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Economic Update
(Monday, April 12, 2021)
This just might be the best U.S. economy ever! I know. I know. It feels like an incredible claim, but a host of economic indicators are flashing bright green. For starters, the goods and service sectors are growing at rates simply not seen in a long time. March readings for the U.S. service and manufacturing growth came in at 63.7 and 64.7, respectively. (A reading above 50 indicates growth.) The combined services and manufacturing score of 128.4 is the best reading in history by almost 9 points, and corresponds to overall U.S. economic growth of between 5% and 6%, well above the 2.5% average of the past 20 years. While the recovery has been uneven for some Americans, the few are not benefiting at the expense of the many. The strong economy is also reflected in the stock market, which is also a leading indicator. The S&P 500 and Dow Jones Industrial Average both closed at record highs on Friday. And there may be more growth to come simply because of the record amounts of government stimulus checks floating around. Eventually, that could lead to concerns that our economy is growing too quickly. In other words, an overheating economy is the new risk. But I’ll gladly take an overheated economy over this pandemic. So wash your hands, put on your face masks, get vaccinated, social distance, and let’s get it on…
Producer Price Index Rose 1.0% in March. The Federal Reserve wanted more inflation and now we have more inflation. For the second time in three months, as shown by the ISM Services Index (below), producer prices jumped by a massive 1% on a month-to-month basis, pushing the headline reading to 4.2% year-to-year, the highest in nearly a decade. Prices are accelerating, at a 7.6% annualized pace in the past six months. Why? Because three things are happening simultaneously. First, a "base effect" is making year-to-year comparisons higher because producer prices fell steeply last March during the onset of COVID-19. Expect more of that in the near future as prices fell even faster in April 2020. Second, extensive "supply-chain" issues are affecting our economy and leading to higher prices. Think the shortage in semiconductors for cars and trucks as well as delays in meeting demand for household appliances. Heck, there is even a ketchup shortage (see ketchup shortage story below). Third, the M2 measure of the money supply is up 27% versus a year ago. The first two factors, the base effect and supply-chain issues, are temporary. But the third issue, the huge increase in the money supply, will affect inflation over the long term. The Fed anticipates that after peaking later this year due to the base effect and supply-chain issues, inflation will subside later this year and into 2022. Yet any waning in inflation later this year (due to the first two factors) will be temporary, as the increase in the money supply gains traction. In terms of the details for March, prices for goods led the overall index higher, with the bulk of that coming from a 5.9% increase in energy costs (have you notice that gasoline at the pump increased 8.8%). The food index rose 0.5% in March as increased costs for chicken were partially offset by lower prices for beef and veal. Meanwhile, transportation and warehousing services had an outsized increase for the third consecutive month.
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Jobs Are Booming. Last week, the Bureau of Labor Statistics released its March 2021 employment data, and payrolls increased a staggering 916,000 for the month. Jobs increased most in leisure & hospitality (up 280,000), construction (up 110,000), and education and health services (up 101,000). Meanwhile, manufacturing jobs increased 53,000, while government jobs rose 136,000 (almost all in education services). Even our own real estate industry added over 10,000 jobs last month. This is what we should expect as unprecedented shutdowns end and businesses re-open. As I wrote weeks ago, the best stimulus for our economy is not checks, but rather a COVID vaccine (and herd immunity). This what will give people confidence to return to more normal life. You can expect similar gains in jobs in the months ahead. In fact, I would not be surprised if some months of 2021 had job gains topping one million! We certainly need it. In spite of the surge in jobs in March, total payrolls are still 8.4 million short of where they peaked pre-COVID (with the leisure & hospitality sector, all by itself, accounting for 3.1 million of that deficit). Most of those gaps should be closed by the end of this year. But, completely closing those gaps won't mean the labor market has fully healed. Jobs would have been growing in the past year if COVID-19 had never happened, perhaps adding two million new jobs or more. Nonetheless, this is the world we have created, and we have a big hole to dig out of. And we are digging rapidly, indeed. COVID-19 and related shutdowns caused the most economic damage among service businesses that need many workers to interact directly with customers (like at restaurants and bars). These workers are often younger and earn lower than average pay. So, when these firms are re-hiring workers, which is a good thing, that process can also temporarily drive down average earnings, which is also happening.
Mortgage Rates Fall for the First Time Since February. Following seven consecutive weeks of increases, benchmark mortgage rates have finally dipped. And that will give homeowners and investors a chance to lock in lower rates — but the opportunity isn’t guaranteed to last very long. The 30-year fixed-rate mortgage averaged 3.13% for the week ending April 8, down five basis points from the previous week, Freddie Mac reports. The 15-year fixed-rate mortgage, meanwhile, fell three basis points to an average of 2.42%. The 5-year Treasury-indexed adjustable-rate mortgage averaged 2.92%, up eight basis points from the previous week. The decline in mortgage rates over the past week was driven by the modest drop in U.S. Treasury yields. As you know, mortgage rates roughly follow the direction of long-term bond yields, including the 10-year Treasury, but that relationship has ebbed and flowed over the course of the pandemic. But whatever break Americans get from rising mortgage rates, it is not yet clear whether it will be short-lived. March’s job figures far exceeded expectations, and the leading index that tracks the health of the services sector reached an all-time high. But mortgage rates fell in spite of these positive signs for our broader economy. Instead, mortgage rates may be responding to pandemic-related signals. For example, with coronavirus cases beginning to rise again in many Eastern states and many countries around the world, investors have a renewed reason for caution, which tends to push bond yields (and mortgage rates), downward. Nevertheless, housing economists agree that the long-term trajectory for mortgage rates does appear to be upward. And that will create pressure on the housing market. Homeowners, who might otherwise be inclined to sell their homes right now could be hard-pressed to list their homes anytime soon. The lack of inventory in the housing market would make it harder for a seller to find a new place to live, and the higher prevailing mortgage rates today essentially jack up the price of any homes they would buy. In other words, sellers are locked in a catch-22.
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How Did $2.7 Billion in Housing Bonds Disappear? Harry Houdini was never this good! The California Debt Limit Allocation Committee (pictured below) is an arm of the State Treasurer’s Office that issues bonds for private projects with a public benefit. The Committee was tasked with getting $3.5 billion in tax-exempt housing bonds out the door. Such financing is often used by the government as an incentive for builders and developers to help increase the state’s inventory of houses and apartments. Instead, the Committee punted the money to an entirely different agency responsible for environmentally friendly projects, which spent only a fraction of the bonds. Today, the Committee’s explanation for what went wrong does little to satisfy state auditors. The absence of a comprehensive and coordinated plan allowed the Committee to mismanage and ultimately lose $2.7 billion in bond resources with little scrutiny, a loss that the Committee failed to publicly disclose and struggled to explain, the California State Auditor writes in a blistering new report. The auditor alleges that such bureaucratic errata began in 2012 and squandered a huge building opportunity, one that likely would have helped Gov. Gavin Newsom move closer to his target of adding 3.5 million homes. In 2012 (and again in 2013 and 2014), the Committee was running out of time to spend bond dollars meant to support affordable housing. It handed those bonds off to the California Pollution Control Financing Authority, which finances green projects. Doing so over the objection of its own staff allowed the Committee to push the deadline for spending those bonds, totaling $3.5 billion, three years into the future. But when the deadline passed, pollution control authority had spent just $800 million. And the remaining $2.7 in unused bonds expired. The auditor’s office alleges that a lack of transparency and “staff’s inability to account for the loss of resources” means California needs to overhaul how it spends and measures the use of affordable housing dollars. But that’s not really an excuse, auditors argue. Time to disband this inept Committee.
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One in Five LA County Properties at Risk of Flooding. Although Los Angeles is literarily built in a desert (and currently experiencing severe drought conditions), over the next 30 years, an increasing number of properties are at risk of flooding. Twenty percent of L.A. properties could flood within the next 30 years, with each at-risk property incurring an average annual loss of $10,444, according to a new assessment from the First Street Foundation. The nonprofit research group found that 132,046 properties are already at risk of flooding in L.A. County — a number that will grow 1.3% in 15 years and 2.6% in 30 years, as global warming causes weather patterns to change and bring stronger storms. While sea level rise is a major contributor to flooding on the East and Gulf Coasts, the majority of flooding in the L.A. area is driven by rainfall and flash-flood events that occur in 1-in-100-year or 1-in-500-year storms, as opposed to some consistent precipitation events. The assessment notes that Norwalk and Gardena are at especially high risk. So if you own rentals in those two cities, think again. What differentiates Flood Factor from FEMA data is that the information is specific to an individual property, including its elevation. It also looks at future, as well as current, risk and includes damage-cost estimates should flooding occur. Flood Factor information is available for 142 million homes across the U.S. (including many areas FEMA has not mapped).
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Southern California Home Prices Rise to All-Time High. The median price of a Southern California home hit $619,750 last month following seven straight month of double-digit price gains, according to new DQ News/CoreLogic figures released last week. Shocking really when you consider you can get a mansion in Georgia or South Carolina for the same amount! Nevertheless, that price happens to be almost double what it was a decade ago and $225,000 above the single-family median only five years ago. That record-high was just one of numerous benchmarks set in Southern California’s housing market last month – a market some observers labeled as “crazy” and “nuts.” That’s the eighth-largest 12-month price gain in the past three decades. Ventura, Orange, Riverside, San Bernardino and San Diego counties all recorded record-high median prices as well. Low mortgage rates continued to boost buying power and homebuyer demand, creating stiff bidding wars that pushed up prices just as the number of homes for sale fell to their lowest level in nearly 16 years. Even though the median price increased nearly 15% in the past year, monthly loan payments rose just 2.9% for buyers putting 20% down (increasing to $2,022 a month from $1,965). This is a shift from a housing market that was appreciating at about 1% per month, to a regular hot seller’s market with a normal 4-5% appreciation per year. Here’s an up-to-date county-by-county breakdown of median prices and percentage increase:
1. Los Angeles County: $708,500, up 14.3%.
2. Ventura County: $650,000, up 13.0%.
3. Orange County: $820,000 (a record high), up 9.6%.
4. Riverside County: $465,000 (a record high), up 16.5%.
5. San Bernardino County: $412,000 (a record high), up 17.7%.
6. San Diego County: $672,750 (a record high), up 14.6%.
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L.A. Accepting Rent Relief Applications from Landlords. Los Angeles landlords (and tenants) can now apply for $235.5 million in rental relief funds, city officials said Tuesday, outlining an effort to keep tenants housed and enable property owners to pay their bills. The money comes from the December federal stimulus bill and is being distributed under rules established by the state that seek to wipe away the rent debt of lower-income tenants. For tenants in Los Angeles to qualify, they must have experienced a pandemic-related financial hardship and have a household income at or below 50% of an area‘s median income. Tenants can apply directly, or landlords can apply on their behalf. This assistance will not only support families that are behind on rent, but it’s also going to help mom-and-pop landlords who are also struggling during this pandemic to pay for their mortgage. The $235 million in rent relief is more than double what was available in a previous city relief program during the pandemic. Nevertheless, given the great need, the city expects not to have enough funds to serve everyone in need this time, and applications will be selected at random. If picked, tenants could see all the rent debt they accrued from April 1, 2020, to March 31, 2021, wiped away. But for that to happen, a landlord must agree to forgive 20% of the debt. The city would then pay the landlord the rest (80%). If a landlord does not forgive 20%, tenants can receive funds to pay only 25% of their rent. Paying that amount protects them from eviction when pandemic-era protections lapse. Los Angeles Mayor Eric Garcetti urges landlords to forgive part of their tenants’ debt and accept the payment from the city. He notes that landlords who reject the deal would stand to receive less money to immediately pay their bills and would still not be allowed to evict their tenants over the remaining debt. Applications will close at 11:59 p.m. April 30. More information is available on the website of Los Angeles’ Housing and Community Investment Department.
Homeowners Facing the Biggest Property Tax Hikes in Four Years. State and local governments are facing a severe cash crunch as a result of the COVID-19 pandemic. And now they’re passing that pain onto homeowners in the form of higher property taxes. A new analysis from real-estate data company Attom Data Solutions found that Americans who own single-family homes paid $323 billion in property taxes in 2020, up more than 5% from 2019. The average property tax nationwide was $3,719 for a single- family home in 2020, up 4.4% from the year prior. Americans last year were hit overall with the largest average property tax hike in four years. A sign that the cost of running local governments and public school systems rose well past the rate of inflation. Property taxes increased faster than average in 55% of the 220 metropolitan areas Attom studied for its report. Many of these counties included popular real-estate markets in the Sun Belt. Among the areas that saw the most notable increases in average property taxes were Salt Lake City (up 11.4%), San Francisco (up 11.1%), Seattle (up 10.3%) and Atlanta (up 10.2%). Other cities that saw property taxes rise more than 10% between 2019 and 2020 included San Jose, Calif., San Diego and Tampa, Fla. The states where the property tax rates are the highest didn’t change, despite the overall increase in property taxes nationwide. For example, New Jersey has the highest effective tax rate at 2.2%, followed by Illinois (2.18%), Texas (2.15%), Vermont (1.97%) and Connecticut (1.92%). On the other hand, Hawaii has the lowest rate in the country at only 0.37%, followed by Alabama at 0.44%. Just another reason to move to Hawaii (or maybe Alabama). There were 16 counties nationwide where homeowners paid more than $10,000 in property taxes last year on average. Twelve of these counties were located in the New York City metropolitan area, of course.
Double-Dome Home Built by a Juggler. Would you be interested in a double-dome home in Connecticut built by a juggler? Yes, I said “double-dome house.” And yes again, I said “built by a juggler.” Set on a hillside across from a horse farm (across the river from the Appalachian Trail) in Cornwall Bridge, Connecticut, this double-dome home was originally built in the mid-2000s by a young circus performer who wanted high ceilings so he could practice juggling. All yours if you can “juggle” the price of $599.000. Each of the two domes has 30-foot wood ceilings, which are still in great original condition. Everything else in the house was “in shambles” when current owners Courtney White and Carlos Moreno purchased the property in 2017. The couple renovated the roughly 1,762-square-foot, 3 bedrooms, 2.5 bathrooms house, on 3.16 acres, with some help from White’s father, a contractor, and two local carpenters. The exterior work alone included new cedar siding, new doors and windows, a wraparound deck, and a gravel firepit area. The bigger dome, which the family calls “The Lodge,” measures 32 feet in diameter, has pine floors, and is anchored by a freestanding black and yellow Malm fireplace. It’s also where the dining area and a fully renovated kitchen with a stainless-steel farmhouse sink and blue calcite countertops are located (White says the geode stone is meant to bring “calming vibes” and “good communication”). And there’s a lofted living space (which could be used as a large bedroom, in addition to two bedrooms on the lower walk-out level). The loft also has a big bathroom with angled ceilings. The second dome, dubbed “The Great Room,” is smaller at 28 feet in diameter but is completely open with no loft. In case you were wondering, the acoustics, as it turns out, are particularly good in a dome home.
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Ketchup Can’t Catch Up! As some of you know, I was born and raised in Pittsburgh, Pennsylvania. The “City of Bridges” is famous for lots of things besides Andrew Carnegie, steel mills, and the Steelers. For example, our hometown product, Heinz Ketchup, is near and dear to my heart (and palette). It is the best ketchup in the Western Hemisphere. I mention this earth-shattering info because after enduring a year of closures, employee safety fears, and start-stop openings, American restaurants are now facing a nationwide ketchup shortage. Oh no! Restaurants are trying to secure the tabletop staple after Covid-19 upended the condiment world order. In distress, managers are using generic versions (yuck!), pouring bulk ketchup into individual cups (double yuck!), and hitting the aisles of Costco for substitutes (OMG!). How on earth can restaurants, in good conscience, serve French fries without Heinz ketchup? The ketchup conundrum strikes at the very cornerstone of American diets. I bet you didn’t know (or care) that the tomato condiment is the most-consumed table sauce at U.S. restaurants, with around 300,000 tons sold to food-service last year, according to research firm Euromonitor. (Yes, even ketchup is researched.) Even more is eaten at home (i.e. on everything), and the pandemic helped push retail ketchup sales in the U.S. over $1 billion in 2020, around 15% higher than 2019. I am proud to say that Kraft Heinz (based in Pittsburgh) is ketchup’s king, holds nearly 70% of the U.S. retail market. But admittedly, the 150-year-old brand wasn’t prepared for the pandemic. Kraft Heinz couldn’t keep up with orders. But please restaurants, you need patience while Heinz ramps up supply. The company is opening two new production lines this month, and more after that, increasing production by about 25% for a total of more than 12 billion bottles and packets a year. Kraft Heinz already is running extra shifts at plants and cut back on some varieties to focus on making more single-serve packets. Ketchup sold in the U.S. is typically made in large domestic factories with tomatoes often grown in our very own Central Valley of California. But here’s the secret to Heinz’s success (don’t tell anyone); they use varieties of different tomatoes to get the unique flavor and texture it wants. Since Heinz has the majority of the market, it was most impacted when demand suddenly shifted to retail as customers sheltering at home bought more ketchup. Some Heinz faithful are truly shaken. Which is more than you can say about that stubborn Heinz ketchup bottle.
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This Week. Looking ahead, investors will continue watching decreasing Covid case counts and increasing vaccine distribution. Beyond that, the Consumer Price Index (CPI) will come out tomorrow (4/13). CPI is a widely followed monthly inflation report that looks at the price change for goods and services. Retail Sales will be released on Thursday (4/15). Since consumer spending accounts for over two-thirds of all economic activity in the US, the retail sales data is a key indicator of growth. With respect to real estate, Housing Starts will come out on Thursday (4/15) and Existing Home Sales on Friday (4/16).
Weekly Changes:
10-year Treasury: Fell 0.05 bps
Dow Jones: Rose 400 points
NASDAQ Rose 300 points
Calendar:
Tuesday, 4/13: Consumer Price Index
Thursday, 4/15: Retail Sales
Thursday, 4/15: Housing Starts
Friday, 4/16: Existing Home Sales
For further information, comments, and questions:
Lloyd Segal
President
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