Economic Update (Monday, June 28, 2021)

[Lloyd Segal]

Economic Update
(Monday, June 28, 2021)

Should Investors Wait Out this Crazy Housing Market? I know. I know. I feel your pain. You’re an investor. Investors buy and sell properties. You’re chomping at the bit (especially with prices soaring). But hold on – hold on for just one minute and consider this. This may not be the best time to invest. Pick any housing statistic at random, and it’s probably setting an all-time record. Home prices: record high. Home sales: record high. Percentage of homes selling above asking price: record high. Inventory: record low. Average time on market: record low. How wild is the housing market right now? So wild, half of the houses listed nationwide in May sold in less than two weeks. So wild, one poll found that most buyers admitted to bidding on homes they’d never seen in person. With prices headed to the moon and listings blinking in and out of existence like quantum particles, nobody seems to know exactly when this is all going to end. In my time studying housing markets, I’ve seen bubbles and I’ve seen busts. But I’ve never seen anything quite like this. It’s a “perfect storm.” So what exactly is happening? The short answer is: supply and demand. On the demand side, demographics are the big, invisible engine driving this machine. Even with the pandemic ending, buyers still feel a desperate need to escape their current apartment, basement, or home (after the coronavirus pandemic closed much of the world for more than a year) and move to greener pastures. To make things even wilder, homebuyers are flush with cash after a year in which the national savings rate soared to its highest level in decades. On top of all that, interest rates are continuing at record lows, luring more buyers into the market and encouraging higher bids. Worse, investors like you and me now have competition from these consumer buyers willing to buy almost anything on the market, regardless of condition. And let’s not forget the Millennials. They are the largest generation in American history. Having been too financially constrained to buy houses at a normal rate in the previous decade, Millennials are now storming into the housing market. On the other side of the coin, supply issues are just as challenging. Years of insufficient building (and a construction pause during the pandemic) have led to extraordinarily low inventory. Plus, some builders are putting their projects on hold because of the sudden tripling of lumber prices and shortage of skilled workers, which could delay the construction boom this country so badly needs. Seniors, who in previous decades sold their homes to downsize, are now more likely to “” which is also keeping millions of homes off the market. Plus, the foreclosure moratoriums have delayed distressed sellers from having to sell their properties. And let’s not forget homeowners keeping their homes off the market simply because they do not want strangers traipsing through their homes during a pandemic. The bad news is, at its current pace, economists predict the number of houses on the market nationwide won’t reach normal levels for at least another 14 months. So during this unprecedented market, investors may need to be patient, wait out the storm, and read the tea leaves….

Miami Condo Collapse Should be a Real Awakening. Besides the horrible tragedy in Surfside Florida last week, there are lessons to be learned for all property owners. I hate to be so prescient, but just last week I wrote about Miami sinking with rising sea levels. According to engineering and architectural experts, multiple factors could have played a role in the tragedy: saltwater corroding the concrete and weakening support beams, a compromised foundation or flaws in the building’s design or construction. Plus, scientists have long noted the risk of building on the shifting sands of a barrier island like Miami Beach. That may not have been what caused the 136-unit Champlain Towers South to inexplicably crumble on Thursday, but experts say it remains an engineering challenge in the region. As is required under Miami-Dade County building code, any property in the county that was built four decades or longer ago is required to complete the inspection process within a few years of that anniversary to certify “each building or structure is structurally and electrically safe for the specified use for continued occupancy.” Champlain Towers had hired an engineer to undergo its 40-year recertification process. Plus, public records did show issues regarding the building beyond two lawsuits over cracks in a unit’s exterior wall, and a structural engineer had warned of major structural damage below the pool deck several years ago. Another issue at hand for the Surfside community is one shared with all of Miami Beach: The towns are built on a barrier island. Climate scientists and geologists have long warned that these islands cannot be developed responsibly. They are made of a loose mixture of sand and mud and provide a natural protection for the shoreline, but eventually sink. An analysis of satellite images taken of Miami Beach, which includes the town of Surfside, found that the area had moved slightly each year through the 1990s, according to a study published in the journal Ocean & Coastal Management in April 2020. The report noted that these issues can lead to greater flooding and structural hazards for local communities. Americans have built approximately $3 trillion worth of property on barrier islands and coastal floodplains all over the country that are in danger, according to “The Geography of Risk,” a book by Pulitzer Prize winner Gilbert Gaul that analyzes the real estate investment in beach communities over the past century. In the meantime, buildings of a similar age will probably undergo fresh analyses and inspections in the aftermath of this tragedy. Don’t be surprised if Florida (and other applicable states) begins requiring building reports to be handed to the state for review on a much more regular basis than every 40 years. More to come…

Existing Home Sales Declined 0.9% in May. Existing home sales (representing 90% of the housing market) declined 0.9% in May to a 5.800 million annual rate. Nevertheless, sales are up 44.6% versus a year ago. Sales fell for a fourth consecutive month because low inventories and elevated prices continue to weigh on closings. Notably, even with recent declines, existing home sales are up 1.8% from the February 2020 pre-pandemic high. But there are finally reasons to believe the worst of the inventory crunch may be behind us. New home construction remains strong, and now that the pandemic seems to be ending (and vaccines are widely available), it's likely that more sellers will feel comfortable listing their homes. In fact, inventories jumped 7.0% in May, the third consecutive month of gains. While inventories are still down 20.6% from a year ago that rate of decline is slowing. The months' supply (how long it would take to sell today's inventory at the current sales pace) of existing homes for sale rose to 2.5 in May from April's reading of 2.4, though these readings still remain near record lows. Despite the shortage of listings, it looks like there is still significant pent-up demand from the pandemic, with buyer urgency so strong in May that 89% of the existing homes sold were on the market for less than a month. The combination of strong demand and sparse supply has pushed median prices up 23.6% in the past year (the fastest rate on record going back to 2000). However, despite these issues you can expect sales in 2021 to ultimately post the best year since 2006. Why? First, because more construction and listings as the pandemic ends should help alleviate the worst of the supply crunch and help keep a lid on price growth. Second, the trend toward 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. Finally, there are significant demographic tailwinds coming together for home sales for the foreseeable future. Census Bureau population projections show that the key homebuying population of those 30-49 years old is set to grow significantly through 2039.

New Home Sales Fell in May. New single-family home sales (representing 10% of the housing market) fell 5.9% in May to a 0.769 million annual rate. But sales are up 9.2% from a year ago. This is the second month in a row that new home sales have fallen. Sales have generally been decelerating since January, as rapid price growth and a lack of completed homes available for sale continue to weigh down closings. While sales are now back to about where they were in February 2020 (before the pandemic erupted), there has been an extreme amount of volatility in sales since then. A good way to cut through some of that volatility and get a better picture of the health of the housing market is to look at a 12-month moving average, which shows sales are currently at the fastest pace since 2007 despite recent declines. One obvious reason for the recent slowdown in sales has been the relentless increase in prices, with the median price of a new home now up 18.1% from a year ago. Moreover, buyers that are willing to brave these price gains are dealing with very few options when it comes to completed homes. It's true that overall inventories have been rising recently and now sit at the highest level since mid-2019. This has pushed up the months' supply (how long it would take to sell current inventory at today's sales pace) to 5.1 months from record low readings of 3.5 months in late 2020. However, almost all of this inventory continues to come from homes where construction is still under way, which is not very helpful data. Doing a similar calculation with actual completed homes on the market shows a months' supply of only 0.6 months, near record lows going back to 1999. The good news is that the inventory of completed homes rose in May for the first time in thirteen months, and while it's too early to say if this represents a new trend, there are reasons to be optimistic.

Southern California Home Prices Hit Record High. Southern California home prices soared in May, hitting another all-time high, though some of the data is starting to point to a potential slowdown in demand. (Did I qualify that statement enough?) The six-county region’s median sales price rose a whopping 24.7% from May 2020 to a record $667,000 last month, according to data released by DQNews. In fact, median home prices in our region have risen by double digits for 10 consecutive months and new records are being set both regionally and locally. The big leap in numbers from a year earlier is partly due to a once-in-a-lifetime comparison. The data reflect closed sales, meaning the 2020 data covered mostly deals that opened escrow during March and April 2020 (the height of the coronavirus lockdowns). At the time, sales plunged and price growth slowed. But as those lockdowns eased, the housing market roared back to life both locally and nationally, spurred by record low mortgage rates and a desire for more space during the pandemic. It’s unclear how long such rapid increases will continue, and many buyers worry they are being priced out of the market. But some data is pointing in the direction of a potential slowdown. For example, an index of national home-buyer demand from real estate brokerage Redfin has fallen 14% from a peak in April. The index factors in requests for home tours and other services the company provides. The number of home sales entering escrow is also falling nationally (and in L.A. County), but those rates are still above the comparable time period 2019 to 2020, according to Redfin:

• In Los Angeles County, the median home price rose 25% to a record $775,000 in May, while sales climbed 117%.
• In Ventura County, the median home price rose 20.9% to a record $701,500, while sales climbed 128.7%.
• In Orange County, the median home price rose 19.3% to a record $895,000, while sales climbed 113.4%.
• In Riverside County, the median home price rose 22.5% to a record $502,250, while sales climbed 81.7%.
• In San Bernardino County, the median home price rose 16.8% to $432,000, while sales climbed 61%.

Will Appraisers Survive in the Digital Age? Momma, don’t let your kids grow up to be appraisers. Appraisers are a dying occupation. For all the digital progress, the mortgage industry has barely made a dent in terms of reducing closing times. The main reason for that, many mortgage professionals say, is due to a logjam that exists specifically with the appraisals. In the 10-year period between 2007 and 2019, the volume of licensed appraisers plunged 32.5%, with figures expected to decline further, according to Valligent data. On average, over half of those appraisers have been in the business for more than 20 years. Of course, predictions of the demise of the appraisal industry are not new. The number of people employed as appraisers has been declining for years and the profession is attracting few new entrants in the workforce, a trend that some see as self-reinforcing. I think we're going to get to a point where very few properties will require a formal on-site appraisal. In response, appraisers argue their local market expertise and understanding of the nuances in each home make them imperative to the process. But I’m not so sure. Others see the appraisal function turned over to digital systems that apply machine learning — in this model, advances in analytics render people largely irrelevant to the process. This theory suggests the future appraiser looks a lot less like a person walking through the property, and more like a person sitting at a desk behind a computer screen. Any industry as data-driven as appraisal is arguably a prime candidate for digitalization. Automated valuation models already help zero in on a home's worth by assessing a combination of local market factors and property features. By that thinking, a better algorithm could help solve for discrepancies in the variations of appraised values. The problem today is you order an appraisal, wait for an appraisal company to accept it and they call the homeowner to schedule it. The appraiser shows up with pen, paper, and a camera, then go back, write the report, send it off. That's why in many areas we're talking about 10-plus business days to get an appraisal done, and that's where we really need to change the system. It may be true that on occasion someone may still need to physically visit a home. Or it may be that real estate agents, property inspectors, and the parties to the transaction can supply all the information needed to process an appraisal.

L.A. County Extends Eviction Moratorium. Landlords, are you sitting down? The Los Angeles County Board of Supervisor voted last week to extend their eviction moratorium through the end of September. The moratorium bars landlords in the county from evicting tenants who cannot pay their rent because of financial burdens related to the COVID-19 pandemic. Fearing a “potential tsunami” of evictions trumpeted in the media, the Supervisors had no other choice. Over the next three months, the county will collaborate with state officials to help L.A. County residents and landlords apply for the state’s rental assistance program. Unfortunately, only a fraction of tenants and property owners who might be eligible have received the assistance, due in part to a lack of outreach by the state, overly complicated applications, and a failure to translate the applications into languages other than English. Also, many landlords didn’t realize they could get rent relief directly. The board’s motion extends protections to commercial evictions in addition to residential. The moratorium now further prohibits no-fault evictions and evictions for unauthorized occupants and pets, as well as for nuisances and for tenants “who reasonably deny entry to their landlords during the public health crisis.” Several tenants wrote to the board pleading for an extension of the moratorium, whether because of pandemic-related loss of income or because of the county’s steep rents. The board also heard from desperate landlords. Fortunately, the measure passed by the board carves out a new exception for single-family homes. So if you own single family rental houses, listen up. Landlords will now be allowed to evict tenants from single-family homes if they (or a family member) need to live there. But even then you can only evict tenants who were financially unaffected by COVID-19, and the house must have been purchased before June 30. Further, a tenant 62 or older can only be evicted if the person moving into the home is also in that age group. The same is true for any tenants who have disabilities, are terminally ill or low-income — the person moving in must be similarly situated.

Drought is Here to Stay in the West. Trees are dying. Riverbeds are empty. Lake Mead's water level has dropped to its lowest point in history. Its gotten so desperate, Utah's governor asked residents to pray for rain! As you know, water is increasingly scarce in the Western U.S. — where 72 percent of our region is in "severe" drought, 26 percent is in “exceptional” drought, and populations are booming. As bad as California is, Arizona, Utah and Nevada are far worse. Insufficient monsoon rains last summer and low snowpacks over the winter left Arizona, Utah and Nevada without the typical amount of water they need, and forecasts for the rainy summer season don't show promise. This year's aridity is happening against the backdrop of a 20-year-long drought. The past two decades have been the driest (or the second driest) in the last 1,200 years in the West, posing existential questions about how to secure a livable future in the region. It's time to ask, "Is this a temporary drought, or is it just the way the hydrology of the Colorado River is going to be from now on?" said John Entsminger, the general manager of the Southern Nevada Water Authority. The good news is that per capita water consumption is down by 40 percent. Indoor water is recycled in southern Nevada, where residents are paid to replace grass with drip-irrigated landscaping. That is one of the region's many ways of confronting a 21st century Colorado River with significantly less water than it had a century ago. That includes a new law that will declare more than 30% of the grass illegal in southern Nevada. The future of the Colorado River in the 21st century (with significantly less water than we had in the 20th century) will require collaboration between the U.S. and Mexico. The challenge before us is how seven states and two countries can all cooperate to figure out how to get by in the coming decades with significantly less water than we’ve had in the past. Which begs the question, why aren’t we building aqueducts from Southeast United States so that we can use their excess water here in the West?

Robert Redford Wants to Sell His Utah Horse Ranch. Interested in a horse ranch in Utah? I mention this because Robert Redford’s Utah retreat — a 30-acre spread dubbed Horse Whisper Ranch after his 1998 western film “The Horse Whisperer” — just came on the market for $4.9 million. That’s $163,333 per acre for those mathematically challenged. Tucked into a picturesque scene of mountains, rivers and valleys, the estate is in the town of Charleston about 15 minutes outside of Sundance Mountain Resort (the ski destination that the famed actor opened in the 1960s and sold last year). Redford has been buying land in Utah for half a century, and according to the listing agency, he owns around 1,800 acres around the Sundance area. He bought this place in 1996 as a winter grazing area for his horses. Deed restrictions limit development on the property, but it still holds a small two-bedroom farmhouse of about 1,500 square feet. A stone fireplace runs floor-to-ceiling in the living room, and there’s also a spacious workshop with wood floors, desks and shelves. Other structures that fill out the grounds include a woodshed, garden house, garage, hay barn, horse stalls and a handful of pastures. Redford, 84, is known for his roles in “Butch Cassidy and the Sundance Kid,” “All the President’s Men” and “The Sting.” The Santa Monica native won an Academy Award for his directorial debut with “Ordinary People” in 1980, and he received an honorary Oscar for his body of work in 2002. In addition to a ranch he maintains in Sundance, Redford also owned a 10-acre residence in California wine country that he sold for $7 million in 2019.

This week. Looking ahead, investors will closely watch comments from Fed officials for hints about changes in monetary policy. Beyond that, the Conference Board’s “Consumer Confidence Index” for June will be released on Tuesday (6/29), and the Institute of Supply Management’s Chicago Purchasing’s Index for June will come out on Wednesday (7/2). But the highlight of the week will be the jobs report. The Bureau of Labor Statistics monthly Employment report will be released on Friday (7/2), and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Bureau expected to report a rise of over 600,000 non-farm payroll jobs in June, and the unemployment rate is forecasted to tick down from 5.8% to 5.6%

Weekly Changes:
10-year Treasuries:    Rose     005 bps
Dow Jones Avg:          Rose 1,000 points
NASDAQ:                    Rose    350 points

Calendar:
Tuesday, June 29:  Consumer Confidence
Thursday, July 1:   ISM Manufacturing
Friday, July 2:       Employment

For further information, comments, and questions:

Lloyd Segal