Economic Update (Monday, March 29, 2021)

[Lloyd Segal]

Economic Update
(Monday, March 29, 2021)

This pandemic has really exposed the fault lines in our workforce demographics. It has exposed the divide between those who can work from home and those who can’t (deemed euphemistically “essential workers"). Working from home has been a privilege of the professional and managerial class. But that’s an exotic world for workers in the service sector such as food preparation and serving, personal care (i.e. hair, nails, and so forth), healthcare, and building maintenance. It was evident from the beginning that American’s unforgiving workplace and healthcare cultures would place the burden of the pandemic on ordinary workers’ shoulders. A huge portion of American workers simply don’t have the economic power to stay home, whether to care for family members or even give themselves a chance to recover from a viral infection, or the legal right to take off from work without losing their jobs or pay. So as we finally glimpse the “light at the end of the tunnel,” let’s once again acknowledge a very special THANK YOU to our essential workers. We could never have survived without you! In your honor, let’s wash our hands, put on our face masks, social distance, get vaccinated, and get down into the weeds…

Existing Home Sales Declined in February. Although still up 9.1% from a year ago, existing home sales took a tumble in February, as harsh winter weather and declining affordability weighed on closings. It also looks like widespread vaccine distribution, the reopening of our economy, and rising inflation expectations have all begun to show up in interest rates (with February alone posting a 50 basis point increase in 30-year fixed mortgage rates). Although rates are still down from early 2020, the upward trend represents a headwind for sales especially with median prices up 15.8% in the past year. Meanwhile, the low inventory of existing homes continues to be a drag on sales as well. Today's report shows that February inventories were tied with January as the lowest for any month on record back to 1999 (and down 29.5% 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 2.0 months, just above January's reading of 1.9 (which was the lowest 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 20% declines in the past year. However, despite these issues I still expect sales to rebound in the spring and remain robust in 2021. Why? Because the trend towards work-from-home is likely to remain in place even as pandemic-related measures are eased around the country. That means people who were previously tied to specific locations (typically in urban areas), will have more flexibility, making more space in the suburbs an attractive proposition. In addition, it also looks like there is still significant pent-up demand from the pandemic, with buyer urgency so strong in February that 74% of the existing homes sold were on the market for less than a month. Less than a month! Finally, here comes those pesky Millennials! According to Pew Research, in 2019 Millennials surpassed the Baby Boomers as the largest living generation. In 2020, for the first time, Millennials accounted for over half of new mortgages according to data from Realtor.com. As a result, look for Millennial sales to continue trending higher as more of this huge demographic enters the housing market.

New Home Sales Decline. New single-family home sales declined 18.2% in February to a 0.775 million annual rate, posting the largest monthly decline since 2013. But don’t be too concerned. Why? Because the sales of new homes are counted when the contracts are signed rather than being counted at closing (like existing home sales). This means they are a timelier indicator of the housing market. So it's not surprising that last month's winter polar vortex had a larger impact on February's new home sales report (-18.2%) than it did on existing home sales yesterday (-6.6%). Look for a rebound in new home sales in March (while existing home sales continue to show weakness). That said, it wasn't all just severe winter weather that impacted new home sales in February. Affordability has been rapidly declining as well, with 30-year fixed mortgage rates having risen roughly 40 basis points in February alone. Apparently, widespread vaccine distribution, the reopening of our economy, and rising inflation expectations are finally showing up in interest rates. When paired with rising home prices, this represents a headwind for sales going forward. New home sales are also suffering from a lack of finished homes waiting for buyers. In the past year, the only portion of the new homes inventory that has increased are homes where construction has yet to start. Meanwhile, the inventory of completed new homes available for sale is down a massive 48.1% over the past year (illustrating just how strong demand was in 2020). The good news is that builders are responding to this inventory shortage, with the number of single-family homes currently under construction at the highest levels since 2007. As more homes become available, you can expect demand will remain strong and push sales higher in 2021 and beyond. Further, Census Bureau projections show that the population of people ages 30-49 (so-called “Millennials”) is set to grow significantly through 2039, which should bolster housing demand for the foreseeable future. This will be a key homebuying demographic that you need to pay attention to. These are the future buyers of your properties.

New Home Construction Falters. Similar to the drop in new homes sales, a sharp drop in home-building activity occurred in February thanks to record-breaking winter weather. But don’t get alarmed. The fundamentals remain strong for the new-homes market. U.S. home builders started construction on homes at a seasonally-adjusted annual rate of 1.42 million in February, representing a 10.3% decrease from the previous month’s revised figure, the U.S. Census Bureau reports. Compared with February 2020, housing starts were down 9.3%. The pace of new permits for new housing units also slowed in February. Permitting for new homes occurred at a seasonally-adjusted annual rate of 1.68 million, down 10.8% from January. A slowdown in both the construction of single-family homes and multifamily buildings prompted the decline in housing starts in February. Single-family starts were down 8.5% nationwide, while multifamily starts fell 14.5%. February’s home construction data will likely prove to be an aberration in hindsight. Last month’s record-breaking cold weather — including a winter storm that crippled much of the state of Texas — caused a serious slowdown in home-building activity. But in the long run, the factors that had driven gain in home building during the latter half of 2020 remain in place for now. Mortgage rates are still historically low, and the COVID-19 pandemic has prompted many people to consider buying larger homes as “remote working” becomes a permanent arrangement for some. But years of under-building following the Great Recession means that the U.S. housing market now has a supply shortage, particularly on the existing-home front. As a result, even first-time home buyers are now increasingly considering purchasing newly-built homes given the lack of other options. This does not mean builders aren’t facing headwinds in their pursuit to construct more homes. Supply-side challenges are still constraining builders’ capacity. Among the headwinds, are escalating lumber costs, a lack of affordable lots to build on and regulations that drive up the cost of construction.

California Must Prioritize Housing Affordability. The reality is that COVID 19 has had widely disparate impacts on Californians in different socioeconomic groups. While wealthier residents are benefiting from low interest rates and a strong stock market, far too many essential workers continue to earn a sub-living-wage and can’t afford to buy a home (see my intro above). The economic harm from the pandemic combined with California’s long history of housing segregation by design (keeping certain neighborhoods exclusive to wealthy, white residents) have combined to make our already dire housing crisis even more extreme. Policies that make housing more affordable in a variety of neighborhoods “separates effort from reward.” Making it easier and less expensive to build homes that lower- and middle-class families can afford is a disincentive to “study, work, invest, invent, or ever set an alarm clock.” This is an insult to the many who are struggling to keep their small businesses afloat, working full-time, paying college debt, and raising children. They should be able to live in safe neighborhoods with access to good schools, parks, and transit. But they simply cannot afford it when the median home price in L.A. County is now over $700,000. These barriers are systemic and not simply overcome by “working harder.” Yet many are adamantly against reforming our housing laws, investing in our underserved populations, and building new homes to reduce costs and increase housing affordability. Even as our lawmakers try to address the problems that have long plagued our state, opponents of housing reform would have us believe that any action to make housing more affordable and accessible is wrong and damaging. Our State Legislature is currently evaluating a series of relatively modest housing bills that can make homes more affordable for homeowners and renters alike. These bills are intended to increase housing affordability by increasing the overall housing supply and creating equitable conditions for hard-working Californians, regardless of their race and income. You may not be concerned with affordability, but as a real estate investor you really should be. After all, people should be able to live near their jobs, close to schools, and have convenient access to healthy food and reliable transit.

City Council Passes Program for Tenants and Landlords. Landlords, here’s some good news. With renters owing thousands of dollars in back rent to landlords since the pandemic started, the Los Angeles City Council announced an additional $259 million for its COVID-19 “Emergency Renters Relief Program.” That's more than twice what it provided last year. The average renter owes between $4,000 and $7,000 to landlords, according to City Council President Nury Martinez. To qualify for the program, the tenants’ combined household income must be at or below 50% of the median income – for a family of four, that's about $56,000. Martinez said the program is aimed at those who are most in need: "I know the daily struggle of the working poor people who have worked for decades to escape poverty. Working in back of houses, in restaurants, looking after other people's children and working in factories, all of this, only to run into the risk of facing it again during this crisis." The relief program will pick up 80% of your tenant’s back rent if you (as the landlord), agree to cover the remaining 20%. But if you don't agree, the program will only cover one-quarter of your tenant’s back rent and one-quarter of their upcoming rent for the next three months. The application window opens at 8 a.m. on March 30 and runs through April 30. Plus, if your tenant fails, or refuses, to apply, you (as the landlord) can apply for the program by phone with L.A.'s Housing and Community Investment Department, or via its website at: https://hcidla.lacity.org/.

New Tsunami Map Details Hazards for LA County. As if the pandemic is not enough to worry about, now we have tsunamis to keep us up at night. A newly updated interactive tsunami map for Los Angeles County allows you to type in your address to determine whether in a tsunami your home will be buried in a surge of seawater. How re-assuring. The California Geological Survey (“CGS”), which developed the map, claims that by using new data and improved computer modeling, it updates 2009 inundation maps showing how far inland a surge of seawater might go in a worst-case scenario. CGS is using a thousand-year scenario as the baseline for their new maps, hoping to avoid the tragic loss of life experienced in Japan’s tsunami. While damaging tsunamis are infrequent in California, if you're on the coast, you need to be aware of this potential hazard. The CGS and the California Governor's Office of Emergency Services have advised several communities with isolated pockets of population and few roads for evacuation -- such as in Marina del Rey, the port of Long Beach, and the port of Los Angeles -- about their increased inundation areas. For example, a large tsunami could flood sizeable areas of Marina del Rey and Long Beach to an elevation of 15 feet. Flood levels for the Port of Los Angeles and the Port of Long Beach could reach elevations of 12 to 15 feet, which would inundate almost all of the land in the ports and some of the surrounding communities. Worse, the county's beaches have over a million visitors per mile of beach during summer weekends and holidays, posing an evacuation nightmare. According to CGS, the first surge of a worst-case tsunami would reach the Los Angeles coastline in only six hours. That may seem like a lot of time, but it will take at least an hour for the National Tsunami Warning Center to issue a warning to California and then additional time for wishy-washy local authorities to determine whether an evacuation is necessary. The bottom line is, if you're near the coast and feel strong shaking from a local earthquake or get an official notification to evacuate, run like hell to higher ground! The most destructive tsunami to hit California occurred March 28, 1964. Several surges (reaching 21 feet high) swept into Crescent City four hours after a magnitude 9.2 earthquake in Alaska, killing 12 people and leveling much of the town's business district. 

San Andreas Fault Is Moving Faster Than We Thought. Just in case you don’t have enough to worry about (see above), let’s throw earthquakes into the mix. Research released last week shows that a portion of the monstrous 750-mile San Andreas fault is moving much faster than scientists previously thought. It's called the Mission Creek strand and it runs through the Coachella Valley, from Indio, through Desert Hot Springs and into the San Bernardino Mountains. While it was long believed to have a slip rate of around 14 Millimeters per year, Science Advances’ research argues that it's actually around 22 millimeters! This particular strand of the San Andreas fault had previously been interpreted to not be active. But it's actually very active and is the fastest slipping fault along the San Andreas in Southern California. As a result, it has the highest likelihood of a large magnitude earthquake occurring in the future. A few millimeters might not sound like a lot (one inch per year) but when we're talking about massive tectonic plates pushing up against each other, the stress adds up. According to scientists, 6-9 meters of elastic strain have likely accumulated along the fault since the last quake (1726), which means when it finally releases, the ground will likely shift 20-30 feet. But whether it takes a single quake, or many of them, to shift that distance remains to be seen. Higher slip rates on faults means more risk. It means stress is accumulating faster on that fault and that we need either lots of smaller earthquakes or a few larger earthquakes to relieve that stress. All of which means that this particular strand on the San Andreas has a greater risk of rupturing than was previously understood. But there is good news, sort of. If a rupture occurs along the Mission Creek strand, its northwesterly orientation would divert much of the quake’s energy away from the L.A. Basin, sparing us some of the resulting devastation. Regardless of what happens on the Mission Creek strand, you know that sizable earthquakes (and resulting devastation) on the San Andreas are inevitable. Like... at any moment. So NOW is always a good time to get your earthquake kit ready.

Tom Cruise lists Colorado retreat. Anyone interested in a mountain retreat in the Colorado Rockies? I mention this because among the tree-laden hills and snow-capped peaks of Colorado, Tom Cruise has listed his scenic mountain retreat for $39.5 million. The estate spans 320 acres in the mountain town of Telluride, a popular skiing and hiking destination that has become a hot spot for second homes during the pandemic. Cruise, star of “Top Gun” and the “Mission: Impossible” franchise, has owned the property since the early 1990s. A mile-long driveway leads to the home, a 10,000-square-foot stunner made of bleached cedar timbers and native stone. The home has seven bedrooms and nine bathrooms. A great room has a dramatic floor-to-ceiling fireplace; there’s also a library, billiards room, gym and media room. The kitchen has a massive center island. In addition, there’s a three-bedroom guest lodge tucked among aspen groves, for when your LA friends stop by. Hiking trails snake through the forested grounds. Other high-octane highlights include a sports court, snowmobile track and dirt bike course. Cruise, 58, has film credits that include “Risky Business,” “Top Gun,” “Rain Man” and “The Last Samurai.” A winner of three Golden Globe Awards, he also received Oscar nominations for his roles in “Born on the Fourth of July,” “Jerry Maguire” and “Magnolia.” Five years ago, he sold his Beverly Hills mansion for $39 million.

American’s Shopping List. Newly released consumer spending data from the Bureau of Economic Analysis vividly illustrates how the pandemic changed our buying habits, showing which products we snapped up while others gathered dust on store shelves. During the early days of the coronavirus worried shoppers stocked up on toilet paper, Clorox wipes and hand sanitizer. Remember those days? But as the pandemic took hold and upended daily routines, COVID affected every sector, taking a toll in sometimes unexpected ways. For instance, sales of specialty cheeses shot up as bored consumers (with disposable income) looked to recreate a restaurant experience at home. Kidney beans sales rose too, a sign of financially-strapped households seeking cheap sources of protein. Those who could afford to do so, splurged on big-ticket luxuries, with spending on pleasure boats soaring 42% from $18.7 billion in February 2020 to $26.6 billion in January 2021. Meanwhile, spending on funerals and burial services increased by 38.1% during that time. In fact, funerals have been one of the few experiences that consumers have continued to spend money on Americans halted most other purchases involving gathering in groups. They stopped going to the movies, concerts, and amusement parks and they stopped traveling, taking vacations and staying in hotels. Consumers redirected their purchasing toward “the five pillars of the COVID lifestyle”: (1) working from home, (2) entertaining at home, (3) educating at home, (4) exercising at home, and (5) keeping a “healthy home” (keeping your homes clean and germ-free, which has in turn spurred sales of air purifiers and vacuum cleaners). The No. 1 way people used their spare time was by watching more TV, followed by cleaning more and cooking more. Spending on flat-screen TVs increased (a trend big-box retailers noticed after the government distributed stimulus checks), as did spending on subscription streaming services to watch on them (i.e. Netflix, Disney+, etc.). People have also been reading more, making music and gardening more, according to data on sales of recreational books, musical instruments and seeds. We stocked up on oranges to fortify our immune systems. But we bought far less cold and flu medicine, in part because social distancing and masks made getting sick a relative rarity. We increased our spending on new cars, but spent less on gasoline. Sales of orthotics drooped, likely a result of people who are often on their feet in restaurant and retail jobs being laid off in record numbers.

Ever Given Stuck in Suez Canal. I know, I know, this story has nothing to do with real estate, but I couldn’t resist. The next time your spouse complains about your driving, remind them that at least you’re not as bad as the captain of the Ever Given. What, you’ve never heard of the Ever Given? Where have you been all week – under a rock? The Ever Given is a giant cargo ship stuck in the Suez Canal. But this is no ordinary cargo vessel. The Ever Given (already a very strange name, right?) is a panama-flagged (Japanese owned, and operated by Evergreen Marine, a Taiwanese company) behemoth, over 1,312 feet long (as long as the Empire State Building is high), 193 feet wide, and weighing over 224,000 tons! It beached this week during a severe sandstorm, blocking the 120-mile Suez Canal, and stubbornly refusing to budge. But, come on, how hard is it really to navigate a ship straight? The front is apparently wedged into sandy clay. Egypt has tugboats and dredgers desperately trying to dislodge the ship, but so far without success. It could take days, even weeks, to free the ship and re-open the canal.. Worse, by this afternoon an estimated 300 cargo ships will be blocked from passing through the Suez Canal, holding up a staggering 12% of all shipping worldwide, costing billions daily. In the meantime, ships are already being re-directed to go around Africa, which is a longer and more dangerous journey. Just another dose of economic anxiety during an already turbulent year. But it is also exactly the kind of absurd story that defines our pandemic; a global catastrophe sparked by something as trivial as a strong gust of wind, sparking an abundance of laughter at the surreal stupidity of the situation. It’s almost tempting to root for the thing. Free the Ever Given! Free the Ever Given! Free the Ever Given!

This Week. Looking ahead, investors will continue watching decreasing Covid case counts and increasing vaccine distribution. Beyond that, The Conference Board’s “Consumer Confidence Index” for March will be released on Tuesday (3/30). The Institute for Supply Management’s Manufacturing (“ISM”) “Purchasing Managers’ Index” for March will be released on Thursday (4/01). Also on Thursday, the National Association of Realtors’ “Pending Home Sales” data for February will be released, as well as the Census Bureau’s “Construction Spending” for February. The key monthly “Employment Report” will be released by the Bureau of Labor Statistics on Friday (4/02). These figures on the number of jobs, the unemployment rate, and wage inflation are generally the most highly anticipated economic data of the month. The consensus forecast is for a gain of 525,000 non-farm jobs, following a 379,000 increase in February. The employment rate is expected to tick down to 6.00% (from 6.2%). So fasten your seat belts!

Weekly Change:
10-year Treasuries: Fell 0.05 bps
Dow Jones: Rose 300 points
NASDAQ: Fell 200 points