Economic Update (Monday, November 30, 2020)

[Lloyd Segal]

                                                     Economic Update
                                           (Monday, November 30, 2021)

The shortened Thanksgiving week was a relatively quiet period for our economy. A large batch of economic reports last Wednesday had little impact, and mortgage rates remained near record low levels. Sales of new homes continued at a blistering pace in October. Builders say that they are putting up new homes as quickly as possible, but that a lack of land, labor, and materials is severely limiting the pace of construction. Existing home sales are also continuing at historic levels. The reduced economic activity resulting from the pandemic has caused a decline in inflation, which has helped keep mortgage rates low. In October, the core PCE price index was just 1.4% higher than a year ago, down from an annual rate of increase of 1.5% last month. Core PCE is the inflation indicator favored by Fed officials, and their stated target is 2.0%. With Thanksgiving in the rear view mirror, let’s wash our hands, put on our face masks (yes you!), social distance, and get under the hood…

Weekly Jobless Claims. As I’ve often said, if you want an immediate snapshot of our economy, pay close attention to the weekly jobless claims. And the snapshot is not good. The pace of first-time filings for jobless claims picked up last week, with the jobs market showing increasing vulnerability to the coronavirus spread. Claims totaled 778,000 for the week ended Nov. 21, up from 742,000 the previous week, the Labor Department reports. The news comes amid an ongoing rise in coronavirus cases and worries that the national health system is severely stressed. New daily cases have averaged 174,225 over the past week, and health officials worry that post-Thanksgiving could send that level higher as families across the country return from holiday travel. Though weekly claims have been below 800,000 for the past six weeks, they are still well above the pre-pandemic record as governments impose restrictions on activity. The hospitality industry has been particularly hard-hit with restrictions on capacity and the likelihood that many will have to go back to take-out only operations or close completely as winter settles in and cases continue to accelerate. Worse, many displaced workers have been seeing their benefits expire. Enrollment in the Pandemic Unemployment Assistance program, which provides benefits to those not normally eligible, decreased by 8,019 over the past week to 311,675. However, people on the PUA emergency program, which helps those who have lost their benefits with 13 more weeks of compensation, surged by 466,106 to 9.15 million (though that data is two weeks behind). The total receiving benefits rose to 20.45 million for the week ended Nov. 7, up 135,297 from the week before. That compares with just under 1.5 million a year ago, underscoring how much damage remains in the labor market. The data reflects a two-speed recovery where the jobs market continues to struggle but other parts of the economy are performing well. Bottom line: over 20 million American s are still out of work!

New Home Sales. New single-family home sales declined 0.3% in October to a 0.999 million annual rate, but up 41.5% from a year ago. Don't let the negative headline number fool you, new home sales continue to impress. Let me tell the sneaky reason why. The drop of 0.3% was due to an upward revision of 43,000 to September's sales pace, putting that month at the highest level since 2006. Without that upward revision, October would have posted a gain of 4.2% versus the sales figure for October reported a month ago. New home sales are now 29.1% above the January pre-pandemic high! A couple of factors should continue to keep the fast pace of new home sales going in the months ahead. First, affordability; near zero interest rates from the Federal Reserve have helped reduce 30-year fixed mortgage to record lows. Second, due to the pandemic, closures, and urban unrest, buyers' preferences have shifted away from units in denser urban environments, toward more spacious options in the suburbs (where most new single-family homes are built). That said, a lack of finished new homes waiting for buyers remains a headwind for sales going forward. The inventory of unsold homes that are either under construction or finished is dramatically down from a year ago. Given the downward pressure that social distancing regulations, shortages of labor, and supply chain issues continue to exert on new construction, do not expect an oversupply of homes anytime soon. This is reflected in the months' supply (how long it would take to sell today's inventory at the current sales pace) of new homes for sale, which has collapsed from 6.8 in April during the height of the pandemic to only 3.3 in October, the lowest level on record going back to 1963. New home sales normally run around 70% of single-family housing starts, but have now exceeded that threshold for each of the past six months. This has occurred despite housing starts rising in October to the fastest pace since 2007. In other words, even though new home construction has accelerated rapidly during the pandemic, it still needs to pick up more to keep pace with consumers' demand for new homes.

Home Prices Surge. According to the S&P CoreLogic Case-Shiller Price Index, a measure of home prices in 20 large cities, rose at a 6.6% yearly pace in October. That’s up from 5.3% in the prior month. A broader measure by Case-Shiller that covers the entire country showed a similarly large 7% increase in home prices over the past year, marking the fastest 12-month gain since 2014. Ironically, home prices have actually risen faster during the worst pandemic in a century instead of getting cheaper. Rock-bottom mortgage rates and a flush of people leaving cities during the pandemic for more space in the suburbs has boosted demand at a time when the supply of homes for sale is near historic lows. Prices rose in 19 of the 20 large cities tracked by Case-Shiller. (The lone exception, Detroit, likely registered higher prices as well, but Case-Shiller could not collect enough data because of rising COVID-19 cases in the area.) The biggest increases took place in Phoenix, Seattle and San Diego. The smallest were in New York and Dallas. New York has seen a particularly large outflow of residents after suffering a huge number of COVID-19 cases early in the pandemic. Dallas was another hard-hit area. Going forward, home sales may slow a bit in the face of a record surge in coronavirus cases and a softer economy. But don’t expect demand — or prices — to taper off all that much, especially if the pending vaccines turn out to be effective and widely available. Sales are at the highest level in years and likely to stay that way if the economic rebound picks up the pace.

Want to Buy Trump’s D.C. Hotel? The Trump Organization is reportedly trying to sell its flagship Trump Hotel in Washington, D.C., a renovated post office that has become uncannily, suspiciously popular among foreign government visitors since Donald Trump assumed the presidency in 2017. But after shopping the hotel with a $500 million asking price (and a requirement that any buyer has to keep the Trump name), the firm received bids that were less than half of that price, according to CNBC, While the toxicity of Trump’s brand undoubtedly is playing a role, it’s probably more important that it’s simply a hotel in 2020. The COVID-19 pandemic has brought business and leisure travel alike to a near halt. While it’s rebounded from April lows, hotel occupancy remains down 32.7 percent year-over-year. Next year won’t be much better, judging by the rise in infection rates and the many months between now and a fully rolled-out vaccine. It is a bad time to sell any hotel, let alone a Trump hotel. The D.C. hotel had been one of the few bright spots in Trump’s uneven hotel business. Others have faltered as Trump wrecked his brand, but the D.C. hotel, down the street from the White House, pulled in $40.5 million in revenue in 2019. But even this high-performing asset could be problematic soon. The Trump Organization took a $100 million loan from Deutsche Bank to renovate it (part of $400 million in debt that according to the New York Times’ exhaustive report in September on Trump’s finances is soon coming due). The hotel’s income, which has likely taken a hit since the pandemic, was widely seen to have been propped up by political actors, foreign and domestic, trying to “curry” favor with the President. Some of whom have reportedly booked rooms at the hotel without even staying in them. And that source of “you-can’t-technically-call-it-a-bribe” cash flow will stop the moment Trump’s no longer in the White House.

Fannie Mae and Freddie Mac Increase Loan Limits. ​ ​The Federal Housing Finance Agency (“FHFA”) announced the new maximum conforming loan limits for mortgages to be acquired by Fannie Mae and Freddie Mac in 2021. In most of the U.S., the 2021 maximum conforming loan limit (“CLL”) for one-unit properties will be $548,250, an increase from $510,400 in 2020. The Housing and Economic Recovery Act (“Recovery Act”) requires that the baseline loan limits be adjusted each year for Fannie Mae and Freddie Mac to reflect the change in the average U.S. home price. Earlier today, FHFA published its third quarter 2020 FHFA House Price Index (“HPI Index”) report, which includes estimates for the increase in the average U.S. home value over the last four quarters. According to the seasonally adjusted, expanded-data HPI Index, house prices increased 7.42 percent, on average, between the third quarters of 2019 and 2020. Therefore, the loan limits in 2021 will increase by the same percentage. For areas in which 115% of the local median home value exceeds the baseline loan limits (i.e. California), the maximum loan limits will be higher than the baseline loan limit. The Recovery Act establishes the maximum loan limit in those areas as a multiple of the area median home value, while setting a “ceiling" on that limit of 150% of the baseline loan limit. Median home values generally increased in high-cost areas in 2020, driving up the maximum loan limits in many areas. The new ceiling loan limit for one-unit properties in most high-cost areas will be $822,375 (150 percent of $548,250). As a result of rising home values, the increase in the baseline loan limit, and the increase in the ceiling loan limit, the maximum limits will be higher in 2021 in all but 18 counties in the U.S. 

Scott Disick Sells Hidden Hills Farmhouse. Scott Disick, star of “Flip it Like Disick,” regular on “Keeping Up With the Kardashians,” and best of all, LAREIC Gold Member, has flipped another! Scott just sold a remodeled farmhouse in Hidden Hills for $5.6 million. That’s $1.29 million less than he was originally asking, but still $2.7 million more than he paid for it last year. The sale is a flip for Scott, who transformed the home from a traditional-style space into a modern farmhouse during his short stay. Completely remodeled, the 5,663-square-foot retreat includes a massive open floor plan, two primary suites, a reclaimed wood pavilion and pool. Hidden Hills is known for its large lots, and this one comes in at 1.33 acres. White panels and rustic wood cover the exterior, and a 10-foot glass pivoting door opens to the 5,663-square-foot floor plan. Inside, a vast open floor plan lined with hardwood combines a marble kitchen, indoor-outdoor dining area, living room with a fireplace and wine closet. There are primary suites on both levels; the lower-level suite opens directly to the backyard, and the upper-level suite boasts a sitting room and spa bathroom (with a steam shower). A reclaimed wood pavilion connects the house to the private backyard, where grassy lawns surround a zero-edge pool, spa and gas fire pit. Scott is best known for his former relationship with Kourtney Kardashian. He previously appeared in his own series called “Lord Disick: Lifestyles of a Lord.”

Demand Heats Up for Hot Tubs. Investors, how about installing a hot tub in your next house? It is cheaper, takes up less room and is easier to install than a pool. Besides, buyers like them! Hot tub sales nationally are up about 25% during the pandemic, according to the Pool & Hot Tub Alliance. Hot tub manufacturers and dealers in the Los Angeles area say they are experiencing a surge in demand, with one local dealer reporting that sales in 2020 have tripled compared to 2019. But with the jump in demand has come longer-than-usual wait times for customers and a nationwide shortage. At the same time, manufacturers of hot tubs are battling a shortage of labor and materials. Jacuzzi Corporation, which is headquartered in Chino Hills, has seen orders bubble over! Sales picked up in April and have stayed hot, hot, hot! Suppliers have also had trouble hiring workers to catch up with the demand. And as you go down the supply chain for materials, the problem becomes compounded. There’s a significant demand and an inability to supply the demand. People are likely choosing hot tubs for their homes because they’re not as big of an investment as a pool (although pool sales have also increased during the pandemic). Understandably, COVID-19, the fear of travel, the need for a more controlled environment, wanting to get out of the house and escape into the backyard, and having something to relax in, are some of the reasons consumers are increasingly choosing hot tubs. Aside from the social entertainment hot tubs provide, they also offer physiological benefits as many people are paying more attention to their physical and mental wellness during this pandemic. The warm water helps relax muscles from sitting through endless Zoom calls, or just the stress of life. Being submerged in water can also have a calming effect on one’s nervous system and help avoid killing your home-schooled kids. Hot tubs have been a symbol of California leisure since the late 1960s when Jacuzzi created the world’s first integrated jet whirlpool bath. And the water has bubbled ever since.

George Clooney Gave $14 Million Cash to His 14 Friends. Uber-star George Clooney has finally revealed the backstory behind the memorable surprise gift of $1 million in cash he gave 14 of his best friends. The great cash-gifting day happened in September 2013, right before his film "Gravity" premiered. The movie wound up being a "very good deal" for Clooney because he was paid based on a percentage of box-office revenue, which was a big box office hit. The actor had already met his future wife, Amal Alamuddin, but the two weren't dating. So he had no immediate family to dote upon. "And I thought, what I do have are these guys who've all, over a period of 35 years, helped me in one way or another," Clooney remembers. “I've slept on their couches when I was broke. They loaned me money when I was broke. They helped me when I needed help over the years. And I thought, you know, without them I don't have any of this. And we're all really close, and I just thought basically if I get hit by a bus, they're all in my will. So why the f--- am I waiting to get hit by a bus?" Clooney came up with the suitcase-of-cash idea, but then he needed to figure out how to get $14 million in cash all at once. No banks would help. But Clooney's research led him to "an undisclosed location" in downtown Los Angeles where pallets of cash are held for sale. Clooney got an old beat-up van that said “Florist” on it (like he was in a heist movie), and drove downtown. He got in an elevator with the florist's van, took the van down to the vault, and loaded it up with cash. He told no one but his assistant and a couple of security guards who couldn’t believe what they were watching. On September 27, 2013, Clooney called each of his 14 friends and announced a dinner party at his house. When they arrived, there were 14 Tumi luggage bags waiting for them. Clooney gave a speech about how much they meant to him and said he wanted to give back. They opened the suitcases, and each of them had $1 million in $20 bills. Needless to say, they were in shock. After all, when was the last time you received a suitcase overflowing with a million dollars in cash? Exactly one year later, on September 27, 2014, Clooney married Amal. Hey George, would you consider another friend?

Netflix Purchases Egyptian Theatre. More than a year and a half after it was initially reported, Netflix has finally closed escrow and purchased the historic Egyptian Theatre in Hollywood. Under the terms of the arrangement, Netflix will own the building but use it only during the week for screenings, premieres, and special events. Operations will remain in the hands of the nonprofit film preservation group American Cinematheque, who will continue to use the theater for public events on weekends under the new ownership. Netflix has also committed to invest in renovating the facility, which requires around $6 million in basic structural upgrades alone–funds that the Cinematheque simply did not have (even before the prolonged shutdown of in-person events caused by the pandemic). American Cinematheque, who previously owned the theater, said in an email to members and patrons, “The Cinematheque was honored to bring the Egyptian Theatre back to life with an extensive renovation in 1998. We are now incredibly excited to announce a collaboration with Netflix to continue to preserve this space as a movie palace and to restore it once again for a new generation of film fans to experience movies on the big screen.” Scott Stuber, head of Netflix films, says, “The Egyptian Theatre is an incredible part of Hollywood history and has been treasured by the Los Angeles film community for nearly a century. We’re honored to partner with American Cinematheque to preserve the theater’s storied legacy and continue providing remarkable film experiences for audiences. We look forward to expanding programming at the theater in ways that will benefit both cinema lovers and the community.” American Cinematheque will continue to own and operate the Aero Theatre in Santa Monica.

Diamond-Encrusted Face Mask. Taking the place of statement sunglasses, facial hair, or a bold lipstick, a face mask is now the first thing a person sees when they look at you (not to mention that masks are massively important to slowing the spread of a virus that’s currently out of control). In response, some Angelenos have started spending big bucks to invest in unique styles they like. But one unnamed L.A. businessman has taken this to the extreme, commissioning a custom mask worth $1.5 million from an Israeli jewelry company called Yvel. Designed by Isaac Levy, Yvel’s founder, and touted as the most expensive face mask in existence, the over-the-top, one-of-a-kind creation features 250 grams of pure 18k gold, and features 3,608 natural black and white diamonds, with a total weight of 210 carats. According to its creators, the mask is designed to be 100 percent wearable, with a slot to insert a disposable N-99 mask, which provides necessary protection from the coronavirus. The anonymous L.A. businessman apparently commissioned the mask as a means of supporting Israeli industry and Yvel’s 150 employees (in both Israel and the U.S.) in the midst of a pandemic that’s put many people out of work. Twenty five of Yvel’s top artisans and diamond setters were carefully chosen to carry out the unique assignment. The ostentatious mask will be handed off to its owner at the end of November, just in time for Hanukkah or Christmas, as the case may be. Meanwhile, it’s traveling around the U.S. with Levy, and will be on display in Palm Beach, Florida, before making the trip to L.A.

Wayne Gretzky selling Thousand Oaks Estate. Hockey legend Wayne Gretzky is looking to score a huge goal in Thousand Oaks! His Colonial-style mansion on nearly 7 acres has just listed on the market for $22.9 million. It’s actually Gretzky’s SECOND time selling the home. The NHL Hall of Famer was the compound’s original owner after building it in 2002. But five years later, he sold it to former baseball star Lenny Dykstra for $18.5 million. The sale kicked off a dramatic saga that saw Dykstra lose the property to foreclosure after declaring bankruptcy. At the trustee’s sale on the steps of the Ventura County Courthouse, it was auctioned for $760,712 (with the winning bidder taking on about $12 million in debt owed on the property). Then, two years ago, Gretzky re-united with the home, shelling out $13.5 million for the promontory estate. That’s $5 million less than the price at which he had sold it to Dykstra roughly a decade earlier. If he gets his price this time around, he stands to make $9.4 million in profit. Tucked behind gates in the Sherwood Country Club, the grounds include an elegant Colonial-style home designed by Richard Landry, two guesthouses, a swimming pool, tennis court and entertainment area surrounded by rolling lawns and manicured gardens, but no ice rink. In total, the homes combine for six bedrooms and 7.5 bathrooms across 13,300 square feet. Gretzky, 59, spent 20 seasons in the NHL, and his record for most goals and assists in league history earned him the nickname “the Great One.” The Canada native spent time with our Kings, Oilers, Blues and Rangers and held 61 NHL records at the time of his retirement. After he hung up his skates in 1999, the league retired his number, 99 — the only time that’s happened in NHL history. Perhaps, more importantly, he is the father of social media diva and model Paulina Gretzky. 

This Week. Looking ahead, investors will continue watching COVID-19 case counts, progress on vaccines, and government stimulus measures. The ISM Manufacturing index will be released tomorrow (12/01) and construction will also be released tomorrow (12/01). Beyond that, the monthly Employment Report will be released on Friday (12/04), and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month.

Calendar:
Tuesday, 12/01:   ISM Manufacturing
Tuesday, 12/01:   Construction
Friday, 12/04:      Employment

Weekly Changes:
10-year Treasury:   Rose 0.02 points
Dow Jones:            Rose 600 points
NASDAQ:                Rose 200 points