Economic Update (Monday, March 8, 2021)

[Lloyd Segal]

Economic Update (Monday, March 8, 2021) Mortgage rates have been on an upward climb this year, with stronger than expected economic data causing the trend to continue last week. In fact, long-term bond yields, including mortgage rates, have already climbed over 50 basis points in 2021 due to improving economic conditions. With the vaccine rollout and massive government stimulus, the outlook for economic activity looks extremely promising, which means that inflationary pressures could increase. In addition, Fed officials gave no indication that they intend to attempt to halt the recent rise in yields. On Thursday, Fed Chairman Jerome Powell acknowledged the economic strength but did not give any indication that the Fed intends to restrain long-term bond yields. As a result, mortgage rates ended the week at their highest levels in months. And they’re only going to get higher. So wash your hands, put on your face masks, social distance, and let’s talk… Employment. According to the Labor Department, the U.S. created 379,000 new jobs in February — the biggest gain in four months — in what’s likely to be a preview of a surge in hiring in the months ahead as people get vaccinated and our economy reopens. Nearly all the job gains came from the battered leisure and hospitality sector, which saw an increase of 355,000 job amid a relaxation of dining restrictions in some areas. Bars and restaurants gained 286,000 jobs while hotel-related hiring totaled 36,000 and amusement, gambling and recreation businesses added 33,000. Health care jobs in February rose 46,000 while retail added 41,000. Manufacturing also posted a 21,000 increase. Despite the gains, we are still 3.5 million short of the employment level from a year ago, just before the worst of the pandemic. Friday’s report also shows that hiring was stronger in January than initially indicated, with that month’s tally revised up to 166,000 from 49,000. The official unemployment rate, meanwhile, slipped to 6.2% from 6.3% (although economists widely believe the real rate is much higher). Federal Reserve officials peg the jobless rate at closer to 11% after adjusting the data for distortions caused by the pandemic. The rebound in job creation in February is likely the start of a major new cycle of hiring. Warmer weather, falling coronavirus cases, rising vaccinations and another massive increase in federal stimulus are likely to act as jet fuel for our economy this spring and summer. So mark my words: we are poised to start growing by leaps and bounds again after a tough winter — if the coronavirus vaccines prove effective. An effective vaccine will allow states to remove all restrictions, let Americans go about their lives again (without fear for their safety) and give companies the incentive to hire. And the newly-passed government stimulus will certainly add to the budding momentum. I have never been more optimistic. Full steam ahead!

Mortgage Rates. The yield on 10-year U.S. Treasury notes jumped on Friday (after the February jobs report topped expectations), sending the benchmark yield to its highest level this year. The yield on the 10-year Treasury was trading at 1.617% and had an intraday high of 1.626%. The yield on the 30-year treasury bond rose to 2.34%. Yields move inversely to prices. Why do we care? Because the yield on the 10-year treasury is the basis for mortgage rates. In other words, we care because if yields go up, mortgage rates will follow. In fact, the benchmark yield has been climbing quickly in recent months after ending 2020 under the 1% level. It topped 1.5% last week for the first time in over a year, and also briefly flashed above 1.6%. Thursday’s jump for Treasury yields put the 10-year above that mark. The rise in bond yields comes as economists and Wall Street strategists are growing increasingly bullish on the U.S. economy as Covid-19 vaccines roll out. As a result, the prospect for strong economic growth, as well as budding concerns about inflation, have pushed down the prices for bonds. This climb in the Treasury yields has led some to speculate that the Federal Reserve may adjust its policy to hold down the yield curve or even ease up on its dovish stance. But so far the central bank has not publicly shown interest in altering its course. Apartment Rents Jump in February. Rents for U.S. apartments climbed 0.6% in February, rising at the fastest single-month pace since the middle of 2019. The increase in pricing proved widespread, as 140 of the 150 metros tracked in RealPage’s data logged at least a little rent growth. Even the country’s gateway metros, where rents were slashed in 2020, experienced rent bumps in February. Rents climbed 0.6% to 0.7% during the past month in Los Angeles and San Jose, while smaller increases of 0.1% to 0.3% were seen in San Francisco, New York, Washington, DC and Seattle. Average monthly rent across the U.S. now stands at $1,422. Influencing results for the past month, leasing activity is still occurring at a time when seasonal weakness in demand is normal. Preliminary calculations show the nation’s occupied apartment count up by more than 30,000 units in February (whereas there typically is no or very little net demand when U.S. temperatures are at their lowest). Looking to the bigger picture, annual change in rents remains negative at -0.9%. Rents are off by 14% to 21% year-over-year in San Francisco, San Jose and New York, and by roughly 5% across Washington, DC and Chicago. At the other end of the performance spectrum, rents are up sharply year-over-year in some locations. Riverside/San Bernardino leads the way, registering 9% rent growth. Sacramento and Memphis also are doing quite well, as prices are up 6.7% and 6.5%, respectively, in those two spots. Other metros posting annual rent growth of at least 4% include Greensboro/Winston-Salem, Virginia Beach, Phoenix, Las Vegas, Detroit, Tampa and Atlanta. U.S. apartment occupancy has been hovering between 95% and 96% since late 2019. Refinance Loans Increase. ATTOM Data Solutions released its fourth-quarter 2020 “U.S. Residential Property Mortgage Origination Report,” which is always entertaining. The Report shows that 3.51 million mortgages secured by residential property (1 to 4 units) were originated in the fourth quarter of 2020 in the United States. That figure is up 5.5 percent from the prior quarter and up 48 percent from the fourth quarter of 2019 – to the highest level in almost 14 years! With interest rates remaining below 3 percent for most purchase and refinance loans, lenders issued $1.06 trillion worth of mortgages in the fourth quarter of 2020 – up 6 percent from the third quarter of 2020 and up 55 percent from a year ago, to the largest quarterly amount since at least 2000. The quarterly rate of increase of loans and dollar volume represents the largest gains during any fourth-quarter period since 2011. The continued boost in lending activity during the fourth quarter of last year came mostly from another jump in refinance mortgages. But the overall figure also was prompted by relatively strong home-purchase lending and home equity lines of credit. Lenders refinanced 2.23 million home mortgages in the fourth quarter, which was 12 percent more than in the third quarter of 2020 and 71 percent above the fourth quarter of 2019. The dollar amount of refinance loans rose to $666.8 billion, an 11 percent increase from the prior quarter and a 67 percent increase from a year ago. Homeowners taking advantage of low rates to roll over old mortgages into new ones continued to account for the majority of home loans in the fourth quarter of 2020. The strong home-lending numbers during the fourth quarter came despite the Coronavirus pandemic that spread throughout the country, slowing or stalling major sectors of our economy and keeping unemployment high. Nevertheless, a rush of homeowners and home buyers taking out various kinds of loans continued amid a scenario of low-interest rates and a desire of many families unscathed by the pandemic to trade life in congested, virus-prone urban areas for more spacious homes and yards in the suburbs.

Judge Carter Forcing L.A. to Deal With Homelessness. Every city needs a David Carter. Who is David Carter? David O. Carter is a Federal District Judge in California that does not take “no” for an answer. Depending on your point of view, Judge Carter is either a fearless disruptor of slow-footed local governments — or a bully interfering with professionals dedicated to serving homeless people. In fact, he is both! Carter is overseeing a settlement agreement between Los Angeles city and county governments in a case brought by the L.A. Alliance for Human Rights, a group of downtown business owners and residents that sued to force the city to shelter homeless people. Judge Carter is requiring the city to find temporary shelter (with the county footing the bill) for thousands of homeless people — mostly those living under or near freeways (because the judge has decided that it’s unsafe to live near the toxic fumes from vehicles). The mandate has forced the city and county to spring into action, moving scores of homeless people from highway underpasses and overpasses to shelter beds and providing them with social services. Judge Carter has continued to hold officials accountable for the problems he has encountered on his frequent visits to L.A.'s skid row neighborhood. Yes, Judge Carter doesn’t just sit in his courtroom handing out judgments. He actually gets out of the courthouse and walks skid row! On a rainy morning last month, Judge Carter encountered a number of drenched homeless women near the Downtown Women’s Center. He erupted in anger and insisted that the Women’s Center cover its parking lot with a tent and offer it as a campground for the women. He also made city officials find shelter for a variety of women that night. Then he called an ex parte court hearing several days later — in that same parking lot — and demanded to know what city officials were doing about getting people sheltered or housed on skid row. No one blames Carter for being outraged by the sea of desperate humanity in skid row every day. It is outrageous! And homelessness has only gotten worse in L.A., even as the city moves thousands of people off the streets each year. Maybe the Judge could be a catalyst for a new, more urgent approach to homelessness. Judge Carter wants the parties to the lawsuit to agree to a settlement that sets enforceable goals. One way to achieve that would be a consent decree that lays out those goals and a deadline for the city and county to achieve them.

Parts of L.A. Barely Felt the Coronavirus Surge. The winter surge of COVID-19 brutalized much of Los Angeles County (see LA County heat map below), sending case rates and deaths skyrocketing for weeks. But if you look closely, you will discover that in some neighborhoods, the pandemic’s wrath was barely felt at all. For example, in West Hollywood, Malibu and Playa del Rey, infection rates actually fell, according to a Times data analysis of more than 300 neighborhoods and cities across our county. Here is why they were spared. Those communities’ relative good fortune can be explained by some obvious demographic factors, such as Malibu’s low housing density and West Hollywood’s large population of singles able to work from home. But residents and city officials also point to other factors they believe helped keep the pandemic under control: sea breezes, easy access to open space for exercising, a strong culture of mask compliance and, crucially, limited contact with other people. The data analysis underscores the wrenching inequities unveiled by the pandemic in L.A. County and beyond. As you can see on the heat map, some areas — the Eastside, eastern San Fernando Valley, South L.A. and southeastern part of our county — have been devastated by the coronavirus. Many of these are low-income communities with a high number of residents who are “essential workers,” putting their lives at risk at supermarkets, manufacturing firms and other businesses. They are far more likely to live in overcrowded conditions, bringing the coronavirus home from work, or to work from home, and spreading it among families and fellow workers. Lifelong, systemic lack of access to primary healthcare and nutrition, as well as environmental factors like pollution, can contribute to a higher likelihood of illness and death from the virus, according to the Center for Disease Control and Prevention. Many of these factors have long plagued the poorer, denser and more diverse parts of our county that were hit hardest during the surge. After all, hard-hit areas lack the assets — vast recreational open space and a population with the economic means to stay home, get goods delivered, and work remotely — of affluent communities that fared better. It was not just living in sprawling single-family homes rather than denser apartments that made the difference, but these additional economic and lifestyle factors. When taken as a whole, these factors paint a tale of two surges — showing that the luxuries of location and privilege play an important role in one’s ability to avoid the coronavirus.

Housing Costs Increase in the Inland Empire. An increase in real estate prices and demand in Riverside and San Bernardino counties is largely being caused by people moving from L.A. California’s Inland Empire–the region including San Bernardino and Riverside Counties–has become one of the hottest real estate markets in the United States. But just as Inland Empire home prices rise, the region’s job growth has dropped, and longtime residents are worried they may be priced out by remote workers from Los Angeles and elsewhere who have swooped in during the pandemic. According to data released this month by CoreLogic, home prices in the Inland Empire rose nearly 12 percent during 2020. Rental inventory, too, has significantly tightened, and prices have risen by 6.9 percent in Riverside County and 9.1 percent in San Bernardino county. In both cases, a significant amount of interest in the market is coming from people moving into the region from other, more expensive parts of the state. The bulk of out-of-market buyers and renters looking for homes in Riverside and the surrounding areas are coming from Los Angeles, followed by Orange County and San Diego. That trend, they say, is linked to the pandemic inspiring a major shift toward long-term “work-from-home” scenarios. Meanwhile, local job growth in the Inland Empire dropped by 7 percent in 2020, and unemployment remains over 9 percent. Even before the pandemic, many of the region’s jobs were concentrated in warehousing, construction, health care, agriculture, and the hospitality sector. In 2019, the Press-Enterprise reported that average wages in Riverside and San Bernardino counties were at that time not just among the lowest in California, but among the lowest of all urbanized counties in the U.S. Worse, retail and storefront real estate vacancies jumped 10 per cent in just the third quarter of last year, an indicator that shops and restaurants have gone out of business and not been replaced. These economic realities leave many Inland Empire workers vulnerable to even minor fluctuations in housing costs. New Orleans’ Landmark Listed for Sale. One of the many joys of real estate investing is the appreciation of great architecture. And some of the finest residential architecture can be found in New Orleans, Louisiana. Which brings me to Nathaniel C. “Buster” Curtis Jr., one of New Orleans’ most famous 20th-century architects —he designed the Louisiana Superdome no less. In 1963, he built something for himself: a brick and glass two-story home on a quarter acre lot on an oak-filled Uptown street, with room for him, his wife, and their seven children. Yes, seven children! The property consists of 4 bedrooms and 4.5 bathrooms within 4,160 Sq ft. The property is hidden behind an eight-foot white brick wall with a cast-iron gate. This allowed Curtis to build an almost entirely glass façade, without worry that his family would be watched by passersby. (It also allowed anyone sitting in the living room or dining room to look out onto the property’s four separate courtyards.) A 70-foot central hallway connects three pavilion-like main spaces: One consists of a living area or music room; another holds the dining room, kitchen, and breakfast nook; the final “pavilion” in the original floor plan. Curtis passed away in 1997, and his wife, Frances, remained in the house until 2013, the year architect Lee Ledbetter and his husband, Douglas Meffert — the home’s second owners — purchased the estate. The biggest changes happened in the “sleeping quarters.” Originally, there was a cluster of seven small bedrooms for each of the seven Curtis children, and some of them were, in Ledbetter’s words, “like monastic cells … square and small.” By knocking down back-to-back closets from adjacent bedrooms, Ledbetter created four larger bedrooms, each with a sitting room and a private bathroom. Outside in the courtyards, Ledbetter and Meffert planted staghorn ferns, palm trees, giant elephant’s ear plants, and yaupon holly (an evergreen shrub meant to attract birds). Ledbetter says he’s sad to leave but feels it’s just too much house for only two people. His loss is your gain for only $1,850,000.

Hammer Splits Hancock Home. Ever since DMZ released text messages where actor Armie Hammer details cannibalistic desires with drinking his ex-girlfriend’s blood and eating her ribs, the actor’s career has been in free fall. It culminated last week when Hammer moved out of his Hancock Park home in the middle of the night while his neighbors slept. Sources say that when Hammer finally quit the residence he did it under cloak of darkness. “Trucks and a gaggle of movers descended on the property, working well after midnight and lit only by flashlights,” a neighbor of the gated property told the New York Post.“ Hammer, 34, and his estranged wife, Elizabeth Chambers, 38, found a buyer for their three-story Tudor last month, though only after cutting their initial $5.8 million asking price by $800,000. Hammer and Chambers put the stately seven-bedroom, six-bathroom mansion up for sale in September, shortly after announcing they were breaking up after ten years of marriage. But failing to find a buyer, a month later they dropped their ask down to $5.3 million and then cut another $300,000 off that price tag in December. Since the scandal—in which women have accused Hammer of engaging in real-life “knife play”—he has been fired (or quit depending on who you ask) from starring roles opposite Jennifer Lopez in Lionsgate’s Shotgun Wedding and the Paramount + TV series The Offer, as well as being dropped by his agents at WME. Perhaps his new agent can get Hammer the lead in the sequel to Silence of the Lambs.

This Week: Looking ahead, investors will continue watching decreasing Covid case counts, increasing vaccine distribution, and the oscillating size of the government’s new stimulus package. Beyond that, the Consumer Price Index (CPI) will come out on Wednesday (3/10). CPI is the most widely followed monthly inflation report that looks at the price change for goods and services. The next European Central Bank meeting will take place on Thursday (3/11), as well as JOLTS (3/11). Weekly Change: 10-year Treasuries: Rose 0.15 bps Dow Jones: Fell 100 points NASDAQ: Fell 700 points For further information, comments, and questions: Lloyd Segal