Economic Update (January 4-9, 2021)

[Lloyd Segal]

Economic Update (Monday, January 4, 2021) Welcome 2021! We’re so happy you’re finally here. For all of us, there is now light at the end of this tunnel. If someone would have told you what was in store of 2020, what would you have done differently? What would you have said? Investors, last year was truly dreadful, but it made you stronger, wiser and more aware. It is often said we are never given more than we can handle, and we are only dealt what we are strong enough to take. Hopefully, last year gave you a chance to look in the mirror and decide who you want to be and the impact you want to have on this world. At this point in your life you are at a humbling crossroads — one that’s character-defining and legacy-building. As we enter 2021, be grateful for the road ahead and where it will take you. With so much to be appreciative of, and grateful for, there are even better things to come as we look forward to this new year… Existing Home Sales. Following five consecutive months of gains, existing home sales took a widely expected breather in November and December. Despite the small decline, sales in 2020 posted the highest annual level since 2006, a remarkable achievement in the midst of the COVID-19 pandemic. If you recall, 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 blown past the previous February high, and are now up an amazing 16.1% from pre-pandemic levels. One major contributor to the recovery has been the Fed's liquidity policies, which have helped push 30-year fixed mortgage rates 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, with demand for existing homes so strong that 73% of the homes sold were on the market for less than a month! That said, sales face a continued headwind from low inventory of existing homes. Inventories are at the lowest for any month on record back to 1999 and are down 22.0% 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 2.3 months, also the lowest reading on record back to 1999. Notably, the inventory shortage is most acute at the lower end of the price spectrum, with available properties worth $500,000 or less posting double-digit percentage declines in the past year. This has resulted in a shift in the mix of homes sold toward more expensive properties. For example, sales of homes worth $1 million and over are up 88.1% in the past year, as wealthy urban dwellers purchase properties elsewhere to escape pandemic-related restrictions and social unrest. Look for continued robust sales as we head into 2021, although sales will eventually settle down due to a lack of inventory. U.S Home Prices Surge. According to the S&P CoreLogic Case-Shiller Price Index, the cost of buying a home surged again in October (the most recent month available), the fastest rate in six years! This is a clear sign the housing market is still booming despite a raging pandemic. The Index, covering the entire country, shows a large 8.4% increase in home prices over the past year. That’s also up sharply from 7% in the prior month. Prices have risen at the fastest clip since 2014 owing to record-low mortgage rates and an influx of people leaving cities to escape the coronavirus and find more space in the suburbs. A limited supply of homes for sale has also been a contributing factor. The data from the last several months are also consistent with the view that COVID has encouraged potential buyers (i.e. former renters) to move from urban apartments to suburban homes. Prices rose in 19 of the 20 large cities tracked by Case-Shiller. (Detroit was excluded once again because not enough information could be collected. A state lockdown to slow the spread of the virus has led to delays in record keeping in Michigan.) The biggest yearly increases in home prices took place in Phoenix (12.7%), Seattle (11.7%) and San Diego (11.6%). The smallest increases occurred in New York (6%), Chicago (6.3%) and Las Vegas (6.4%) — cities that have been hit hard from the virus or whose local economies have suffered the most. Home sales aren’t expected to slow much, if at all, even amid a record coronavirus outbreak. Super-low mortgage rates and the growing prospects of our economy gradually returning to normal are likely to keep demand high. That’s good news for investors but bad news for prospective home buyers (who are unlikely to get much of a price break in 2021).  Top Housing Markets For 2021. Millions of Americans have embraced the work-from-home lifestyle. And the shift toward remote working is beginning to influence where people call home. A new report from Realtor.com identifies the markets that are poised to be the strongest in 2021 across the country, based on their projected home sales and price growth. Coming in at the top of the list is Sacramento. The Golden State’s capital, Sacramento embodies the shifts that are expected to occur in home buyers’ preferences in the New Year. Sacramento itself isn’t a tech hub — but by being roughly a two-hour drive from San Francisco, it’s become a “bedroom community” for many people who work for the country’s largest tech firms (but don’t want to break the bank due to the high-cost housing in those areas). And now that many tech companies, including Google and Twitter, have indicated that employees can continue working remotely until next summer, or even beyond, there are benefits to living somewhere like Sacramento. It’s not too long a drive should a worker need to visit the office, but has a much cheaper cost of living, plus good schools. Other cities that will likely see their housing markets boosted by the popularity of remote working include San Jose proper, Denver, Seattle and last year’s No. 1 housing market Boise, Idaho. Besides Sacramento, Denver and Boise, Phoenix and Harrisburg, also count among the top 10 on the list. Phoenix’s warm climate has attracted an influx of new residents from pricier metros like Seattle and Portland: 1 Sacramento--Roseville--Arden-Arcade, Calif. 2 San Jose-Sunnyvale-Santa Clara, Calif. 3 Charlotte-Concord-Gastonia, N.C.-S.C. 4 Boise City, Idaho 5 Seattle-Tacoma-Bellevue, Wash. 6 Phoenix-Mesa-Scottsdale, Ariz. 7 Harrisburg-Carlisle, Pa. 8 Oxnard-Thousand Oaks-Ventura, Calif. 9 Denver-Aurora-Lakewood, Colo. 10 Riverside-San Bernardino-Ontario, Calif. Mortgage rates. Mortgage rates closed out 2020 near the lowest levels on record. But those looking to lock-in cheap financing shouldn’t wait on the sidelines much longer. The 30-year fixed-rate mortgage averaged 2.67% for the week ending Dec. 31, up one basis point from the new record low of 2.66% set the week prior, Freddie Mac reports. Meanwhile, the 15-year fixed-rate mortgage dropped two basis points to an average of 2.17%, representing a record low for this mortgage product. The 5-year Treasury-indexed hybrid adjustable-rate mortgage fell by eight basis points to 2.71%. On more than a dozen separate occasions in 2020, mortgage rates dropped to record lows. Indeed, rates fell to levels once thought to be infeasible, if not impossible. But a number of factors could push rates higher in 2021. As you know, mortgage rates roughly track the direction of long-term bond yields, especially the 10-year Treasury note, which is market sensitive. Accordingly, the results of two Senate runoff elections in Georgia and the possibility of more fiscal relief are both less certain in the eyes of bond investors and thus could prompt sharp movements in bond yields depending on their outcomes. Until more is known on either of those fronts, meaningful movements in bond yields (and mortgage rates) appear unlikely. Longer-term, the trajectory of the pandemic and our economy will have a major influence on rates. With vaccines now rolling out, the global community seems poised to begin emerging from the pandemic. If that benefits our economy as expected, rates will certainly rise. 2021 Will Be a Bumpy Ride for Airlines. Pandemic-pummeled airlines are retooling for 2021, trying to keep jobs on life support while strategically streamlining and dangling rock-bottom rates in the hopes customers return. From Boeing to bailouts, the aviation industry had one of its worst years in 2020, a radical comedown after a run of profits right up to coronavirus lockdowns. Passenger volume fell from over 2 million daily at the beginning of March to a rock bottom of only 90,000 in mid-April, according to TSA checkpoint statistics, as stay-at-home orders and travel restrictions hit. While that number has since recovered, even the busy holiday season saw passenger volume at less than half what it was a year ago, with only 1.2 million people traveling on Dec. 27, versus 2.6 million last year. Airlines received $25 billion in government assistance from the CARES Act. It required them to keep employees on payroll. But after that funding ran out, airlines were forced to reckon with personnel costs, encouraging early retirement and voluntary leave, negotiating lowering costs with labor unions, and implementing furloughs and layoffs for the remaining gap. Assuming a national vaccine distribution by the second half of the year, profits for 2021 are still predicted to be down over $11 billion. Airlines will have to embrace new technologies, retire older, less fuel-efficient planes to stay afloat, and overhaul some of its longstanding business models. The industry is adopting new cleaning and safety protocols to mitigate coronavirus risks during air travel, installing high-performance air filtration systems, sanitizing planes, and educating staff. Passengers are required to wear masks and can be placed on a do-not-fly lists for non-compliance. But it’s still going to be a long winter, and a turbulent spring. The hope is that if they hunker down, get lean while being flexible (to ramp up when demand returns), airlines can catch a ride on what is expected to be a surge in pent-up demand when safety re-emerges and widespread travel resumes. In the interim, those vaccinated (or willing to take a chance on a flight) will find savings to entice them to step aboard. Consumers will find lower travel costs, as airlines will continue to significantly discount ticket prices to stimulate demand. Of course, the industry will return, not immediately stronger, but ultimately reshaped, redesigned and ready to meet whatever the new challenges are. Airlines see the “light at the end of the tunnel,” or should we say “the floodlights at the end of the runway?” House Too Dangerous to Enter Still Gets 17 Offers. If you think it’s difficult to find a fixer in LA, consider what’s happening in Seattle. The house was too dangerous to even enter, but that didn’t stop a gutted Seattle house from selling fast. Listed for $330,000, a trash-filled Bothell, Washington, property received 17 offers. According to the Seattle Times, 2502 166th Place S.E. was gutted and requires at least $150,000 in repairs. Compass agent Sam Forselius listed the property above asking price and with only one photo. The fixer-upper was advertised as an “investment opportunity.” “A whole lot of potential awaits,” read the listing. “Down to studs, remodel needed. Due to extremely poor condition and water damage issues, sold 100 percent as-is including refuse. No entry allowed.” Still, he received 17 offers and sold it in only five days! The new buyer was not even able to inspect the interior due to the water damage and unsafe conditions, but he bought it anyway (sight unseen!). The cul-de-sac surrounding the house showcases more attractive homes. An average home in the Bothell area prices at over $600,000 and affordable properties, in particular, are hard to come by. But given the extremely competitive state of Seattle’s housing market (home values spiked after the rise of tech giants like Amazon and Microsoft, and now command nearly $750,000 for an average home in the area) interest is high. All over the Pacific Northwest, investors are competing for fixer uppers, even sight unseen!  Bring Outdoor Dining Back? As expected, the fight over outdoor dining in Southern California is heating up. Frustrated LA restauranteurs spent nearly a year being pushed to the brink — forced to lay off staff, change concepts, amass untold debt, fight landlords, build expensive outdoor dining patios, and stay safe during the largest public health crisis in recent history. Then, on November 25, the LA County Department of Public Health and LA County Board of Supervisors went one step further and imposed a 3-week ban on outdoor dining as the coronavirus cases rose precipitously across the state. In other words, restaurants were now being told that the outdoor open-air spaces they spent thousands to build are no longer suitable for safe operation despite no direct data linking restaurants to the uptick. Meanwhile, restaurateurs argue, grocery stores, retail shops, and outdoor gyms are allowed to remain open (with capacity caps in place), and airlines and hotels continue to ferry and house travelers during the holidays. The California Restaurant Association and Engine 28 restaurant (owned by attorney Mark Geragos) sued to overturn the county ban. The lawsuit in LA County Superior Court ended in a (sort of) victory, when Judge James Chalfant ruled that the Department of Public Health “acted arbitrarily” in closing outdoor dining at restaurants, chiding public health officials for a perceived "lack of data" to show that restaurants were directly causing a spike in COVID-19 cases. Chalfant’s injunction meant that, barring further evidence, county officials would have been forced to reopen outdoor dining on December 16. However, the county’s reopening timeline was superseded by the state-level regional stay-at-home order from Governor Gavin Newsom’s office (which was extended on December 28). Fresh off the tentative win in Superior Court, Geragos is now taking his fight directly to federal court, filing a new lawsuit against Newsom that would over-turn the current state outdoor dining ban. And this time, he’s not alone. Geragos is joined in his new lawsuit by Angela Marsden, the owner of Pineapple Hill Saloon & Grill in Sherman Oaks. In this new Federal suit, the restauranteurs allege that Newsom and state officials “have seized the coronavirus pandemic to deprive restaurants (the plaintiffs) of fundamental rights,” calling the ban a “gross abuse of their power.” If the Federal lawsuit moves ahead, a judge could rule that outdoor dining must be allowed to resume, though for now that possibility remains remote. As legal experts have noted, notwithstanding Judge Chalfant’s ruling, government officials are given wide latitude during emergencies to act in the interest of public health and safety, with or without firm, immediate data to guide any decisions.  Los Angeles Wants a Flying-Taxi Division. What Could Go Wrong? On a webinar last week, Mayor Garcetti announced the formation of the U.S.’s first urban air mobility partnership, which would have “low-noise, electric aircrafts flying in our local airspace by 2023.” But almost no one seemed to know what that meant, but the immediate reaction was that it was probably something bad. In reality, “urban air mobility” is a fancy way to say flying taxis, and can be used to describe a whole range of airborne vehicles that are shared, electric, autonomous, and tooled to take off and land vertically. Think of them as extra-quiet helicopters or extra-large drones. They could, eventually, be used to ferry humans from one place to another. Some types of airborne vehicles are already useful in an urban setting — ambulances, say — and they’re also being used more and more often in commercial applications like drone deliveries. From a technology standpoint, conventional helicopters are so dangerous, expensive, loud, polluting, and generally annoying that almost any innovation is welcome. The newly formed partnership, which is operated out of the city’s newish public-private transportation think tank, the Urban Movement Labs, will “map out challenges identified by local, diverse stakeholders surrounding public airspace and property rights” and design a “vertiport,” billed as a “new piece of L.A.’s transportation network where people can go to fly on an urban air mobility aircraft.” L.A. is a popular place for such visions because, until recently, fire codes required all buildings to put helipads on top. Nevertheless, the reason Angelenos are openly disdainful about this whole thing is that city leaders are, once again, distracted by (the extremely uncertain prospect of) shiny, whirring objects polluting our skies, while ignoring the most basic, everyday ground transportation needs of regular Angelenos, 99 percent of whom will never ride in a flying taxi. You’d think the city would want to address these transportation issues, because without these everyday needs fulfilled first, no “solutions” layered upon us can truly be successful. In other words, without fixing what’s truly broken, L.A.’s urban air mobility division will just be building freeways in the sky, replicating all the problems we still haven’t managed to solve on the ground. The Realtor and the Pop Singer. The real estate world is abuzz with the news of the engagement of Realtor Dalton Gomez to superstar Ariana Grande. Gomez is best known throughout Hollywood for being attached to notable design icons like John Lautner and Richard Neutra. Gomez, 25, has represented sellers for some of Los Angeles’s most architecturally significant properties, making him somewhat of a prodigy. Gomez is a “five-year veteran of the luxury real estate market,” according to his bio at the Aaron Kirman Group, which he joined five years ago. Working alongside Kirman (host of the show Listing Impossible), Gomez represented sales for two Case Study homes — the experimental mid-century houses built in L.A. during the 1940s and 1950s that redefined residential architecture in the U.S. — last year: Pierre Koenig’s Case Study No 21 (also known as the Bailey House), which went for $3.26 million, and Craig Ellwood’s Case Study No 16, which went for $2.9 million. Of course, his fiancée, Ariana Grande, needs no introduction. She is a 27-year-old pop singer also known for her teenage appearance in the Broadway musical 13. Gomez racked up Instagram likes over the weekend when he presented his fiancée with a diamond and pearl engagement ring (with a pearl possibly repurposed from her grandfather’s tie pin). But how did they meet LAREIC members are dying to know? Open House? Nope. At a LAREIC monthly meeting? Nope? At Starbucks? Nope. Gomez met his future wife over the pandemic summer. As the sole buyer’s agent at the Aaron Kirman Group, Gomez helped Ariana find and close the June purchase of her home, a glassy contemporary 10,095 square foot mansion high in the Bird Streets of Hollywood Hills. Grande sealed the deal for $13.7 million, about half what the property had been listed for two years earlier. I guess Adriana could say it was love at first sight (the home and the Realtor). Heck, now that I think about it, if Gomez found me a property at half the listing price, I would marry him too! ​Bella Thorne's Pink House. Anyone interested in investing in a hot pink house in Sherman Oaks? Now on the market for $2.9 million, former Disney Channel star Bella Thorne’s bright pink, two-story home is hard to miss. Thorne transformed the originally black and white exterior to its current, shocking, hot pink when she purchased the property in 2016 for $2.011 million and put her creativity into redecorating the home’s interior as well. A rainbow-colored staircase leads to the second floor alongside a wall that features a psychedelic mural, which depicts flying saucers and cartoonish red and white toadstool mushrooms. That sentiment is reflected in rooms that seem to have little continuity between them, apart from their bold color choices. The living room features a block pastel blue and green paint scheme with deep blue and green feather boas trimming the windows. Turn to the adjoining room, and you’ll find more hot pink paint with a collage of flowers of red, pink and white donning one full wall. Meanwhile, the kitchen features cabinets of all different colors and globular hanging lights, likewise multicolored. In the master bedroom, more murals are to be found, this time with creatures like cats and long-necked birds. Aside from some unusual decorating choices, the five-bedroom, six-bathroom home does include some special features, like an enormous master closet that could probably fit the entire wardrobe of Rod Stewart! In addition, the living room has extensive glass sliding pocket doors that open up to the backyard, where a swimming pool and patio await. Although the property has a few high-end features that could be selling points for some, it will take a unique buyer with an acquired taste, or color blind, to redecorate. Thorne, who is only 22, has appeared in television shows including My Own Worst Enemy and Big Love, after she first gained public attention as CeCe Jones on the Disney Channel series Shake It Up. She’s also acted in films such as Blended, The DUFF and Infamous. But apparently no interior decorating classes on Bella’s imdb profile.  This Week. Looking ahead, investors will continue watching Covid case counts, vaccine distributions, and of course, Georgia’s double Senate election tomorrow (1/5). The ISM national manufacturing index will be released tomorrow (1/5) and the ISM national services index on Thursday (1/7). The monthly Employment report will be released on Friday (1/8). These figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Weekly Changes: 10-year Treasuries: Rose 0.01 Dow Jones Avg: Rose 300 points NASDAQ: Rose 100 points Calendar:  Tuesday, 1/5: ISM Manufacturing Thursday, 1/7 ISM Services Friday, 1/8: Employment Lloyd Segal