Economic Update (Monday, May 17, 2021)

[Lloyd Segal]

Economic Update
(Monday, May 17, 2021)

The Centers for Disease Control and Prevention now declares fully vaccinated people in the United States can safely resume outdoor and most indoor activities without a mask. But Los Angeles County health officials say: not so fast! The county won't revise its current masking requirements until at least this week, when regulators with Cal/OSHA (the state's workplace safety division), are expected to revisit their temporary COVID-19 safety standards. The agency is weighing whether to relax its requirements on mask-wearing and social distancing at worksites, as long as employees are fully vaccinated. County public health director Barbara Ferrer says the current rules also apply to customers going into workplaces, like grocery stores or other businesses: "Until there's been a change in that, it's really important for us not to jump the gun and create an unintended consequence where we're creating risk where we didn't need to,” she said. L.A. County updated its mask guidelines two weeks ago to reflect state and federal recommendations that allow fully vaccinated people to go mask-free outside, unless they're in a crowded space. So, at least for the time being, put on your facemasks, social distance (unless you’re making love), get vaccinated, and let’s get under the hood…


Remembering Eli Broad. Los Angeles lost a legend on April 30th. He may have been impossible to deal with, but Eli Broad used his immense fortune to elevate our city’s standing as a cultural mecca. Arguably no other benefactor in L.A.’s recent memory wielded Broad’s name recognition, clout and influence. He ranked No. 6 on the L.A. Business Journal’s “Wealthiest Angelenos List” with a net worth estimated at $7.9 billion in 2020, but his legacy is so much more. It all started in 1958, with real estate of course. Broad co-founded Kaufman and Broad Building Co. with Donald Bruce Kaufman, his wife’s cousin’s husband. They launched the company with $25,000 borrowed from Broad’s in-laws. KB Home, as it’s named today, began by developing starter homes for baby boomers in the Detroit suburbs. Their novelty product? Cookie-cutter homes without basements, a feature that not only cut costs but could be built faster. The company quickly expanded west and in 1963 relocated its headquarters to Los Angeles. By 1968, KB Home was erecting single-family homes in nearly three dozen new master-planned communities in or near Chicago, Detroit, Southern California and Northern California. In the Newhall-Saugus area, one of KB Home’s subdivisions, dubbed Broadview, advertised three- and four-bedroom ranch homes ideal for families. KB’s homes were catering to an American dream of middle-class prosperity that was still very much alive in the postwar era. Outfitted with country kitchens, fireplaces, self-cleaning ovens, dishwashers and disposals, the single-family homes were priced from $21,500 to $27,900. The company distinguished itself from its competitors by steering clear of speculative land development, instead acquiring a manageable few hundred acres of land at a time and selling from model homes. “Our profits come from producing homes,” Broad said at the time, “not from appreciation in land values.” KB Home’s footprint was wide. In Southern California, it developed new subdivisions from Moreno Valley to Huntington Beach. Broad departed KB Home in 1995 and shifted his billions into the insurance business. Before his death, Broad and his wife pledged to donate 75% of their wealth. As of last year, they had given away more than $4 billion.

Consumer Price Index Soars. The Consumer Price Index soared 0.8% in April to match the biggest monthly increase since 2009, the Commerce Department reports. The rate of inflation over the past year jumped to 4.2% from 2.6% in the prior month — the highest level since 2008. The pace of inflation has surged (after years of languishing at unusually low levels), largely due to the rapid reopening of our economy. The rate of inflation is the highest level in nearly 13 years, signaling greater stress on our economy as businesses grapple with supply shortages (that are at least temporarily raising the cost of many goods and services). Businesses can’t keep up with demand, a problem exacerbated by ongoing bottlenecks in the global trading system tied to the pandemic. Computer chips are especially in short supply and that’s held up production of new autos and other manufactured goods. Americans are also rushing to dine out, travel, and go far f-a-r away for vacations, activities they shied away from during the pandemic. That’s also driving up prices at popular vacation resorts and other venues where people congregate. Prices for a broad swath of goods and services rose by record amounts in April: used cars and trucks, tires, computers, televisions, furniture, toys, computers and airline fares, among other things. The cost of some of these goods and services (such as plane tickets), which fell sharply during the pandemic, are now recovering lost ground with a vengeance. Likewise, prices for other products like used vehicles are setting new all-time highs. The cost of used cars and trucks soared 21% over the past year, the CPI shows. The cost of food is also rising twice as fast as it was before the pandemic. Senior Federal Reserve officials, who are supposed to protect the U.S. from high inflation, insist the increase is temporary. They contend inflation will subside by next year once the pandemic fades, supply shortages are resolved, most people go back to work, and the global economy has largely recovered. The U.S. central bank is betting inflation will fade by next year and fall back toward its long-term goal of 2% (where the rate of inflation it has hovered for most of the past decade). But investors are less sure. Regardless, our economy will likely be fine if the Fed is right. But if the central bank gets it wrong, all bets are off. The Fed could be forced to raise interest rates sooner than it wants and potentially choke off a budding economic recovery.

Mortgage Rates Fall Again (despite inflation). What’s going on? While analysts fretted over the high rate of inflation in the U.S. economy, mortgage rates once again decreased. The 30-year fixed-rate mortgage averaged 2.94% for the week ending May 13, down two basis points from the previous week, Freddie Mac reports. The benchmark mortgage rate has fallen since the end of March, when it reached the highest level since June of last year, and has remained under 3% for a month now. The 15-year fixed-rate mortgage, meanwhile, fell 4 basis points to an average of 2.26%. The 5-year Treasury-indexed adjustable-rate mortgage averaged 2.59%, down 11 basis points from the previous week. The low-rate environment is also a boon to those looking to buy a home at a time when home prices are being pressured higher by strong demand and a lack of supply in the market. The fall in mortgage rates came as somewhat of a surprise to market observers, given reports this week that pointed to a growing rate of inflation in the economy. While I don’t expect double-digit mortgage rates any time soon, I do expect mortgage rates to follow Treasury yields higher as the combination of abundant supply and concerns about inflation, mean that investors expect higher returns. The yield on the 10-year Treasury note, 1.659%, has risen nearly 11 basis points over the past five days. But if April’s inflation readings continue for a more extended period of time, the nation’s central bank will likely respond. And that could affect mortgage rates. “In theory, a steep uptick in inflation would force the central bank to tighten policy by hiking interest rates or slowing the pace of bond purchases,” said Matthew Speakman, an economist with Zillow. Any shifts away from the Fed’s current outlook, he added, “will place more upward pressure on mortgage rates.”

Grocery Store Properties Thrive During Pandemic. Investor demand for grocery store properties has soared during the pandemic, transforming the sector into one of the hottest real estate investment categories. Why? Glad you asked. Because spending on in-store groceries surpassed spending on dining-out during the Covid-19 pandemic. Plus online grocery sales also surged in 2020, according to a report from Jones Lang LaSalle. As more people ordered groceries from their computers and smartphones, digital grocery sales grew by a staggering 52%! As a result, in-store and online gains have boosted profits for grocery store chains. Albertsons, for example, reports sales growth of 16.9% last year, while Kroger (which owns Ralph’s), reports sales growth of 14.1% last year. Because groceries were deemed “essential” during the pandemic, they were permitted to stay open and operate. As a result, they’ve seen a massive uptick in sales. That uptick has led grocery store properties and grocery-anchored shopping centers to become the only in-demand retail sites on the market. As expected, traffic at grocery stores also gives a boost to other stores at shopping centers with a grocery tenant. In fact, some grocery stores that were previously expected to close when their leases expired had strong enough sales during the pandemic that they were kept open. Even before the pandemic, grocery-anchored centers were a favorite retail asset type among investors. That trend continued during Covid-19. Grocery stores not only survived but thrived. For example, grocery stores in Southern California saw anywhere from 2,500 to 3,000 visitors a day during the pandemic. That’s a lot of people. That’s why grocery-anchored centers, out of all retail properties, have the highest occupancy rates. Another reason investors like grocery centers is that grocery stores are often under a triple net lease, which means tenants are responsible for everything from maintenance to taxes. For investors, this means you can sit back and collect rent.

L.A. and Neighboring Counties Now in Extreme Drought. Most of Los Angeles and Ventura Counties, along with sections of Riverside and San Bernardino Counties, have reached conditions that qualify as “extreme drought,” according to a new report from the U.S. Drought Monitor. Of course, this is obvious to anyone who has looked at the Los Angeles River recently (see photo below). Orange County and the southernmost tip of L.A. County are a step lower, classified merely as “severe drought.” The report contains a list of “historic impacts” associated with each drought tier, noting things that have occurred in previous years. For the extreme level, that includes a dramatic drop in reservoir and aquifer levels, the implementation of water use restrictions, and impacts on wildlife and agriculture. It also creates a greater likelihood of frequent, intense wildfires, noting “fire season now lasts year-round.” At the next tier up, “exceptional drought”–a status already impacting eastern San Bernardino county–the fire threat increases even more, with the report describing a “very costly” fire season, during which the “number of fires and area burned are extensive.” Increased outbreaks of West Nile Virus have also been associated with the extreme drought tier. Forecasts provided by the National Oceanic and Atmospheric Agency that extend through July 31 show no projected improvement in the region’s conditions–and indicate that some areas farther south—including San Diego County—that are currently experiencing only “abnormally dry” conditions rather than an official drought, may worsen into drought status.

Phil Spector’s Castle Sells in Alhambra. Not all homes are dreams come true. Sometimes they are nightmares. That applies to a certain castle in Alhambra, the site of a tragic nightmare in 2003. The site where the late record producer Phil Spector shot Lana Clarkson to death. Spector, the erratic and disgraced producer behind the “Wall of Sound” recording technique (who died in January), paid $1.1 million for the French Chateau-style mansion in 1998. The fateful day came five years later when Spector was arrested after 40-year-old Clarkson was found shot to death in the mansion’s marble foyer. In court, Spector’s chauffeur claimed he emerged from the back door of the home moments after the shooting with bloody hands and said, “I think I killed somebody.” The understatement of the Century. Spector, who had a history of drunken spats and domestic abuse allegations, was convicted of second-degree murder in 2009 and was sentenced to 19 years to life. He died at 81 in January after contracting COVID-19. The home was then inherited by his former wife, Rachelle Short, who sold it. The estate sits atop a private knoll with panoramic views of the San Gabriel Valley below. Walled and gated, it spans 2.66 acres and features a motor court with a fountain surrounded by gardens and trees. The home has 10 bedrooms and 11 bathrooms, as well as a pair of bedrooms and bathrooms perched above the four-car garage. The house has waffled on and off the market since 2019. It first listed for $5.5 million, most recently offered at $4 million, and just sold for $3.3 million. During his music career, Spector produced award-winning work with iconic groups such as the Ronettes, the Beatles and the Ramones (a group I once managed for one entire excruciating week). Spector’s writing credits include “Be My Baby” and “Then He Kissed Me.”

Why Gasoline Is So Expensive in California. No, it’s not because of the Colonial Pipeline. Although the hack of the Colonial Pipeline - one of the most important in the country – is causing concern among residents throughout the east coast, that emergency does not directly impact the West Coast since that pipeline supplies most of its gasoline to the southeastern states. So what’s causing the spike here? At $6 a gallon, California now ranks as the state with the most expensive gasoline in the country. Gasoline prices in California have increased exponentially in recent days, reaching record highs across our state. A gallon of gasoline can cost up to $6 at some gas stations in downtown LA. From LA to Sacramento, the average gallon price is $4 and above, according to Gas Buddy. But why? Gasoline prices have not stopped rising in recent weeks in California due to the high demand, a common phenomenon at this time of year in the state (compounded by the urgency of nearly everybody to go somewhere, anywhere, now that the pandemic is unwinding). There is also the cost of refineries switching over to their “summer blend” which happens this time every year. And this price trend is expected to continue until Memorial Day. AAA estimates that gas prices this year could be the most expensive in California since Memorial Day in 2014 (when a gallon cost $4.17). However, the difference compared to last year is abysmal. In 2020, the average price of a gallon was $2.76 at this time of the year in California, although the context was totally different. Last year people were under strict quarantine and did not dare drive. Today the world is different. But I guess we can’t complain. Compared to Georgia, at least we gave gasoline.

Crystal Cove Home With 30-Car Garage Listed for Sale. Do you by chance need a house with a 30-car garage? Wait a minute. Why would anyone need a garage for 30 cars? Regardless, a newly built Crystal Cove mansion has come on the market for $39.95 million that does. The price is the highest on the Multiple Listing Service in Newport Beach. Set on a half-acre lot with ocean views, the four-level Northern Italian-style home on Coral Ridge checks all the boxes when it comes to luxury. Within 15,376 square feet are seven bedrooms, 13 bathrooms and a lower floor devoted entirely to the pursuit of entertainment and wellness. There’s a gym and a dedicated spa room with a sauna. The top-floor master suite extends outdoors onto an ocean-facing observation terrace. Outdoor features include Mediterranean-inspired landscaping, an entry courtyard with water features, an infinity-edge swimming pool, a putting green, a fire pit, and a built-in barbeque with bar seating. But, without question, the show-stopper is two massive garages with museum-quality lighting, an 18-foot car turntable and parking spaces for 30 luxury cars. In fact, the garage is larger than most homes. All you need now is 30 cars.

This Week. Looking ahead, investors will continue watching decreasing U.S. Covid case counts and increasing vaccine distribution. Beyond that, it will be a big economic week for our real estate sector. Today (5/17), the National Association of Home Builders releases its NAHB/Wells Fargo “Housing Market Index” for May, followed by the Census Bureau’s new residential construction data (including “Housing Starts”) for May on Tuesday (5/18). The Conference Board will release its “Leading Economic Index” for April on Thursday (5/20). Finally, on Friday (5/21), the National Association of Realtors will release its “Existing Home Sales.”

Weekly Changes:
10-year Treasuries: Rose 005 bps
Dow Jones: Fell 500 points
NASDAQ: Fell 350 points

Calendar:
Monday, 5/17: NAHB Housing
Tuesday, 5/18: Housing Starts
Friday, 5/21: Existing Home Sales