Economic Update (Monday, March 22, 2021)

[Lloyd Segal]

Economic Update
(Monday, March 22, 2012)

The TV commercial used to say “When E.F. Hutton speaks everyone listens.” Well, E.F. Hutton is no more. Now we have the Federal Reserve. And when the Fed speaks, truly EVERYONE listens! For example, this week the Fed said that it would keep current policy unchanged but increased its forecast for economic growth, prompting economist to predict interest rate increases in 2023. In response to a question about winding down the central bank’s bond-buying program, Fed Chairman Powell said that it is “not yet” time to start considering tapering its purchases. “When we see we’re on track, when we see actual data coming in that suggests we’re on track … then we’ll say so.” The central bank also said in its latest statement that it would keep rates near zero, and reiterated it would keep buying $120 billion of Treasuries and mortgage-backed securities until “substantial further progress” is made toward the central bank’s goals of maximum employment. So, with interest rates heading in the wrong direction, let’s wash our hands, put on our face masks, social distance, get vaccinated, and look under the hood….

Harsh Weather Weighs Down Retail Sales. Retail sales dropped by a seasonally adjusted 3.0% last month, the Commerce Department reports. Unseasonably cold weather gripped the country in February, with deadly snowstorms lashing Texas and other parts of the South region, curtailing sales. The decline last month also reflects the fading boost from one-time $600 checks to households (which were part of nearly $900 billion in additional fiscal stimulus approved in late December). Excluding automobiles, gasoline, building materials and food services, retail sales decreased 3.5% last month. (These so-called “core retail sales” correspond most closely with the consumer spending component of gross domestic product.) Still, last month’s drop in core retail sales left the bulk of January’s gain intact, and the decline was probably temporary (due to weather conditions). President Joe Biden signed his $1.9 trillion rescue package into law, which will send additional $1,400 checks to households as well as extend a government-funded $300 weekly unemployment supplement through Sept. 6. The anticipated rebound in retail sales will also be driven by an acceleration in the pace of vaccinations, which should allow for broader economic activity, even as the rate of decline in new COVID-19 cases has leveled off. Households have also accumulated $1.8 trillion in excess savings. But fasten your seat belts because economists forecast 7.0% growth this year! That would be the fastest growth since 1984 and would follow a 3.5% contraction last year (the worst performance in 74 years).

Home Flipping Sales and Profit Declined in 2020. ATTOM Data Solutions released its year-end “2020 U.S. Home Flipping Report,” which shows that 241,630 single family homes and condos in the United States were flipped in 2020, down 13.1 percent from 2019 (to the lowest point since 2016). Obviously, less investors are buying my book “Flipping Houses." The number of homes flipped in 2020 represented only 5.9 percent of all home sales in the nation during the year, down from 6.3 percent in 2019 to the same percentage seen in 2018. The declines in the number of homes flipped in 2020, as well as the portion of home sellers represented by investors, marked the first time since 2014 that both measures decreased annually. While flipping activity declined, gross profits and profit margins shifted in opposite directions. For example, profits rose in 2020, but profit margins dipped (the third straight year that returns on investments declined). Houses flipped in 2020 typically generated a gross profit of $66,300 nationwide (the difference between the median sales price and the median amount originally paid by investors). That was up 6.6 percent from $62,188 in 2019 to the highest point since at least 2005. But the typical flipping profit of $66,300 translated into a 40.5 percent return on investment compared to the original acquisition price. The latest ROI (before accounting for mortgage interest, property taxes, renovation expenses and other holding costs) was down from 41.5 percent in 2019 and down from 46.4 percent in 2018. The 2020 ROI also stood at the lowest point since 2011. Further, house flips as a portion of all home sales decreased from 2019 to 2020 in 126 of the 198 metropolitan statistical areas analyzed in the report. Among the 53 markets in the U.S. with a population of 1 million or more, those with the largest gross-flipping profits in 2020 included San Jose, CA ($274,000); San Francisco, CA ($171,000); New York, NY ($152,000); Los Angeles, CA ($151,500) and San Diego, CA ($147,750).

Los Angeles Homeownership Ranks Nation’s Worst (again). Congratulations Los Angeles! Another first! Again! Los Angeles county had the nation’s lowest home-ownership rate in 2020 for the third year in a row. Census stats, highlighting long-running home affordability challenges, show only 48.5% of L.A. households living in residences they own. That was the lowest rate among the 75 largest metropolitan areas tracked. In contrast, the top metro was Florida’s Cape Coral-Fort Myers at 77.4%. Despite historically low mortgage rates making homebuying popular in the pandemic year, L.A. ownership rose only 0.3 percentage points, the 20th smallest gain among the metros. In stark contrast, our neighbors in the Inland Empire have 65.8% of their households as owners — the region’s highest rate since 2009 (but still 29th lowest nationally). The gain was a 1.4 percentage-point improvement from 2019, but was the 28th smallest improvement among the 75 metros. Nationally, ownership rose 2 percentage points to 66.6%. The metro with the biggest gain was Birmingham, Ala., up 9.3 points to 76%. The worst performance was in Toledo, Ohio, which was down 6.6 points to 63.4%. The pandemic likely exacerbated the gap in ownership rates in the coastal L.A. metros vs. the more affordable Riverside and San Bernardino counties. Last year’s 17.3 point gap was a jump from the 13.5 point average difference seen in the previous five years. California’s overall ownership rate was 55.9% last year, third-lowest among the states. Best was West Virginia at 77.8%; worst was the District of Columbia at 42.5%.

Housing Starts Declined in February. Housing starts declined 10.3% in February to a 1.421 million annual rate. Starts are down 9.3% versus a year ago. The drop in February was due to both single-family and multi-family starts. In the past year, single-family starts are up 0.6% while multi-unit starts are down 28.5%. Housing starts fell for the second month in a row in February, largely the result of harsh winter weather across much of the country, which impeded construction activity. Given that February's job's report from earlier this month showed the construction sector had shed 61,000 jobs (the first decline in 10 months), the weakness in the report wasn't surprising. The decline in housing starts was also broad-based, with both single-family and multi-family construction posting declines. That said, anticipate a return to the upward trend in housing starts very soon, led higher by single-family homes. Why my confidence? First, despite a 10.8% decline in February, building permits for future construction remain near the highest level since 2006. Compared to a year ago, permits for single-family units are up 15.0% while permits for multi-family homes are up 21.4%! Moreover, permits have now outpaced new construction for seven consecutive months. This has resulted in a backlog of projects that have been authorized but not yet started, which is now the largest backlog in nearly 15 years. So, with plenty of future building activity in the pipeline and builders looking to boost the inventory of homes as well as meet consumer demand, look for both overall and single-family starts to post even higher highs in 2021. The only thing standing in builders’ way are lumber prices…

Insane Lumber Prices Continue. If you hangout in Home Depot, you already know that lumber prices have gone through the roof. So with lumber (and other building material costs) climbing to record-high levels, homebuilder confidence fell two points in March, per the latest report from the National Association of Home Builders. That drop in builder confidence is in spite of sky-high buyer demand (see above), which hasn’t waned despite rising home prices and climbing mortgage rates (the latter up 30 basis points from February). The pandemic shut down a large swath of lumber mills in early 2020, handcuffing construction crews all over the country, causing a lack of new homes for sale, forcing home prices upward. NAHB Chairman Chuck Fowke noted that supply shortages and high demand have caused lumber prices to jump “about 200%” since April 2020! The elevated price of lumber is adding approximately $24,000 to the price of a new home. Though builders continue to see strong buyer traffic, recent increases for material costs and delivery times, particularly for softwood lumber, have depressed builder sentiment this month. A Homesnap report said new home listings increased only .22% in December, while total sales increased 19.29%. Like most facets of the current housing environment, the continued successful rollout of the COVID-19 vaccine should do wonders for the cost of building materials, as more lumber plants reopen in Canada and the U.S. – thus, increasing inventory and driving overall prices down. And with more homes being built, overall sentiment – and builder confidence – should rise.

Filming in Los Angeles Begins to Rebound. As you know, Los Angeles is a “company town.” And that company is film and TV production. Everyone you know is probably in te film business, near the film business, services the film business (i.e. housing), or wishes they were in the film business. So as the business goes, so goes LA’s economy. I bring this up because FilmLA, the organization that tracks production in our city, says it received 777 film permit applications in February. This represents a 43 percent increase compared to January! That’s really good news for our company town. The organization notes that a late-month surge in production took place, making February the third busiest month Los Angeles has experienced with regards to filming since last June. That said, production activity remains around 40 percent below normal for this time of year. Of course, production first restarted last June after a roughly three-month-long shutdown due to COVID-19. But in the 37 weeks since the city has been reopened for filming, FilmLA has processed approximately 5,533 film permit applications spanning 3,789 unique projects. As new COVID-19 case counts continue to diminish and more projects restart production, you can be optimistic that our local film economy will soon be back on track. Further, on-location filming (for months conducted safely in observance of strict health protocols), will rise again with the reopening of businesses and expanding vaccine availability. As for feature films shooting in the area, most have been indies. Some of the larger productions, include the Michael Bay-directed Ambulance with Jake Gyllenhaal, A24’s C’Mon C’Mon starring Joaquin Phoenix, and Netflix’s Sweet Girl with Jason Momoa and Marisa Tomei.

Don’t Hold Oscars at Union Station. Speaking of movies, it seems as Hollywood will get a reprieve from the Academy Awards annual disruptions this year. The Oscars, like so many other American institutions, are operating on a COVID-19 delay, with the nominees just announced last week, a full two months late. Now the Academy is eyeing a ceremony on April 25, and loosening-but-still-not-all-that-loose state restrictions will allow for some kind of low-capacity, in-person gathering. Apparently the Dolby Theatre is still under contract and will be used “” this year. But instead of filling the Dolby with an audience full of those celebrity cardboard-cutout heads normally used for rehearsals (with real humans in every fifth seat), the Academy has opted for a smaller, “supper club”–like ceremony at a different venue: Union Station. With its cinematic arched entrance plazas and grand ticketing halls — which have, of course, appeared in thousands of films and TV shows — the 1939 landmark won’t need weeks of staging from the glam squad. But what about the disruptions to commuters who are dependent on the buses and railroads? In response, Metro has promised that no bus or rail service will be affected, and that they are “working hard to minimize disruptions around Union Station.” But as anyone who has been there during a film shoot knows, navigating closed-off entrances and heavily patrolled detours, it will end up negatively impacting people who rely on transit. In fact, “chaos” is the word that immediately comes to mind. It also seems extremely likely that the large “unhoused community” living near Union Station will be chased off to someplace else. It’s too bad, really, that the Oscars passed over a much better alternative for holding a ceremony that’s outdoors enough to be safe, wouldn’t create any disruption, and might have allowed more people to attend. Apparently, the Academy’s location manager wasn’t talking to the casting manager. Because if you are facing the front entrance of Union Station, all you have to do is turn around and look up the hill to see it. Dodger Stadium — with its 16,000-space parking lot — has played many essential roles during the pandemic. The Oscars could have been its best “role” yet.

Michael Govan Chillin’ in a Trailer Park. You can tell a lot about a museum by where its director lives. For instance, Ann Philbin, who has spent the last 20 years turning the Hammer into a bastion of progressive art, occupies a predictably gorgeous midcentury architectural gem in Beverly Hills. The Museum of Contemporary Art’s more iconoclastic Klaus Biesenbach, on the other hand, has set up housekeeping in a massive converted downtown-adjacent warehouse—a space he shares with his pet duck, Cupcakes —decorated with palm trees, midnight-blue walls, and a lone bed as its main piece of furniture. But what about Michael Govan, the controversial LACMA director who’s demolishing the museum’s Miracle Mile campus to make room for the new $750 million David Geffen Galleries? At the moment, he’s camped out in a trailer park in Malibu. Govan, 58, has been doing a lot of house-hopping lately. Until last fall, he’d been living in a 1926 Tudor-style, five-bedroom, 5,800-square-foot mansion situated “on the best street in Hancock Park,” as a recent Trulia listing describes the property. But in November, the owner of the house—Museum Associates, the nonprofit providing LACMA with financial backing—sold the mansion for $6.7 million. At that point, Govan, who’d been living in the home for free since he started as director in 2006, downsized to a more modest (but still rent-free) $2.2 million, 3,300-square-foot Spanish Revival in Mid-Wilshire (owned by the museum). But after occupying that house for less than four months, Govan “self-evicted” and had the museum put it up for sale in order to refill LACMA’s coffers (after it took a financial beating during the pandemic). It’s unclear where Govan will be settling down next—the makeshift Malibu digs are obviously temporary housing. But it does, as Govan suggest, give new meaning to the term “trailer trash.”

What Mayor Garcetti Might Borrow from Mr. Mayor. When the NBC sitcom Mr. Mayor debuted, the show presented itself as a lighthearted dig at local politics. Ted Danson plays Neil Bremer, a wealthy retired businessman who makes billions in outdoor advertising, gets bored, and runs for mayor of Los Angeles to impress his teenage daughter. In the very first scene of Mr. Mayor, we learn that Neil’s predecessor abruptly resigned during a nightly coronavirus briefing, bolting from the podium. On the evening that scene aired, L.A.’s real-life mayor, Eric Garcetti, stood at his own podium and reported that Angelenos were dying of COVID-19 at a record-breaking rate of one every eight minutes. Mr. Mayor may have been sold as escapist comedy, but it’s honestly not very escapist for Angelenos. Even Garcetti himself was too preoccupied to watch, according to a spokesperson. But for City Hall insiders, it’s the details that make Mr. Mayor hit extremely close to home. Neil lives in a grand, Tudor-style mansion that’s a dead ringer for L.A.’s mayoral residence, Getty House. The cramped Art Deco offices of City Hall, which the show’s production designers toured in 2019, are accurate down to the laminated ID badges. Along the way, this L.A.-of-the-very-near-future program proposes some better-than-current-day policy solutions. With the season over, here’s a look back at five good ideas from Mayor Bremer’s fictional city — that should happen in Mayor Garcetti’s real-life Los Angeles:

1. 1. Cut down all the palm trees (replace with water conserving trees).
2. 2. Stop drilling for oil (save our environment).
3. 3. Ban flying-taxi services (save our skies).
4. 4. Build in rich neighborhoods (everyone should share the burden)
5. 5. Add more bus lanes (improve our traffic flow).
6. No word if Mr. Mayor will be renewed for a second season, but Garcetti won’t be renewed — he’s termed out in 2022.
   
   

This Week. Looking ahead, investors will continue watching decreasing Covid case counts and increasing vaccine distribution. Beyond that, this will be a busy week for economic data. The National Association of Realtors’ existing-home sales for February will be released today (3/22). The Census Bureau’s reports on new-home sales for February will be released tomorrow (3/23). The Census Bureau’s February durable good report – seen as a decent proxy for business investment – and HIS Markit’s manufacturing and service purchasing managers’ indexes for March will be releases on Wednesday (3/24). On Thursday, the Bureau of Economic Analysis’ third and final report for fourth-quarter 2020 GDP is expected to be unchanged from its second estimate in late February (at a 4.1% annualized rate of growth). On Friday (3/26), the Bureau of Economic Analysis will release Personal Income and spending data for February. Also on Friday (3/26), the Federal Reserve’s preferred measure of inflation, the personal consumption expenditures price index (“Core PCE”) for February will be released.

Weekly Change:
10-year Treasuries:  Rose 0.10 bps
Dow Jones:             Fell 200 points
NASDAQ:                 Fell 100 points

Calendar:
Monday, 3/22:       Existing Home Sales
Tuesday, 3/23        New Home Sales
Friday, 3/26:          Core PCE

For further information, comments, and questions:

Lloyd Segal
President