Monday Morning Quarterback

(Monday, April 15, 2024)

More than any other American city, Los Angeles is trying to address its problems by transforming its built environment. Yes, the very same Los Angeles where tens of thousands sleep outside every night; where biblical-scale natural disasters seem as common as light rain; where the freeway traffic is so slow you might as well get out of your car and dance (see photos above). Los Angeles has its problems, no doubt about it. But unlike most cities in America, LA has big plans to address them by transforming its environment. The city has come to recognize that so many of its pathologies are connected to urban planning and urban infrastructure. If it wants a better future, Los Angeles will need better “urbanism,” so to speak. LA’s big plans for housing, transit, and streets will never be enough, on their own, to end homelessness, seriously reduce inequality, heal the environment and keep people healthy and safe. Even the most utopian urban planning interventions can’t fully address every social, economic, environmental and political problem. There’s so much more LA can do, and plenty it can do better. But what LA is already doing will help a lot. Angelenos ten or twenty years hence will benefit enormously from the urban policies the city is pursuing today. Every other American city would do well to watch, learn and copy. Take housing for example. LA voters have put their money where their mouth is and consistently voted in favor of affordable housing, including the Measure HHH bond issue in 2016 and the “mansion tax” passed last year. The mansion tax is a testament to the strength of LA’s tenants rights groups, which put forward the measure and led the campaign. These origins left their imprint on the final law, which will include significant funding for rental assistance and eviction defense in addition to money for new construction. And LA leaders are increasingly recognizing that they need to do more. Funding affordable housing and protecting tenants are necessary, but not sufficient, to address the city’s housing woes. The other side of the equation is simply making it easier to build. The city took a major step forward on this front with Mayor Karen Bass’ first action in office, an executive order that exempts affordable housing projects from most zoning and building codes. The policy, known as ED1, has been successful beyond anyone’s expectations. In just over a year, developers have proposed 16,000 new units of affordable housing under the program, roughly double the figure from prior years, with no additional public subsidy. In other real estate investor news, let’s get it on…

Consumer Price Index Rose In March. Consumer prices rose 0.4% in March, pushing the twelve-month comparison up to 3.5%. At this point it looks clear that the progress against inflation made from mid-2022 to mid-2023 has stalled. Consumer prices were up 9.1% in the year ending in June 2022. While many thought the drop back to 3.0% in the year ending in June 2023 was all due to the Fed, it was likely influenced greatly by supply chain disruption and recovery. With CPI inflation back up to 3.5% from a year ago, it is clear that the problem has not gone away. Looking at the details, March inflation was boosted by energy prices, which rose 1.1% on the back of higher prices for gasoline. However, it’s important to point out that energy has not been the culprit for the stubbornly high inflation readings over the last year; energy prices are up 2.1% in the same timeframe versus 3.5% for overall prices. But stripping out energy and its often-volatile counterpart (food) to get “core” prices does not make the inflation picture look any better. That measure rose 0.4% in March for the third consecutive month, while the twelve-month comparison remained at 3.8%, proving that underlying pricing pressures remain stubbornly high. Rental inflation (both for actual tenants and the imputed rental value of owner-occupied homes) continue to defy predictions of imminent reversal, rising 0.4% for the month and running at or above a 5% annualized rate over three-, six-, and twelve-month timeframes. Housing rents have been a key driver of inflation over the last year, and economists expect it to continue to do so, as it makes up a third of the weighting in the overall index and still hasn’t caught up with the rise in home prices in the past four years.  

Why It’s So Hard To Buy A House Right Now. House hunters and investors looking to buy a house this spring are continuing to find the housing market challenging. Bidding wars have never left in some markets. Mortgage rates remain near 7%, squeezing how much buyers can afford. Home prices continue to rise. “Limited inventories of existing homes for sale, high prices and still-elevated mortgage rates are likely to act as headwinds for housing activity,” according to a note from BofA Global Research. But a broader uptick in new-home construction could offer a way out of the current gridlock between keen home buyers and reluctant home sellers who have rock-bottom mortgage rates they don’t want to give up. Housing affordability has deteriorated as the 30-year mortgage rate has risen over the last two years. The rate on a 30-year mortgage averaged at 6.74% as of April, according to Freddie Mac. Every decline or increase in mortgage rates equates to hundreds of dollars in savings or extra costs, respectively. So even though rates “remain elevated, even incremental declines can help support activity on the margin through improved affordability,” BofA wrote. If mortgage rates fall in the coming months, as many forecasters expect, that could bring down borrowing costs and improve transaction activity. However, “there is risk that Fed [interest-rate] easing cycle gets delayed,” the BofA economists noted, “which could limit the decline in mortgage rates.” Affordability will also improve if more home listings hit the market, the BofA economists wrote. As seen in the chart above, existing-home listings are currently low, as homeowners who refinanced or bought a home during the pandemic secured rock-bottom mortgage rates and now have little incentive to move as a result, causing the so-called “lock-in effect.” That has helped spark the market for new homes, with builders ramping up construction to meet strong home-buyer demand. Home builders are optimistic that demand will remain strong through the rest of the year. A March survey of builders revealed that confidence in the market was at the highest level since July 2023. Buying a home remains challenging as home prices continue to rise. New home prices have moderated, however, as builders deploy sales incentives such as price cuts to draw buyers in.

US Population Just Had Its Largest One-Year Increase in History. The U.S. has just experienced its largest one-year demographic increase in the country's history. Growing by over 3.8 million in 2023, mostly due to immigration, according to a recent report by John Burns Research and Consulting (JBREC). Immigration is one of the biggest issues ahead of the 2024 presidential election, with polls showing widespread concern. Eric Finnigan, vice president of Building Products Research and Demographics at JBREC, wrote about the report on X, formerly known as Twitter, saying that "the population surge is likely short-lived" as it's almost entirely due to immigration, which is "conditional on policy, legislation, regulations" and others. "Even so, the surge will have important ripple effects for years through housing, the economy, and the rest of society," Finnigan added. On December 19, the U.S. Census Bureau stated that the American population had grown by more than 1.6 million over the year 2023, reaching a total of 334,914,895 people. While the uptick was still historically low compared to pre-pandemic time, the Bureau wrote, 2023 saw a bigger increase than 2022 and 2021. Most of this growth (87 percent) was driven by the South, the most populous region in the country, which increased by over 1.4 million residents in 2023. According to the Census, the growth in the South can mostly be attributed to migration, with 706,266 people moving from other regions of the U.S. to the South and almost 500,000 coming from outside the country. Population growth can have a positive impact on a country's economy, with more people bringing up demand for goods and encouraging economic growth. On the other hand, the massive influx of migrants crossing the southern border has concerned many across the country, who fear the U.S. will be overwhelmed by the arrival of so many people.

The Year Of The Mansion Tax. One year ago, Los Angeles’ “mansion tax” took effect. It has either been a godsend or an absolute disaster, depending on who you ask. The transfer tax (formally known as “Measure ULA”) levies a 4% charge on all property sales above $5 million and a 5.5% charge on sales above $10 million, with proceeds funding affordable housing and homelessness initiatives. When L.A. voters approved the measure in November 2022, it quickly became the dominating storyline in L.A. real estate. Proponents say the tax generates crucial funding to address L.A.’s housing crisis, and they’re right. In its first year, Measure ULA has raised roughly $215 million, according to the L.A. Housing Department. The L.A. City Council passed a $150 million spending plan for ULA funds in August, and the money has been flowing into six programs: short-term emergency rental assistance, eviction defense, tenant outreach and education, direct cash assistance for low-income seniors and people with disabilities, tenant protections and affordable housing production. Critics, including many L.A. real estate professionals, claim the tax has hampered the market — not just luxury home sales, but also multifamily developments and commercial properties, since the tax applies to all property sales above $5 million. They’re also right. When the tax first took effect on April 1, 2023, it all but froze L.A.’s luxury real estate market, with many sellers pulling their homes off the market at the prospect of paying an extra few hundred thousand in taxes if they sold. A year later, the market is still just as icy. The striking slowdown is partly due to chilled buying across Southern California, as soaring interest rates keep many prospective buyers out of the house hunt altogether. But in L.A. (the only city affected by the tax) home sales above $5 million have plummeted at twice the rate of other affluent cities, as buyers opt for homes in neighboring areas that aren’t subject to the tax. From April 2022 to March 2023, the year before Measure ULA hit, L.A. had 366 single-family home sales of $5 million or more. In the 12 months since, there were just 166 — a drop of roughly 68%.

Mapping the Future. Depending on who's doing the estimating, America housing is short anywhere from 2 million to 6 million. If you've tried to buy a place in the past year (or you know anyone who has), then you don't need me to tell you that. Hardly anything's on the market, and none of us can afford what is. The question is: Why? That simple question, oddly, has been impossible to answer with any real precision. The housing shortage may be national, but the problem is local. Where homes get built, how many, what type, how big the lot has to be, how many meetings it takes to build something new — those things are all governed by zoning rules. And every town and village and city zones itself. Which means there are more than 30,000 different sets of zoning rules in America. When it comes to housing, we're a nation of “islands,” governed by no central authority. To make matters worse, each of those 30,000 islands has its very own language for those rules. Many maps favor the suburban ideal of single-family homes on expansive lots, while essentially disallowing every other form of housing. One place might call a two-family home a duplex (and allow it), where another code might call it a "townhome" or just "multifamily" (and nix it). In some places, "mixed-use" means a neighborhood that combines homes and shops (nope!); in others it means a combination of offices and industry (sure, why not?). Some cities have maps digitally coded into a standard geospatial data format; other towns still use paper. In city after city, the rules are woefully outdated, head-scratchingly obscure, or outright racist. If you could decipher all those rules, and make comparisons between different cities and states, you might be able to figure out which rules let more homes get built, and which ones don't. But no one has ever assembled America's zoning regulations in one place, let alone force them to use the same words to mean the same things — until now. For the first time, a team of researchers is compiling every city's zoning rules into a National Zoning Atlas. That means everyone from policymakers to homeowners will be able to look at their local zoning maps and understand their town's hidden architecture. And maybe, armed with that information, we'll finally be able to remodel America's fixer-upper of zoning policies into a tasteful showcase for starter homes and cheap apartments. Stay tuned.

California is Building Fewer Homes. Across California and the nation, developers started fewer homes in 2023, a decline some experts say could eventually send home prices and rents even higher as supply shortages worsen. Developers cite several reasons for delaying new projects. There’s high labor and material costs, as well as new local regulations that together make it harder to turn a profit. Perhaps the biggest factor (and one hitting across the country) is the high cost of borrowing. High interest rates not only make it more expensive for Americans to buy a home, but they add additional costs for developers who must shell out more money to build and manage their projects. As a result, fewer projects make financial sense to build and fewer homes are built. In all, preliminary data from the Census Bureau show building permits for new homes nationwide fell 12% in 2023 from the prior year and 7% in California. Drops were recorded in both single-family homes (most of which tend to be for sale) as well as multifamily homes (which are chiefly rentals). Then a funny thing happened. Demand for their product didn’t crater as much as expected, in large part because existing homeowners didn’t want to sell and rid themselves of ultra-low mortgage rates. As for-sale builders restart their engines to take advantage of a shortage of listings, there are signs of improvement. During the first three months of this year, builders in California pulled 35% more permits for single-family homes than during the same period a year earlier, according to census data. Permits for multifamily continued to decline — dropping 33%. The diverging paths are probably due to several factors, said Rick Palacios Jr., director of research for John Burns Research and Consulting. On a whole, single-family home builders have access to a wider source of debt that isn’t as vulnerable to rising interest rates. 

Golden Toilet Stolen at Churchill’s Birthplace. Four men were charged last Monday with the theft of an 18-carat gold toilet from Blenheim Palace, the sprawling English country mansion where British wartime leader Winston Churchill was born. The toilet, valued at $5.95 million, was an artwork titled “America” and intended as a pointed satire about excessive wealth in the USA by Italian conceptual artist Maurizio Cattelan. It was part of an art installation at Blenheim Palace, near the city of Oxford, a few days before it vanished overnight in September 2019. The Crown Prosecution Service said Monday it has finally authorized criminal charges against four men, ages 35-39, over the theft. They are accused of burglary and conspiracy to transfer criminal property. But here’s the crazy part of this story. The golden toilet was fully functioning! Yes, it was a working toilet at the museum! Prior to the theft, visitors to the exhibition could book a three-minute “appointment” to actually use it. The museum said the artwork invited viewers to “make use of the fixture individually and privately” to experience “unprecedented intimacy with a work of art.” Police said that because the toilet had been connected to the palace’s plumbing system, its removal caused “significant damage and flooding” to the 18th-century building, a UNESCO World Heritage site filled with valuable art and furniture that draws thousands of visitors each year. In 2021, the Thames Valley Police, the force investigating the theft, suggested that it would be a “challenge” to recover the toilet. And indeed, the toilet has never been found. “Will we ever see that toilet again? Personally I wonder if it’s even in the shape of a toilet to be perfectly honest,” police and crime commissioner Matthew Barber told the BBC. “If you have that large amount of gold I think it’s likely that someone has already managed to dispose of it one way or another.” The four suspects will appear at Oxford Magistrates’ Court next week, prosecutors say.

Basic Training Investing Boot Camp. Saturday, April 27, 2024, 9:00 am to 6:00 pm, will be our semi-annual Basic Training Boot Camp. Everything you ever wanted to know about real estate investing but were afraid to ask. Iman Cultural Center, South Hall, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034.The cost of the Boot Camp is $149.00 per person if paid before April 20. After April 20, the price jumps to $1 million! So don’t wait to register. (Gold Members and former Boot Campers can attend for FREE, but still need to register.) You can register at LARealEstateInvestors.com. 

Vendors Expo Returns! Our world-famous, super-duper "Vendors Expo" returns on Thursday night, May 9, 2024. The Vendor Expo opens starting at 6:30 pm. We'll have 40+ of the finest vendors featuring real estate products and services you will want to utilize as a successful investor. Stick around after and enjoy our guest speaker. Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, CA 90034. FREE Admission. Metered and free street parking. Please RSVP at www.LARealEstateInvestors.com.

You Go Girl! Meet Women Who Rock Real Estate.  Join us on Thursday night, May 9, 2024, when we have a very special panel on women investors. Our moderator will be Deborah Razo, President of the Women’s Real Estate Network (“WREN”). Deborah is an all-star investor, including fixing and flipping houses, residential construction, and multi-residential properties in the U.S. and Puerto Rico. The panel will feature Cindy Coleman discussing note investing, Angela Sillmon discussing short-term rentals, and Jen Maldonado discussing raising capital for your projects. The women will be discussing how they started investing and challenges they confronted along the way. If you’re a woman investor, DO NOT miss these talented women! (men, you can attend - but at your own risk!) Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034 (Culver City adjacent). FREE Admission. Metered street parking. RSVP at www.LARealEstateInvestors.com.

“Cash Flow Chronicles” Podcast. We are so very excited about our podcast, "Cash Flow Chronicles" hosted by our very own Bill Gross. Bill has been a Realtor, broker and real estate investor since the Ice Age! No one is more experienced in local Southern California real estate than Bill Gross. Each week, Bill interviews real estate professionals sharing their insights and advice. Every Tuesday at 3:00 pm, and anytime thereafter on YouTube, Facebook, and Google.

This Week. Investors will continue to watch for Fed officials to elaborate on their plans for future monetary policy. For economic reports, Retail Sales will come out on Monday from the Census Bureau. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key measure of the health of the economy. Housing Starts will be released on Tuesday from the Department of Housing and Urban Affairs and Existing Home Sales on Thursday from the National Association of Realtors.

Weekly Changes:

10-Year Treasuries:           Rose  010 bps

Dow Jones Average:          Fell    600 points

NASDAQ:                           Rose  050 points

Calendar:

Monday (4/15):                    Retail Sales

Tuesday (4/16):                   Housing Starts

Friday (4/10):                       Existing Home Sales

For further information, comments, or questions:

Lloyd Segal President

Los Angeles County Real Estate Investors Association This email address is being protected from spambots. You need JavaScript enabled to view it.

310-792-6404