Economic Update (Monday, January 25, 2021)

[Lloyd Segal]

Economic Update (Monday, January 25, 2021) There aren’t many people—apart from, say, Elon Musk—who are going to look back fondly on 2020. It was a year of illness, pain, uncertainty, and loss. Frankly, we all deserve a medal for simultaneously enduring a global pandemic and a gruesome presidential election cycle. Of course, there were bright spots to be found if we knew where to look—and some of the time, we didn’t even have to look up from our smart phones to find them. Democracy won, we got outdoors more, we headed back to drive-ins, the internet showcased some really clever people, racial injustice triggered massive global protests (and hopefully changes), vaccines were developed in record time, and of course, our Lakers and Dodgers returned championships. But that was last year, and this is a new year. So as we enter 2021 with high hopes (and a new administration), let’s wash out hands, put on our face masks, social distance, and get down into the weeds… Housing Starts. Housing starts increased 5.8% in December to a 1.669 million annualized rate, up 5.2% versus a year ago. But the gain in December was entirely due to single-family starts; multi-family starts actually declined. In the past year, single-family starts are up 27.8% while multi-unit starts are down 38.7%. Despite a global pandemic, labor shortages, social distancing regulations, and a myriad of other obstacles, builders apparently didn’t get the message and started construction at the fastest pace since 2006 (up 7.9% versus 2019). Looking at the details, single-family construction was responsible for all of December's gain, rising for the eighth month in a row! As you can see, there has been an ongoing divergence between single-family and multi-unit construction, as the pandemic continues to shift buyer preferences away from dense cities and toward more spacious suburbs. Single-family construction has now made a full V-shaped recovery and sits at an amazing 29.4% above its February pre-pandemic high. Meanwhile, new multi-unit construction is down 37.9% over the same period. The ongoing rebound in single-family construction is doubly important because each single-family unit adds much more to economic activity than each multi-family unit. Looking forward, new building permits (a leading indicator of future construction) rose 4.5% in December to a 1.709 million annual rate. Compared to a year ago, permits for single-family houses are up 30.4% while permits for multi-family buildings are down 6.6%. This stark contrast reinforces my prediction that single-family construction will continue to lead the way in the year ahead. And, as you know, I’m almost never wrong (only every other day). Look for single-family starts to post even higher numbers in 2021. In other housing news, the NAHB Index, a gauge of homebuilder sentiment, fell from 86 in December to 83 in January. But 83 is still very good. Heck, any number above 50 is worthy of celebration. Existing Home Sales. Coming on the heels of the strong report on housing starts (see above), news on existing home sales continues to demonstrate the remarkable resiliency of our housing market in the face of the COVID-19 pandemic. According to the National Association of Realtors, existing home sales increased 0.7% in December to a 6.760 million annual rate. Sales are up 22.2% versus a year ago! Nationally, sales in 2020 were the strongest since 2006. In the six counties of Southern California, sales rose 29% from a year earlier! Demand during the past year has been buoyed by the trend towards work-from-home and a desire for more space in the suburbs to escape the worst of pandemic-related restrictions and urban unrest. From February (pre-pandemic) to the bottom in May, sales collapsed 32.1%, as lockdown measures and widespread economic uncertainty took hold across our country. But since May, sales have blown past the previous February high, and are now up 17.4% from pre-pandemic levels! Another major contributor to the recent recovery has been the Fed's liquidity policies, which have helped push 30-year fixed mortgage rates to record lows, boosting affordability. The third factor is the pandemic (and the resulting public health measures) has given potential buyers a new sense of urgency, with demand for existing homes so strong in December that 70% of the homes sold were on the market for less than a month. That said, sales face a continuing headwind from the low inventory of existing homes. The NAR report shows that inventories were the lowest for any month on record back to 1999 and are down 23.0% versus a year ago. This is reflected in the months' supply (how long it would take to sell today's inventory at the current sales pace) of existing homes for sale, which is now only 1.9 months, also the lowest on record back to 1999. As a result, buyers are being forced to pay higher and higher prices because of the lack of homes for sale. The median price in the United States has now risen to $300,000. In Los Angeles County, the median price rose 11.4% from a year earlier to $700,000, while sales climbed 26%. In Ventura County, the median price rose 14.2% to $650,000, while sales climbed a staggering 39.7%. Latinos in LA Disproportionately Hard Hit with Covid. With sandy beaches and year-round sunshine, our beautiful city conjures up images of celebrities and tanned residents comfortably scattered in a suburban sprawl of roomy single-family homes. But these popular images of L.A. belie the reality for millions of residents, many of whom are considered "essential workers” and live in dense housing in even denser neighborhoods, at a time when public health officials recommend working from home and maintaining social distance. Sadly, last weekend Los Angeles became the first county in the United States to surpass 1 million confirmed Covid-19 cases and over 15,000 deaths. Worse, in a county of 10 million residents, the coronavirus has had a disproportionate effect on Latinos, who comprise 40 percent of the state's population but 55 percent of all confirmed Covid-19 cases and 46.5 percent of all deaths. In fact, death rates among Latinos in L.A. are TWICE as high as the rest of our population! And Latinos, who are half of all county residents, are hospitalized three times more often than white people. Our incredible Public Health Director and budding TV star, Dr. Barbara Ferrer, said Wednesday during her daily briefing that "the surge shows what happens as the gap widens between the people living in the highest-resource areas and those in the lowest-resource areas." Unfortunately, Los Angeles has a lethal combination of poverty and density, and that leads to rapid spread of the virus. For example, since early November, when the surge started, the death rate among Latino residents in L.A. increased by more than 800 percent, from 3.5 deaths per 100,000 residents a day to 28 deaths per 100,000 residents a day. Over the same period, the death rate among Black residents increased from less than 1 per 100,000 people a day to more than 15 per 100,000 people. In stark contrast, white residents are at less than 10 deaths per 100,000 people a day. As you can see, the problem is most acute in Latino and Black neighbor-hoods, where residents face the highest burden of sheltering in place during the pandemic. According to a study by the Latino Policy & Politics Initiative at UCLA, 40 percent of Black and Latino residents live in neighborhoods with high density, lack of green space, and few grocery stores. In a county where researchers now estimate that 1 in 3 residents has been infected with the coronavirus (since the beginning of the pandemic), the disparity between our neighborhoods has never been more stark. L.A.’s Office Market Struggles. Demand to rent offices has literally disappeared as the pandemic has left business owners wondering when employees will be able to return, if ever. Office lease signings have fallen since March, when fear of COVID-19 forced many companies to send staff members home, to work remotely or receive unemployment assistance. Overall vacancies climbed to nearly 16% in the final three months of 2020, compared to 12.3% in 2019’s fourth quarter, according to real estate brokerage CBRE. The losses capped the worst year for office leasing since the Great Recession. Understandably, managers are putting off moves as they wait to see how quickly our economy recovers and whether their space needs might change after vaccines bring an end to the pandemic and people are willing to work in offices again. The South Bay real estate market, which includes the coastal cities between Rancho Palos Verdes north to El Segundo, was one of the few areas in Los Angeles County that actually gained more rented office space than it lost in the fourth quarter. South Bay has shed its longtime dependence on the defense industry and no longer rises and falls in tandem with office districts in L.A.’s Westside. South Bay has emerged as a stand-alone very popular market. Its popularity is attributed in part to shifts in attitude in recent years among executives, who have concluded that they no longer need to keep their companies in traditional business centers such as Century City and downtown Los Angeles and have set up shop in the increasingly upscale neighborhoods along the South Bay. How companies will want their offices to look when they return from the pandemic is unclear, but don’t expect a big drop in rents. Despite the economic headwinds, the average asking price for rents sought by Los Angeles landlords in the fourth quarter climbed slightly, reflecting the reluctance by landlords to drop prices. Nevertheless, in order to compete for the reduced number of tenants in the market, landlords are offering other inducements, such as months of free rent and generous "TI" allowances for tenants to build out offices the way they like. Rents sought by landlords for the most desirable spaces in the South Bay, known for its Class A properties, averaged $4.14 per square foot per month in December compared to $3.78 in 2019’s fourth quarter. Federal Rent Relief is Coming. Landlords take heart, rent relief for your tenants is coming. And rent relief for your tenants means rental income for you! Loss of jobs and income from the COVID-19 pandemic has put many people around the country, millions by the estimate of some experts, behind on their rent payments. Eviction moratoriums, both a national one and a statewide one in California, expire at the end of the month, putting many of your tenants at risk of losing their homes and apartments. But in Los Angeles County, most evictions will be prohibited for longer even if the national and state moratoriums aren’t extended (but they will be extended). Regardless, your tenants, no matter where they live, are required to eventually pay back what they owe to you. Fortunately help is on the way. The stimulus package passed by Congress in late December includes $25 billion in rental relief funds, with an estimated $2.6 billion coming to California. Here are some things you should know as a landlord about that money. Households that make 80% or less of the median income in their area and include at least one person who qualifies for unemployment (or has experienced a financial hardship because of the pandemic) qualifies. The income qualification is determined by household income for all of 2020, or monthly income when the household applies for help. States and local jurisdictions will distribute the money and must prioritize two types of households: those with incomes at or below 50% of the area median income, and those with one or more person(s) who has been unemployed for at least 90 days. The U.S Treasury Department says tenants will be able to apply through programs set up by states and some local governments. On Jan. 12, Los Angeles City Council President Nury Martinez submitted a motion that asks staff for recommendations on how to distribute the new rental relief funds. The stimulus law says the money is supposed to go directly to you, as the landlord, once the tenant has been approved. But you can also apply on the tenant’s behalf (but you’ll need the tenant’s consent to do so). Tenants can use the money for unpaid and future rent and utility payments, as well as other housing-related expenses caused by the pandemic. The maximum a household can get is 15 months of relief, but that depends on their demonstrated level of need. For more information on rental relief, you can visit the Treasury Department’s website and look under the heading “Information for Renters.” Santa Monica Pier in Peril. The iconic Ferris wheel, along with the nearby roller-coaster and the rest of the Pier’s historic rides, have yet to re-open under Gov. Newsom’s four-tier reopening system. If you've been on the Santa Monica Pier recently, you'll notice that only locals have been visiting since it was allowed to partially reopen. As a result, retail business is a fraction of what it usually is. Oklahoma-based Premier Parks (which operates Pacific Park), as well as other businesses on the 111-year-old Pier is trying to make the best of the pandemic. The new protocols forced the closure of the Pier’s bridge at Ocean and Colorado avenues and only a single point of entry and exit on Ocean Front Walk (which nobody can see). Masks and social distancing are mandatory, and the city is limiting the number of guests on the pier to only 3,000 at any one time. As a result, businesses are open, but sales are not even close to 2019 levels. Attendance is less than half of what it used to be, and people that you see are just locals. We were there yesterday (Sunday) and it was a ghost town. Of course, vendors on the Pier welcome any business after being closed for months but locals don’t spend like tourists. This visitor mix is severely affecting sales which focuses on California- and Santa Monica-themed souvenirs. As you would expect, sales are not very good because locals are not normally buying souvenirs that say where they live. It’s usually the people who are out-of-country or out-of-state that buy touristy stuff on the Pier. The biggest challenge now for Pier businesses is educating government policymakers that when they have such reduced revenue, but their fixed expenses remain fixed, eventually they close their doors and go out of business. That’s where the Pier desperately needs legislative support. Pier businesses need immediate relief. Outside of their labor and food, rent is often times their largest fixed expense. Here’s hoping legislators will consider “decoupling” the Pier from the rest of the amusement park industry (i.e. Disneyland and Universal Studios, which are closed) since it’s an “open air, free access” venue, more like Downtown Disney and Universal CityWalk (which are open). Elon Musk sells Bel-Air Homes. As promised, the richest man in the universe has abandoned Los Angeles and moved to Texas. True to his word, Elon Musk has sold all of his remaining houses in LA. The tech billionaire ended 2020 on a selling spree, unloading four homes — three of them tucked into a quiet Bel-Air cul-de-sac — for a combined $62 million. The four sales closed a few days before Christmas. The buyer is spec developer Ardie Tavangarian, who told Bloomberg he had a contract to buy the homes in July and planned to combine them into a single project. It’s an ambitious endeavor, but it seems possible. Three of the homes share a cul-de-sac, and the fourth is found directly beneath them down the hill. Musk’s home-selling saga actually started in May, when the Tesla and SpaceX CEO tweeted that he planned to sell almost all physical possessions, including his handful of L.A. homes. The longtime California resident doubled down in December, moving to Texas and criticizing California on his way out the door. He took the selling task on himself, listing a total of seven properties scattered across the state for a combined $137 million. The homes popped up on Zillow as “for sale by owner." (Imagine calling the FSBO number and Musk answers!) He sold the first in June for $29 million and the second in October for $7 million. The latter, which was once owned by actor Gene Wilder, was purchased by a limited liability company tied to Elizabeth Hunter, wife of film director Jordan Walker-Pearlman — who happens to be a nephew of Gene Wilder. The four escrows all closed between Dec. 21 and 22, with the largest trading hands for $29.72 million — about $5.5 million more than Musk paid for it in 2016. The modern mansion was built a year earlier and sits on 1.5 acres with six bedrooms and seven bathrooms in 9,309 square feet. Musk, 49, is now the world's richest person (surpassing Jeff Bezos), with Forbes estimating his net worth at $153.5 billion. So heck, what's a few million more. LA Voted Worst Traffic City (Again). Even during the pandemic with people working at home, Los Angeles still has the nation’s worst traffic, a new study shows. Of course, you already knew that, but I thought I would let you know it’s now official (again). Was there ever any doubt? Consumer electronics company TomTom (you know, the guys that make those small GPS thingamajigs for your car's dashboard) released its new study and L.A. is ranked number one in the United States when it comes to congestion. TomTom says in 2020, Los Angeles topped the nation with a 27% congestion level (meaning 27 percent more time to get from point A to B), which is down from 42% the year before, but still far ahead of the other 19,495 cities in the United States! Doug Shupe with the American Automobile Association says Los Angeles is seeing fewer cars on the road since the pandemic, but so is every other city, so it’s not surprising that L.A. is still the worst. “This study did not surprise me because severe traffic in SoCal is something we’ve been dealing with for decades,” Shupe said. “The traffic troubles we experience in SoCal won’t go away overnight!” But he says it will get better, eventually. “There’s a lot of infrastructure projects planned before the 2028 Olympics,” Shupe naively reasons. Compared with the rest of the world, L.A. ranks 85th in congestion levels, with the worst in the world now going to Moscow. But don’t worry Moscow, we’ll catch up. Quote of the Week: “2019: Stay away from negative people. 2020: Stay away from positive people.” This Week. Looking ahead, investors will continue watching Covid case counts and vaccine distribution. The next Federal Reserve Open Market Committee meeting will take place this Wednesday (1/27). Recent comments from officials have made it clear that rate hikes will NOT be seen any time soon, so investors mainly will be looking for guidance on the Fed's inflation outlook and its bond purchase program (which affects mortgage rates). Beyond that, fourth quarter Gross Domestic Product, the broadest measure of economic activity, will be released on Thursday (1/28). The core PCE price index, the inflation indicator favored by the Fed, will come out on Friday (1/29) to end the month. Weekly Changes: 10-year Treas: Fell 0.01 points Dow Jones Avg: Rose 100 points NASDAQ: Rose 500 points Calendar: Wednesday, 1/27: Fed Meeting Thursday, 1/28: GDP Friday, 1/29: Core PCE  For further information, comments, and questions: Lloyd Segal President