Economic Update

We are no longer in a “pandemic.” We are now in an “endemic.” What does that mean, you ask? Let me use a real estate analogy. During the pandemic, the virus was like uninvited house guests that won’t leave. But in an endemic, the virus bought the house down the street and moved in. Now you have unwanted neighbors you have to avoid at all costs. In other words, the virus isn’t going anywhere, and we need to learn how to live with it. Even our very own Governor has accepted this stark reality. [Recently], he unveiled his new “SMARTER” plan (Shots-Masks-Awareness-Readiness-Testing-Education-RX), an acronym to combat Covid-19. The plan includes the capacity to administer at least 200,000 vaccines and 500,000 tests per day, as well as stockpiles of 75 million high-quality masks and wastewater surveillance for coronavirus variants, among other measures highlighted in a 30-page document. A good start to fighting this uninvited neighbor. So, with guarded optimism, the Omicron variant rapidly receding, daily new cases and hospitalizations plummeting, let’s get back to the business of real estate.

Existing-Home Sales Surge Higher

Existing-home sales increased by nearly 7% between December and January, hitting a seasonally-adjusted, annualized rate of 6.5 million, the National Association of Realtors recently reported.  Nevertheless, compared to a year ago, sales were down more than 2%. More alarming, unsold inventory dropped to a 1.6-month supply in January, representing a record low. (A balanced market is indicated by a 6-month supply of homes.) This supply imbalance is contributing to the higher median prices being reported.

For example, as of January, the median sales price for an existing home was up 15% on an annual basis to $350,300.

According to NAR chief economist Lawrence Yun, the inventory of homes priced at or below $500,000 has dwindled, while supplies of more expensive homes remain more robust. “There are more listings at the upper end — homes priced above $500,000 — compared to a year ago, which should lead to less hurried decisions by some buyers,” Yun said in the report. “But clearly, more supply is needed at the lower end of the market in order to achieve more equitable distribution of housing wealth.” Time will tell whether the jump in home sales in January is prolonged, or merely a monthly blip. Economists suggest that rising interest rates likely fueled January’s uptick. As you know, mortgage rates have rebounded significantly since the beginning of the year and the Fed is on track to tighten its policy. In this context, families probably rushed out in January to buy a house as they were concerned that rates will be even higher in the coming months. Looking ahead, the major question for investors is whether rising rates will quench housing demand stemming from a demographic tidal wave of young households at key home-buying ages.

Housing Starts Declined in January

Housing starts declined 4.1% in January to a 1.638 million annualized rate. But starts are up 0.8% versus a year ago. The drop in January was due to both single-family and multi-family starts. In the past year, single-family starts are down 2.4% while multi-unit starts are up 8.3%. As you can see, after three months in a row of gains, new home construction started 2022 on a slightly “softer” note. There were two likely sources of weakness in January. First, following the warmest December since at least 1921 (in the lower 48 states), the weather became unusually cold in January which probably slowed down activity in certain parts of our country. Second, January was the month when COVID cases were setting record highs due to the highly contagious Omicron variant. In fact, the US Census Bureau reports that 8.8 million workers called in sick in January, likely exacerbating the current labor shortages in the homebuilding industry.

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Looking at the details of the report, both single and multi-family construction posted declines. However, you can expect a rebound in construction in the coming months as these temporary factors dissipate. The good news is that builders have a huge number of permitted projects sitting in the pipeline waiting to be started. In fact, the backlog of projects that have been authorized but not yet started is currently the highest level since the reports began back in 1999.

Meanwhile, permits for new building projects rose 0.7% in January, demonstrating that builders continue to see more demand on the horizon. Compared to a year ago, permits for single-family units are down 5.0% while permits for multi-family homes are up 12.8%. With plenty of future building activity in the pipeline, builders look to boost the near record-low levels of inventory to satisfy buyers. And as more Millennials enter the housing market, it looks very likely construction will continue its upward trend. Keep in mind, we need roughly 1.5 million new housing units every year based on population growth and scrappage (i.e., voluntary knockdowns, natural disasters, etc.). Fortunately, 2021 was the first year in the aftermath of the 2008/9 recession that has crossed that threshold, and 2022 will likely exceed that benchmark as well.

Home Builder Confidence Dips Amid Supply Disruptions

The National Association of Home Builders’ monthly “Confidence Index” dropped one point to a reading of 82 in February, the trade group said. It was the second consecutive month that the Index has dropped by that amount. Despite the decline, the reading still remains strong (Index readings over 50 are a sign of improving confidence.) The NAHB actually has four indexes. The other three includes an index that measures sentiment regarding sales over the next six months, which fell two points to 80, while the index regarding prospective buyers slipped four points to 69. The bright side was the index that measures current sales conditions which rose by one point to 90. Supply-chain disruptions remain an ever-present headache for home builders. National Association of Home Builders’ chairman Jerry Konter noted in the report that many builders are waiting months to receive cabinets, garage doors, countertops and appliances. These delivery delays are raising construction costs and pricing prospective buyers out of the market. However, demand for newly-built homes remains high as prospective buyers have so few options in the existing homes market. Still, pricing is a concern in an environment where mortgage rates are rising. Low inventories support building activity, but worker shortages, high prices and limited material availability remain constraints for builders.

Retail Sales Surge as Economy Faces of High Inflation

Sales at U.S. retailers (such as Amazon and Best Buy) jumped 3.8% in January as Americans bought more cars, furniture, consumer electronics and other stuff, a very good sign for our economy. The increase in sales was the largest since last March, when Americans spent a good chunk of their stimulus money from the government. Further, a rapid decline in omicron cases during the month likely abetted the increase in spending, as did a shift in spending toward goods from services.

Some economists caution against extrapolating too much from the strong January retail report. They point out that sales snapped back after a steep 2.5% drop in December. What’s more, retail sales have shown a pattern of surging in January after declining in December going back to 2018. That suggests problems with the government’s process of adjusting sales for seasonal swings during and after the holiday season. Rapidly rising prices for gas, food, new cars and so forth, meanwhile, appear to have only played a small part in the increase in sales last month. Retail sales are a big part of consumer spending and offer clues on the strength of our economy. Based upon retail sales, it appears Americans are generally in good financial health. Savings are high, wages and salaries are rising at the fastest pace in decades, and most people feel secure in their jobs. However, high inflation threatens to sap their buying power, discourage them from making purchases, and even endanger our economy.

Sales jumped 5.7% at car dealers in January and rose sharply for the second month in a row. Demand for new vehicles is still quite strong despite record high prices and struggles by manufacturers to produce enough cars and trucks. A chip shortage has curtailed production. Auto sales account for about one-fifth of overall retail spending. Setting cars aside, retail sales still advanced a strong 3.3% last month. Sales also rose sharply at internet retailers (14.5%), furniture stores (7.2%), department stores (9.2%) and home centers (4.1%). The only retailers to record a notable decline in sales were gas stations and restaurants. The cost of fuel fell last month, though it’s starting to rise again. And restaurants suffered a drop in sales because of the omicron wave.

Inside the Staggering Rise of Industrial Real Estate

Have you noticed? Suddenly, industrial properties are one of the sexist real estate sectors for investors. It starts with the money piling into the sector: $160 billion was spent on industrial properties in the United States last year, according to CBRE, a 55% increase over 2020! Globally, industrial has grown from 11% of the real estate investment market in 2016 to 22% in 2021. The nation’s warehouse stock has grown by roughly 75% in the past three decades, with the average size of a new warehouse roughly double those built in the early 2000s. Last year, tenants leased one billion square feet, per CBRE, a record since the firm started tracking the sector. Since 1989, the national average asking rent has more than doubled. In other words, the least sexy mainstream commercial real estate asset class — by a wide margin — has become a booming sector that real estate investors are now fighting over.  In the 1980s and ’90s, and even in the early days of e-commerce, working in industrial real estate meant slow-paced days that revolved around the loyalty between tenants and landlords, a leisurely pace of leasing up new buildings, and experience instead of data analytics determining a new warehouse site. When you think about it, warehouses are one of the purest forms of real estate. “It’s not some fancy office building downtown. It’s just four walls and a roof that doesn’t leak, which means the inherent true value is where they’re located. So in locating them, you’re in tune with all the drivers of demand.” That pace and pressure have given way to a fiercely competitive, high-tech industry that has been center stage during the pandemic’s wild supply chain swings and the rise of e-commerce.  Industrial brokers have gone from a necessary evil to a needed strategic partner for brands and tenants. The activity is frantic. Deals are signed before projects break ground, just-in-time delivery is the norm, and developers are going vertical and looking in unheard-of places (including office and mall conversions) for potential locations. And landlords run the show.

Price increases for available space are headed north before there are even proposals submitted, especially considering the state of the market. Now landlords ask for bids first, and everything thereafter is basically a blind auction. Companies bid up a property and all of a sudden Amazon (a potential dark horse until any deal is signed), comes in with better credit and cash in hand and swoops up a key property. In many ways, the market is becoming a victim of its own success. For example, new multi-story buildings and mega-warehouses attract pushback from municipalities, campaigning against road congestion and the environmental costs of these buildings.

After practicing law for over 30 years (specializing in real estate litigation), Lloyd Segal assumed leadership of the Los Angeles Real Estate Club in 2017 from the late Phyllis Rockower. Lloyd is also an author, real estate investor, mentor, public speaker, and LANDLORD. He is also the author of four real estate reference books, including “Stop Foreclosure in California” (Nolo Press), “Stop Foreclosure Now” (American Management Association), “Foreclosure Investing” (Regency Books), and “Flipping Houses” (Regency Books). The Los Angeles Real Estate Investors Club (“LAREIC”) is the oldest (23 years) and largest investor club in California. In his new role as President, Lloyd has been busy expanding LAREIC events and programs for members and real estate investors. For more information visit https://www.lareic.com.