Economic Update (Monday, April 5, 2021)

[Lloyd Segal]

Economic Update
(Monday, April 5, 2021)

Given the news from the labor, real estate, and manufacturing sectors, it's no surprise that “Consumer Confidence” in the U.S. has increased to the highest level since the beginning of the pandemic. This index from the Conference Board jumped from 90.4 in February to 109.7 in March, far above the consensus forecast and the best reading in a year. The rollout of the vaccine, the reopening of our economy, and the distribution of stimulus checks have certainly helped make consumers more optimistic about future economic conditions. So with this continuing optimism, let’s wash our hands, put on our face masks, get vaccinated, social distance, and get under the hood…

Employment Report. Restaurants and other businesses hired the most workers in March as the U.S. added 916,000 new jobs, signaling our economy is primed for a period of rapid expansion. Employment accelerated after the weather warmed and a decline in coronavirus cases allowed states to relax business restrictions. Further, rising vaccination rates gave Americans more freedom to venture out to eat, attend a game, travel or engage in other activities they would have avoided at the height of the pandemic. Plus, massive federal fiscal stimulus, including $1,400 checks for most households, also gave people more money to spend. Economists predict even faster hiring in the months ahead if most Americans get vaccinated and the coronavirus pandemic fades away (though it will take a while to know for sure). The official unemployment rate (“U-3 rate”), meanwhile, slipped to 6% from 6.2%, the Labor Department reported Friday. Yet the official rate doesn’t capture nearly 4 million people who lost their jobs last year and left the labor force. Economists peg the true unemployment rate at above 9%. A better measure of unemployment is the government’s so-called “U-6 rate” that includes people who’ve recently stopped looking for work as well as those who can only find part-time jobs. The U6 rate fell to 10.7% from 11.1%. It had reached a record 22.9% last April. Employment is likely to speed up through the spring and early summer if the vaccines do their job and keep the coronavirus pandemic at bay. Companies in leisure and hospitality hired the most people in March. They added 280,000 jobs to bring total employment gains in the past two months to 664,000. More Americans are going out to eat and the numbers are expected to grow as most of the country gets vaccinated and spring arrives. Just me you and me, people are eager to go out after being stuck at home for the past year. Nearly 350,000 people joined the labor force in March in another good sign, but the total is still about 3.9 million below pre-pandemic levels. Those missing workers are no longer counted in the official unemployment rate, helping to explain why the U-3 rate is relatively low now.

Unemployment Drops to 11.5% in LA County. Call it a double-dose of good news.
Los Angeles County’s unemployment rate dropped to 11.5% last month as the county added nearly 48,000 jobs. The Employment Development Department reports that the unemployment rate dropped more than a full percentage point from January’s 12.6% (though the rate was still more than twice as high as the 5% recorded in February 2020). Some 242,000 Los Angeles County residents entered the labor force looking for work. Previously, the labor force had been shrinking as residents gave up looking or chose to stay home to care for children or other family members. These positive developments coincided with a drop in the number of coronavirus cases and hospitalizations as the surge that began in November began to recede in February. Still, the county’s 11.5% unemployment rate was significantly higher than the statewide average of 8.5% and nearly twice as high as the 6.0% national average. The EDD also provided a breakout of unemployment rates by city. The unemployment rate for the county’s largest city, Los Angeles, was 10.6% in February, while the rate for the second-largest city, Long Beach, was 11.7%. The city with the highest unemployment rate was Lancaster at 15.7%, while the lowest rate for a city with significant employment was San Marino at 3.4%. On the closely watched payroll jobs front, the EDD reported that employers in L.A. County had 4.06 million people on their payrolls last month, a jump of 47,900 from January and the first increase in four months.



Home Prices Rise at Breakneck Pace. Home prices continue to increase at an incredibly fast pace across the country, according to two separate indices released Tuesday, adding to the financial pressures home buyers face amid rising mortgage rates. The S&P CoreLogic Case-Shiller “20-City Price Index” posted an 11.1% year-over-year gain in January, up from 10.2% the previous month. The separate and broader S&P CoreLogic Case-Shiller “National Price Index,” which covers the entire country, demonstrated an 11.2% gain year-over-year in January, representing the highest gain in nearly 15 years. Prices rose on a monthly basis in 19 of the 20 large cities tracked by Case-Shiller, with Cleveland being the only city to see prices drop. But who wants to live in Cleveland? Compared to January 2020, prices were up in all 20 cities the report tracks. Phoenix saw the highest rate of price appreciation with a 15.8% gain year-over-year, followed by Seattle and San Diego. January’s data remains consistent with the view that COVID has encouraged potential buyers to move from urban apartments to suburban homes. This demand may represent buyers who accelerated purchases that would have happened anyway over the next several years. The pandemic prompted a rush into the housing market. For example, cramped households eagerly sought out larger homes (with more outdoor space) further out in the suburbs and rural areas, while the rise of remote work also led to a need for more room. Plus, millennials are reaching their prime home-buying years. These buyers have encountered little supply of homes for sale, creating an incredibly competitive and stressful market. Until now, that’s caused home prices to rise quickly, but that could soon change. Chief among those challenges is the recent increase in mortgage rates. So this year, mortgage rates have risen over half a percentage point, and mortgage rates jumped above 3% for the first time since last summer. Higher interest rates mean higher housings costs for home buyers, naturally. As a result, home buyers will be forced either to lower their budget for the property they wish to purchase or exit the market entirely if owning a home simply isn’t within their means anymore. That could put some pressure on home prices, causing the rate of home price appreciation to slow later this year.

3D-Printed Housing Developments. The future is here! 3D-printed real estate is taking off in a big way. But this isn’t your grandmother’s desktop printer. These printers are huge, and they don’t spit out paper. They print out 3-dimentional concrete or polymer. ICON, a pioneer in 3D-printed homes in the U.S., just completed four homes in East Austin, Texas. In partnership with Kansas City-based developer 3Strands, the two- to four-bedroom homes are now on the market, starting in the $400,000 range. ICON prints the homes on site, using its Vulcan construction system, which spits out a “proprietary extrudable concrete.” This is the highest speed, lowest cost method. It also allows for the most flexibility in floor plans. Construction of the homes is 10% to 30% cheaper and several months faster than conventional construction. This is especially important given the rising costs builders are seeing for conventional construction materials, like steel, aluminum and especially lumber. There is also an acute labor shortage in the homebuilding industry. In contrast, 3D-printed homes require very few workers, as the printer does the bulk of the construction. A much larger community is being planned in Rancho Mirage, California, by competitor Mighty Buildings. Mighty just announced it will put up 15 3D-printed homes in what it deems “the world’s first planned community of 3D-printed homes.” Mighty claims the 3D printing production process eliminates 99% of construction waste and is 30-40% cheaper than traditional construction. It will also use solar energy. Whether made of concrete or a polymer, these homes have shown to be far more energy efficient, sustainable and resilient than conventional wood-built homes. Mighty is building all across California so they have been thoroughly tested and can withstand earthquake or wind. With demand for 3D-printed homes now so strong, the biggest challenge for these companies is how to scale up quickly. ICON has four 3-D printing systems, and is already building more.

Los Angeles is Bringing “High Design” to Granny Flats. In L.A., where the simple act of securing permits to build an average “granny flat” in an average backyard can turn into an epic battle with the city’s Department of Building and Safety, that could take weeks, if not months. But a new initiative organized by Mayor Eric Garcetti’s office in collaboration with our friends at the Building and Safety Department aims to change that — while offering very imaginative designs for accessory dwelling units (“ADUs”) (whose aesthetics generally lie somewhere between box and shed). Imagine, instead, a playful studio in the form of a flower, or a contemporary two-story apartment that offers minimalist chic at a backyard scale — all available as designs that have already been preapproved by the city for construction, thereby shaving weeks off the permitting process. More than a dozen designs for accessory dwelling units, known as “ADUs,” will be offered through the city’s “ADU Standard Plan Program,” launched last week. In its initial incarnation, the program will feature designs by a range of architectural studios, from the well-established to the up-and-coming. This is a valuable program for several reasons. First, it simplifies the construction of ADUs — a critical form of housing stock — in the midst of a severe housing shortage. Second, it supports the work of forward-thinking architectural firms at a time in which many of these firms have been financially hammered by the pandemic. Neither the quaint term “granny flat” nor the more clinical “ADU” gets at how critical this form of housing has become in Los Angeles over the last few years. State legislation enacted in 2017 led to an overhaul in the ways ADUs are regulated in the state, and made it easier for city planning departments to approve their construction. This has made it easier to insert additional housing into single-family neighborhoods in which high-density projects can trigger planning battles. Plus, they are generally more affordable than the market-rate housing produced by developers. In 2017, the city of Los Angeles received 1,980 applications for ADU construction. Last year, that figure was 5,374! With single-family homes making up more than 56% of the state housing stock, the creation of additional ADUs will contribute meaningfully to easing California's housing shortage.

Backyard Homes Project. Continuing on the subject of ADUs, Los Angeles is launching a project addressing our housing crisis. Called the “,” it hopes to bring innovation to a field where it's often hard to come by. Thanks to recent state measures easing regulations on accessory dwelling units (a.k.a. "ADUs," or "granny flats"), Los Angeles has been in the throes of an ADU mania. Thousands of applications have poured in from homeowners across the city, and the ADU has proved to be a lab for housing experiments. The premise of the Backyard Homes Project is to create a one-stop shop: Homeowners promise to rent their ADU to a Section 8 voucher holder for a minimum of five years. In exchange, the homeowners receive affordable design and construction, free project management and favorable financing. The project is led by LA Más, a local nonprofit run by architects, designers and planners who specialize in urban design innovation and aim to blaze a path for more cautious government and industry to follow. The goal of the program is to lower the barriers for low- or moderate-income owners to become landlords, generating long-term income. Design and construction of ADUs start at $100,000 for garage conversions or $130,000 for new construction. LA Más charges a flat fee of $8,000 for the design. Through the program, homeowners can qualify to refinance through the Self-Help Federal Credit Union. But unlike banks, this credit union will estimate the value of the property AFTER the ADU is built ("ARV"), thereby increasing the equity available to borrowers to borrow against. The new loan adds ADU construction costs to homeowners' existing mortgage balance. Later, homeowners pay the higher mortgage with the rental income that is subsidized by the Section 8 program. So, for example, the monthly mortgage payment might jump by $800, but the rental income is, say, $1,200. A UCLA CityLAB study suggests that ADUs are feasible for 10% of the 500,000 single-family lots in Los Angeles, evidence that there’s plenty of room for ADUS without bumping up against the limits of supply.

We Don’t Need to Save Every Unremarkable Building in LA. As Sunset Boulevard curves towards downtown Los Angeles, Taix French Restaurant sticks out like an anomaly amid the strip malls. A single-story green-and-cream French chateau replica festooned with gabled roofs, half-timbering, and clinker bricks. At a meeting of L.A.’s cultural-heritage commission last month, two historians dramatically recounted these Francophone flourishes in great detail, emphasizing French pronunciations like porte-cochère. It was the final plea — la dernière chance! — to convey the historic significance of the 60-year-old Echo Park restaurant, which is staring down demolition. This virus-fueled pandemic of shuttering business almost guarantees an accelerated loss of both a family-owned business like Taix and the building it currently occupies — these weird, irreplaceable structures that make up L.A.’s vernacular. The types of structures that a place like L.A. (if we’re being honest), has always been likely to destroy, pandemic or not. By nominating Taix as a cultural historic monument, the neighborhood heritage group aims to save the building, and therefore the business. But according to the restaurant’s owner, Mike Taix, it is already too late. Many of the “significant” architectural details cited by the historians, like pressed-tin ceilings, were not original, but had been added by Taix himself over the last 25 years. In fact — and here’s the twist — it was Taix’s own idea to remake the site into a new, large, mixed-use development, with housing on top floors and room for a smaller, more profitable restaurant on the ground floor. But dozens of longtime patrons vehemently disagreed with this strategy, showing up to the meeting to chastise Mike Taix for his decision. The superficiality of the building itself was not lost on L.A.’s cultural commissioners — “That brick is glued onto the wall,” said commissioner Richard Barron, adding “It’s not architecture. It’s Disneyland!” And while there are certainly structures in L.A. worthy of preservation on their own merit, Taix’s building clearly isn’t one of them. In other words, if the owner is explicitly saying his business won’t survive, keeping the building around as a cultural monument raises questions about what “culture” are we really trying to preserve?

Best Counties for Buying Single-Family Rentals in 2021. ATTOM Data Solutions just released its Q1 2021 “Single Family Rental Market” report, which ranks the best U.S. markets for investing in single-family rental properties in 2021. The report analyzed single family rental in 495 U.S. counties, each with a population of at least 100. The “Average Annual Gross Rental Yield” (annualized gross rent income divided by median purchase price of single-family homes) among the 495 counties is 7.7 percent for 2021, down from an average of 8.4 percent in 2020. But offsetting the declining yields for investors are improved financing terms for such rental properties. At the same time, house prices are rising faster than rents in most of the country. Good news for investors because as home ownership becomes less affordable it puts upward pressure on rents. The single-family home rental business is less profitable this year compared to last year across most of country, with yields on average deals decreasing. That’s happening as home prices on properties that investors are paying for, in most areas, are rising considerably faster than rents, which is cutting into their profit margins. Further, single-family home prices are rising faster than rents in 430 of the 495 counties analyzed (86.9 percent), including Los Angeles County, CA; Cook County (Chicago), IL; Harris County (Houston), TX; Maricopa County (Phoenix), AZ and San Diego County, CA. Prices are rising faster than wages in 391 of the 495 counties analyzed (79 percent), including Los Angeles County, CA; Cook County (Chicago), IL; Harris County (Houston), TX; Maricopa County (Phoenix), AZ and San Diego County, CA.

In-N-Out of Her Bradbury Mansion. If you need any further evidence that you’ve been to In-N-Out too many times, this is it! A mansion bought from burgers is back up for grabs in Bradbury. In-N-Out heiress Lynsi Snyder, whose grandparents founded the beloved fast food chain, listed her amenity-loaded mansion onto the market for $16.8 million. The Mediterranean-style retreat spans four acres in Bradbury Estates, a guard-gated community just a few ironic miles north of Baldwin Park (where Snyder’s grandparents Harry and Esther Snyder opened the first In-N-Out Burger in 1948). Snyder bought the place from former Dodger star Adrián Beltré for $17.41 million in 2012, records show. In 2017, Snyder tried to sell her estate for $19.8 million, but there were no takers. But even at $16.8 million, it’s the priciest property currently on the market in the San Gabriel Valley. The estate offers a world of its own with two homes that combine for more than 18,000 square feet, as well as a 3,400-square-foot recreation center, two-hole golf course, tennis court, basketball court, infinity-edge pool and cabana set among vineyards and fruit trees. Manicured gardens and a motor court approach the portico entry of the main house. Inside are 11 bedrooms, 13 bathrooms, a wine cellar, tasting room, billiards room, movie theater, and gym. A voluminous foyer with dual staircases kicks thing off, leading to chandelier-topped spaces such as a formal living room, formal dining room, indoor-outdoor great room, and double island kitchen. A native of Glendora, Snyder is president and owner of In-and-Out Burger. It has 358 locations across California and the Southwest, but none in Bradbury Estates (yet). Forbes puts her net worth at $3.6 billion. That’s a lot of burgers!

Toilet Paper Costs Are Going Up. Are you spending too much on toilet paper? If yes, I’ve got bad news you. No, toilet paper is not discontinued. Worse! Prices are going up! Kimberly-Clark, the maker of Scott toilet paper (and Huggies diapers), just announced they will soon start charging more for toilet paper (and related paper products) to counter dramatically rising lumber costs. The biggest tissue producer told U.S. and Canadian customers that it’s raising prices for most of their consumer products to offset “significant” commodity cost inflation (i.e. lumber), with percentage increases in the mid-to-high single digits. Nearly all price hikes will take effect in June and impact baby and childcare, adult care and Scott bathroom tissue businesses. The move by the maker of Kleenex tissues has triggered analysts’ expectations that more companies will start raising prices for tissue products as well. Toilet paper becomes the latest consumer good to be impacted by higher raw material costs during the pandemic. Early in the pandemic, if you remember back that far, toilet paper became a rarity on supermarket shelves as shoppers stockpiled essential staples amid curfews and lockdowns (attempting to stem the spread of COVID-19). But in 2021, toilet-paper makers now have their own supply challenges. These price increases were expected after the cost of pulp — a wood product used to make toilet paper — soared by 35% in the last year. And there’s a real estate irony in all this: These toilet paper price hikes are tied to a lumber shortage created by a huge upswing in homebuilding. Surging pulp is following record-high lumber prices, which have significantly increased the cost of construction and reduced wood inventories at mills across North America.

This week. Looking ahead, investors will continue watching decreasing Covid case counts and increasing vaccine distribution. Beyond that, it will be a light week for economic data. Of note, the ISM Services Index and Factory Orders will come out today (/405), and the PPI inflation data on Friday (4/09).

Weekly Changes:
10-year Treasury:  Rose 0.03 bps
Dow Jones:           Rose 100 points
NASDAQ                Rose 300 points

Calendar:

Monday, 4/05:   ISM Services
Monday, 4/05:   Factory Orders
Friday, 4/09:     PPI