes in exchange for his help getting real estate projects approved. In one instance, Huizar accepted $600,000 cash in a paper bag from a developer (that Huizar used to settle a sexual harassment lawsuit against him in 2014). In a Federal courthouse on June 3, Justin Jangwoo Kim, a real-estate appraiser and former City Planning Commissioner, pleaded guilty to fixing a bribe for Huizar: $400,000 in cash, delivered in a paper bag. George Esparza, whom the Los Angeles Times has described as one of Huizar's closest aides , also agreed to plead guilty to racketeering as part of what the U.S. attorney described as a “Huizar’s pay-to-play bribery scheme.” The corruption probe proved, in sordid details, that Huizar was working for companies that can afford to withdraw hundreds of thousands of dollars in cash and hand it off in paper bags (like $15 takeout meals). The councilmember was available — for a price. In meetings that took place in cars, coffee shops, bowling alleys, hotels, and karaoke bars in 2016 and 2017, Kim helped negotiate the sum between Huizar and a local developer. Huizar’s aid initially demanded $1.4 million but finally agreed to $400,000. The $400,000 cash bribe was handed over to Huizar, in a paper bag, in February 2017. The condominium plans were approved two months later by Huizar’s Planning Department. Some of the details that investigators uncovered — escorts, Lakers-game tickets, clandestine meetings, and cover-ups — belong in the plot of a great noir (a genre that has fictionalized some of L.A.’s ugliest truths). According to the FBI, a guy named just Chiang connected Huizar to a Chinese developer, identified as Shenzhan Hazens. Together, Chiang and the developer arranged a trip to Hong Kong and China for Huizar and his family, secretly contributing $100,000 to his (or wife’s) election campaign in, what else, paper bags. In exchange, Huizar helped get the developer’s plans for a W Hotel and 435 condominiums near L.A. Live approved by the Huizar-chaired planning committee. Oh yeah, in addition to paper bags, it appears you’ll also need lots of cash.

McDonald’s Santa Inez Ranch. How about a 554-acre ranch in Santa Inez? A piece of fast-food history was just served up in Santa Ynez, where a ranch once owned by late McDonald’s owner Ray Kroc is listed for $29 million. That’s a lot of Big Macs! Kroc bought the property for $600,000 in the 1960s, and spent years turning the scenic land into a research and development facility and a vacation spot for himself and other McDonald’s executives. At the time, he dubbed the retreat “The J & R Double Arch Ranch,” which stood for Jane, his wife at the time, and Ray, himself. Thankfully, the garish golden arches that once framed the entry to the property are gone, but many of the structures remain. The most impressive building is the lodge, a massive 17,000-square-foot space designed by Glenn Marchbanks Jr. complete with a commercial kitchen, a dining room for 100 people, a 3,000-square-foot great room, and a 5,200-square-foot conference hall. The lodge itself holds 20-bedroom suites, and the property can host a total of 100 of your nearest and dearest friends. In the 1970s, a stylish circular house was added atop a knoll with 360-degree views of the surrounding valley. Elsewhere are four single-family homes, two bunkhouses, a gymnasium, resort-style pool, helicopter pad and two tennis courts. For equestrian activities, you can stable your string of horses in barns, paddocks, fenced corrals and multiple trails that wind through the dramatic landscape. Kroc franchised his first McDonald’s restaurant in 1955 and bought the original McDonald’s brothers out of the business six years later, rapidly expanding the fast-food chain into an empire in the following decades. He also owned the San Diego Padres for a decade and amassed a fortune of roughly $600 million by the time he died in 1984. If you’re interested, don’t call me! Contact Maria Temmel at Coldwell Banker in Santa Inez.

Tennis Clubs Struggle with Demand. Not everyone is suffering during this pandemic. Tennis clubs, clinics and coaches across L.A. County are experiencing a pandemic-fueled bounce in demand for court time and lessons. Business is way up as compared to pre-pandemic time. After all, tennis is already socially distanced and carries a low risk of coronavirus transmission, according to health experts. Add in L.A.’s year-round warm weather, and it’s not surprising the game is thriving here. Nevertheless, while tennis businesses in Los Angeles are struggling to keep pace, restrictions on lessons, group activities and court availability have dramatically curtailed revenues. At Mulholland Tennis Club, for instance, the nonprofit facility has seen revenue plummet to $1.4 million this year compared to $3 million in 2019. The club furloughed 30-40 workers in March due to the pandemic lockdown. Now, it has 70% of them back, working different roles due to pandemic-era adjustments. A check-in station is set up outside where staffers take members’ temperatures. Players also must complete a quick COVID-19 evaluation, answering a series of questions every time they enter the facility. Courts and other facilities are all reservation-based. Group lessons that used to accept 10 to 15 people are now limited to just four. In addition to courts and other facilities now available only by reservation, group activities are heavily restricted, and programs like summer camps and tournaments have adapted to regulations established during the pandemic by L.A. County. Still, players want to play. After all, people are craving relationships, connections, interactions, but need to do it at a distance. As such, tennis is perfect! The biggest challenge players face is finding available courts. There’s so many people wanting to play (and will even pay a higher price to play), but the courts are already occupied.

Bicycles in Demand. Another business enjoying increased demand during this pandemic are bike shops. The pandemic has been great for the bicycle business. Retail bike sales jumped 81% nationally between April and October, compared to the same period last year, according to the National Bicycle Dealers Association. In fact, bike sales surged 297% in the past four months! Demand for bikes, and for mechanics to work on them, continues to exceed supply. In Los Angeles, that surge has been acutely felt, given our city’s focus on fitness and recreation, as well as our open spaces and climate. And unlike other parts of the country, bike shops here have been deemed “essential businesses” because they provide transportation. Industry observers say consumers see bikes as an alternate means of exercise while gyms are closed, an antidote to “cabin fever” and a form of transportation that avoids mass transit crowds. Bicycle sales that had been experiencing flat or declining sales prior to the pandemic suddenly are seeing an immediate surge this summer. Bikes that sell as low as $100 to $500 as mass-market bikes (sold by such chains as Big 5 Sporting Goods, Dick’s Sporting Goods, and Walmart) have mostly sold out. Bikes for more serious riders can run $1,000 and up. But store owners say available bicycles priced above $1,000 are even harder to find. At the same time, it has been a bumpy ride for local bicycle businesses. Disruption in global inventory supply chains has left stores with long lists of unhappy customers waiting months for bikes and accessories. The industry had already entered 2020 with inventories at an all-time low, due largely to import tariffs imposed by the United States in 2018 and 2019 as part of that silly trade war with China (the source of 80% of U.S. bicycle imports). Then factories in Asia, which make the majority of the world’s bicycles and bicycle parts, shut down in January and February in response to the pandemic. Few facilities were functioning at capacity until April. So production is still running two to three months behind.

Mrs. Maisel’s Riverside Apartment. If you enjoy “The Marvelous Mrs. Maisel” on Amazon Prime, you probably ogle over her luxurious 10-room apartment. Well, that apartment is located at the Strathmore Apartments, 404 Riverside Drive, on the swanky westside of Manhattan. And now you too can live in one of those beautiful apartments at the Strathmore, which has just been listed for sale. The two-bedroom, two-bathroom unit sits high up in the Strathmore, whose classic prewar exterior and interiors are featured prominently on the TV series. It isn’t nearly as sprawling as the ten-room Maisel apartment, but it does still have a rather grand living room with three windows, two of which come with Hudson River views. Originally, each floor only had two Maisel-size apartments, but later some were split up into smaller units. Based on the original floor plan, the present-day E line, which is at the southwest corner of the building, was once a cluster of bedrooms with a dressing room. There’s a foyer big enough for a dining table, and both bedrooms are large with two closets each. Though the kitchen and two bathrooms are more dated, they both come with huge windows. The apartment has stayed in the same family since 1975 and comes at a rare price point for the Strathmore ($975,000), which hasn’t seen an under-$1 million listing in over a decade.

This week. Looking ahead, investors will continue watching Covid case counts, progress on vaccines, and government stimulus measures. Beyond that, Wednesday (day before Thanksgiving) will be a very busy day for economic data. New Home Sales, Durable Orders, and the core PCE price index (the inflation indicator favored by the Fed), will all be released on Wednesday (11/25). Other than that, markets will be closed on Thursday for Thanksgiving, and probably Friday as well. So enjoy the holiday! 

Calendar:

Wednesday, 11/25: Core PCE
Wednesday, 11/25: New Home Sales
Wednesday, 11/25: Durable Goods

Weekly Changes:

10-year Treasuries: Fell 0.05 points
Dow Jones: Fell 200 points
NASDAQ: Fell 50 points