Economic Update (Monday, May 3, 2021)

[Lloyd Segal]

Economic Update
(Monday, May 3, 2021)

Here’s some fun facts. According to University of California Davis’ “Road Ecology Center,” Los Angeles traffic patterns changed dramatically during the pandemic. In March of 2020, as the region locked down, traffic congestion (that symbol of Southern California life) disappeared overnight. For many Californians, the suddenly empty roads were a discomfiting novelty—simply further evidence that life as we knew it had changed. From early March through the summer, driving in California dropped over 60 percent, as measured by vehicle miles traveled. Not surprisingly, traffic speeds went up. On once-gridlocked freeways, for example, cars were moving at a steady clip not seen in over 50 years. But they also found “fast and furious want-to-be” drivers hurtling along irresistibly empty SoCal freeways at over 120 mph. By mid-April of 2020, in fact, the California Highway Patrol reported an 87 percent increase in citations for drivers exceeding 100 mph. Fortunately, most drivers didn’t indulge their Fast and the Furious fantasies. Traffic patterns on surface streets were also upended. In Los Angeles, speeds on some city corridors increased by up to 30 percent. Officials urged drivers to slow down, especially because more pedestrians and cyclists were out. To curb speeding, officials turned some daytime traffic signals to nighttime settings so drivers would encounter more red lights. Analysts also discovered that driving patterns varied markedly by neighborhood. In the first weeks of the shelter-in-place order, the number of crashes on California roads and highways dropped by about half. But when heavy rains hit Southern California in April 2020, crashes shot back up. And by mid-May of last year, fatal crashes on L.A. streets were on par with previous years. So let’s fasten our seatbelts, put on our face mask, social distance, get vaccinated, and peek under the hood…

Gross Domestic Product. The U.S. economy charged ahead in the first three months of the year thanks to more Americans getting vaccinated, fewer people catching the coronavirus and Washington approving another gargantuan $1.9 trillion stimulus. Gross domestic product, the official scorecard for our economy, rose at a 6.4% annual pace in the first quarter, the Commerce Department reports. Growth would have even stronger if supply bottlenecks and shortages of key materials didn’t curb production. Economists predict even faster growth in the months ahead if the bottlenecks ease, coronavirus cases keep falling and government restrictions fall by the wayside. Consumer spending surged 10.7% early in the new year, helped by a combined $2,000 in stimulus checks that the government sent to most Americans in January and March. More generous unemployment benefits and the creation of 1.5 million new jobs also spurred higher spending. Americans spent more on autos, home furnishings, recreational goods, clothing and takeout food, among other things. The private sector also ramped up spending, especially on new equipment and software. Business investment jumped 10%. Yet the value of stockpiled goods, or inventories, declined by a whopping $147.5 billion in the first quarter because companies could not keep up with demand. GDP would have risen 9% if the level of inventories had been unchanged. There’s a silver lining, though. The speedier recovery of the U.S. economy along with generous government aid has enabled Americans to spend more on imports as well as domestically produced goods and services. The economy was bound to speed up again once the vaccinations did their job and coronavirus cases fell. About 43% of the population — and 55% of all adults — have received at least one coronavirus shot. Low interest rates and government stimulus on a unprecedented scale have also push the economy into overdrive. Much of the stimulus has yet to be spent, what’s more, and the Biden administration is aiming to spend even more money.

Mortgage Rates Remain Under 3%. Investors still have a chance to lock in ultra-low interest rates on their mortgages. How long that opportunity will last could depend on the action the Federal Reserve takes to address potential inflation in the coming months. The 30-year fixed-rate mortgage averaged 2.98% for the week ending April 29, up one basis point from the previous week, Freddie Mac reports. The rate on the 30-year loan is down roughly 20 basis points since reaching the highest level since June of last year at the end of March. The 15-year fixed-rate mortgage, meanwhile, increased two basis points to an average of 2.31%. The 5-year Treasury-indexed adjustable-rate mortgage averaged 2.64%, down 19 basis points from the previous week. Mortgage rates have fallen in response to the movement on long-term bond yields, including the 10-year Treasury note, which they roughly track. In light of the rising COVID caseloads globally, U.S. Treasury yields stopped moving up a month ago and have remained within a narrow range as the market digests incoming economic data. The Fed is poised to keep rates low for the foreseeable future. Also relevant to mortgage rates: The central bank plans to maintain its pace of asset purchases, which include mortgage-backed securities. By buying those securities, the Fed pumps liquidity into the mortgage market that allows lenders to dole out more loans with lower interest rates. Of course, the low rates are welcome to home buyers and existing owners alike. Lower rates ease the affordability constraints for buyers, which is especially important in a competitive spring housing market where prices are rising rapidly. And for homeowners, the extended period with sub-3% rates give them yet another opportunity to refinance their home loan if they have not already.

Southern California’s Home Prices Are Still Rising by Double Digits. According to data released Wednesday by real estate firm DQNews, median home sale prices in SoCal’s six counties jumped by 14.5 percent since the same time last year, hitting a record $630,000. The number of houses, condos, and town homes sold in that period rose 32.2 percent. The upward trend predates the pandemic, but it took off with renewed vigor as the rest of our economy faltered. In December, when the median price reached $600,000, housing experts credited the surge to people whose earnings remained largely untouched by the crisis as shuttered work places left them craving more space. These lucky customers continue to drive the surge, along with plummeting mortgage rates and millennials who are entering their early 30s. Across the region, there wasn’t a single county that didn’t see a double-digit leap in the media price of homes in March. San Bernardino County saw the biggest increase—18.3 percent to $429,500—but Los Angeles County wasn’t far behind with a 17.2 percent increase to $750,000. While that sounds outrageous, Orange County remains the county in the six-state region with the highest media home price, $835,000, which represented a 10.6 percent jump last month.

Is the U.S. Housing Market Heading for a Crash? That’s the question a lot of Americans appear to be asking themselves (see storm clouds forming below). Data from Google underscore the concerns that many people have about the state of the housing market. Searches for the phrase, “When is the housing market going to crash,” are up 2,450% over the past month. Similarly, Americans are searching in droves for explanations about why the housing market is so hot and why home prices are rising, Google reports. Americans’ concerns are perhaps a natural by-product of today’s extremely competitive market. For some, today’s real-estate market might feel eerily similar to the market conditions that preceded the Great Recession. Given that the last housing boom triggered a global economic meltdown, these concerns are certainly understandable. But housing experts argue that Americans don’t need to get themselves too worked up — yet. A year ago, when COVID-19 cases first skyrocketed across the U.S., the home-buying market came to a screeching halt as people were advised to stay home to avoid getting sick. At the time, it seemed the housing market was poised for a downturn. Instead, the opposite occurred. When real-estate transactions were allowed to resume, Americans flocked to buy homes. With jobs turning remote and schools becoming virtual, families sought more space in the suburbs. Some city residents tired of their cramped apartments and decided to make a permanent move to more rural areas, while others merely opted to purchase second homes to escape to amid the stay-at-home orders. With the sudden crush of people seeking to buy homes, prices skyrocketed. The demand for housing also triggered a building craze. Last year saw a 12% gain in the construction of single-family homes. The sudden increase in home-building activity has since caused a surge in the prices for lumber, driving up the prices of new homes even higher.

Coeur d'Alene is the Hottest Emerging Housing Market. The picturesque lakeside city of Coeur d’Alene, Idaho (with the wonderfully romantic name), tops the list of the country’s hottest emerging housing markets, according to a new ranking launched Tuesday. The Wall Street Joournal/Realtor.com Emerging Housing Market Index identifies the top metro areas for home buyers seeking an appreciating housing market and appealing lifestyle amenities. After Coeur d’Alene, the top metro areas in the ranking are Austin, Texas, Springfield, Ohio, Billings, Mont., and Spokane, Wash. (just across the state border from Coeur d’Alene), ranks fifth. Buyers from other Western states are moving to northern Idaho in droves, seeking a more rural and less expensive place to live. The median sales price in the Coeur d’Alene region rose in March to $476,900, up 47% from a year earlier, according to the Coeur d’Alene Association of Realtors. Finding a home to buy in the metro area of about 166,000 is getting tougher: Inventory of homes for sale shrank by 71% to just 337 homes. That amounts to less than a month’s supply. Over 70% of page views on Coeur d’Alene property listings came from outside the state in the first quarter, up from about 66% a year earlier. The top metro areas for interest in Coeur d’Alene listings were Seattle, Spokane and Los Angeles. Coeur d'Alene has a small-town feel. Some buyers have been drawn to Coeur d’Alene’s more relaxed Covid-19-related restrictions. Students in Coeur d’Alene public schools have been able to attend school in person at least part-time all year. Kootenai County, where Coeur d’Alene is based, had 105.6 Covid-19 cases per 1,000 people as of April 19, in the top half of counties in the U.S. Coeur d’Alene is also a popular second-home and luxury market owing to the area’s natural beauty and access to outdoor activities, such as skiing and water sports. That has helped boost the number of high-end sales. In the first two months of the year, 67 homes in the area sold for $1 million and above, up from 12 sales in that price range in the first two months of 2020. New residents who recently sold homes in more expensive markets such as Seattle and Los Angeles are often able to buy homes in Coeur d’Alene in cash. That threatens to price out professionals the city needs.

Becerra Joins Lawsuits Challenging Housing in Wildfire Areas. Attorney General Xavier Becerra has joined lawsuits against two proposed developments in San Diego County, in the hilly scrublands east of Chula Vista. “ have become the norm in recent years, with dozens of deaths and whole towns forced to evacuate,” Becerra said in a statement. “That’s why local governments must address the wildfire risks associated with new developments at the front end.” Specifically, Otay Ranch Village would place more than 1,100 homes on a two-lane road within five miles of 68 recorded blazes (including the Harris fire in 2007). Otay Ranch Village would construct more than 1,880 homes on a site that’s repeatedly burned (including the 2003 Otay fire). Becerra’s move to quash rural developments in San Diego follows similar efforts in Lake and Monterey counties. The intervention of the attorney general is a fascinating escalation of power, effectively to force counties to do what they’ve rarely done — which is to rethink their greenlighting of developments in wildfire prone areas. The San Diego County Board of Supervisors approved both Otay Ranch projects with the support of local California Department of Forestry and Fire Protection officials. During public hearings, politicians, such as former Supervisor Greg Cox, stressed the need for more housing, while San Diego County Fire Chief Tony Mecham testified that residents could be safely evacuated in a large blaze. Building industry officials also touted the support of local fire authorities for many rural housing projects. Jutting into chaparral and other scrublands, the development proposals have drawn the ire of environmental groups concerned about habitat destruction, wildfire and greenhouse gas emissions from long car trips. Such legal challenges against suburban development received a significant boost in 2018 when the state updated the California Environmental Quality Act to, among other things, tighten the rules around approving housing developments in wildfire-prone areas.

Restaurants Line Up for Drive-Thrus. Once largely the province of fast-food brands, drive-thrus have been embraced by quick-service restaurants over the past year as consumers sought out socially distanced, contact-free food options. For local developers and property management companies who build and lease locations to these chains, the scramble is on to create stand-alone drive-thru restaurants or to increase drive-thru capabilities at existing properties. Demand was already accelerating for drive-thrus even pre-Covid because a lot of these tenants (whether it’s Starbucks or Chipotle or Habit Burger Grill), their drive-thru restaurants were already doing significantly higher volumes than their non-drive-thru restaurants. Covid has really been an accelerant to that trend, and a big accelerant. When Covid hit, it became all the more apparent to them that this is how they have to expand moving forward. Business at restaurants before the pandemic was generally 70% dine-in and 30% drive-thru. Now, that has reversed, and restaurant chains are eager to take advantage of the trend. 70% of Chipotle’s new locations in 2021 will have a “Chipotlane,” the company’s version of a drive-thru. In locations where a drive-thru is impossible, the company will install walk-up windows. Orders at drive-thru locations have been increasing. Drive-thrus saw a 25% to 35% increase in sales during the pandemic. As a result of that, concepts that had drive-thrus absolutely were Covid compliant and thrived. The sales that they were ringing up were phenomenal. All these companies started to say to themselves, ‘Why do we need stores that have sit-down dining or outdoor dining when we’re making a boatload of money though our drive-thrus?’” Drive-thru-only locations have a much smaller storefront than a dine-in restaurant. They also have lower expenses, with fewer paper products needed, no refills and less table cleaning. But adding a drive-thru lane is not always easy. It often means multiple entrances and exits to a property, enough room for a line of cars and city approvals (which developers and experts agree can be tricky to get). Locations are often leased on a triple net basis. In that case, the tenant can be responsible for everything from utilities to roof repair to taxes. The tenant is able to use the location without having to buy it, and a landlord is able to collect rent without having to do much work. Experts see demand for drive-thru properties continuing.

Remember the Office? Once upon a time the office would have seemed an unlikely object of nostalgia. Whether you were working in an office that was depressing because it tried too hard to be fun or an office that was depressing because it was depressing, going there meant submitting to various forms of low-level irritation (at the very least). Air-conditioning cold enough to make your fingers ache. Elevator small talk. Mediocre salads from that place downstairs. Yet somehow, a year’s absence from that HVAC terrarium has felt like a loss. The confines and routines of the office turned out to be its charm. They’re what allowed its “occupants” (in all their eccentricity) to shine. Perhaps your office had a view of cubicles and more cubicles, or maybe a window as a bonus. Cramped quarters mean sustained acquaintance with colleagues’ habits, moods, smells, and snacks. More than that, offices encouraged a collective effort to figure out how the workplace works: They encourage gossip (which can be as much analysis as breaking news). I miss collapsing on a couch to dissect a meeting that finished five minutes prior. I miss ducking into empty conference rooms to debrief. I miss being told to shut the door. All those warrens of office chatter! During the pandemic, it was startling to realize I didn’t need the office and even more startling to miss it anyway. Especially after a year of staring at each other’s heads on Zoom. The office environment we find when we return will no doubt be different from the one we used to know. But what better time to ask how the office might be remade to serve the people who spend their days there? Business as usual will never be acceptable this time around.

Nixon’s Western White House Re-lists for $65 million. The Casa Pacifica compound dates to 1926 and comprises a stately home and other structures totaling 15,000 square feet, including an entertainer’s pavilion with a bar, guest suite, den, and four terraces. The listed price is 13% more than the $57.5 million sought before the nine-bedroom, 14-bathroom Spanish Colonial Revival-style estate known as the “Western White House” fell off the market a year and a half ago. President Richard Nixon and Frist Lady Pat Nixon bought the secluded coastal bluff estate in 1969 and dubbed it “La Casa Pacifica.” He was the second of only three owners in its nearly 100-year history. Nixon also welcomed notable guests. Soviet leader Leonid Brezhnev, Lyndon B. Johnson and Frank Sinatra are among those who once crossed the threshold of the oceanfront home. When the 37th President of the United States resigned from office in 1974, he and the former First Lady moved in full time. The very same Casa Pacifica where Nixon rationalized his actions during Watergate by telling David Frost “well, when the President does it, that means it is NOT illegal.” They sold the property in early 1980 and relocated to the East Coast. There’s an ocean-view pool terrace, a lighted tennis court with a spectators’ area, a catering facility, expansive lawns, edible and ornamental gardens, and 480 feet of beach frontage on this nearly 5.5-acre parcel subject to a historic property preservation agreement to keep it intact. And it’s all shielded from prying eyes, tucked away in an exclusive community that requires passing through three gates to reach it. The current owner is Allergan co-founder and retired CEO Gavin S. Herbert.

This Week. Looking ahead, investors will continue watching decreasing Covid case counts and increasing vaccine distribution. Beyond that, the Institute of Supply Management’s “National Manufacturing Index” will come out today (5/03), and their “National Services Index” on Wednesday (5/05). But the main event will occur on Friday (5/07) when the monthly Employment Report will be released by the Bureau of Labor Statistics. These figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. So fasten your seat belts.

Weekly Changes:
10-year Treasury: Flat 000 bps
Dow Jones: Fell 200 points
NASDAQ Fell 050 points

Calendar:
Monday, 5/03: ISM Manufacturing
Wednesday, 5/05: ISM Services
Friday, 5/07: Employment

For further information, comments, and questions;

Lloyd Segal
President