Everybody knows by now that, [recently], the Bureau of Economic Analysis released its Gross Domestic Product (the annualized rate of growth) for the third quarter (July, August & September) at 33.1%. Yes, that’s an historic high figure! But don’t get too excited just yet. That’s not the real story. Here’s why. First, the headline number of 33.1% is intrinsically misleading — it’s an annualized rate, meaning that it’s how fast the economy would grow if the actual third-quarter figures were extended out to a whole year. In truth, our economy grew by only 7.4% in the third quarter.
Second, it must be considered in the context of previous changes in the size of our economy. In the second quarter (which ended June 30), the U.S. economy was reported to have shrunk by a historic 9.46% (or 31.4% on an annualized basis). So 7.4% still doesn’t bring us back to where GDP was before the pandemic struck. All told, our economy is still -3.5% smaller than it was at the end of 2019. To recover the entire economic shrinkage of the disastrous first half of 2020, annualized third-quarter growth would have had to been 53.3%, which obviously didn’t happen. Third, there is a mathematical wrinkle to the GDP which is mindboggling: The Bureau of Economic Analysis’ quarterly figures don’t exactly measure economic growth during only the quarter. They’re actually the product of a complicated formula that takes into account economic growth over five months (not three), starting with the final two months of the previous quarter. Yes, you read that right. And, as you already know, our economy has slowed down in August and September, compared to June and July. As a result, if one takes [this recent] GDP statistic as a snapshot of the economy, it’s a snapshot that has already faded based on the slowdown in consumer spending and the escalation of COVID-19 infections in August and September.
Consumer Confidence. The Consumer Confidence Index slipped to 100.3 from 101.3 in September, the Conference Board reports. Consumer confidence waned in October, reflecting somewhat less optimism about the jobs market and the U.S. economy in the next six months amid another outbreak of coronavirus cases. Another gauge that assesses how Americans view the next six months—the so-called “Future Expectations Index,” declined to 98.4 from 102.9 in September. Apparently, fewer consumers now (compared to a month ago) think the economy will be better in six months. And slightly more said they think it will get worse. Consumer confidence has waxed and waned during the pandemic based on the number of coronavirus cases. Infections in the U.S. have risen to new highs in October (just like in much of Europe), a disturbing trend that could lead to more restrictions or people avoiding public spaces where crowds tend to gather. If the outbreak does get worse, our economy could suffer another lapse, especially in the absence of more federal aid. All in all, there is little to suggest that consumers foresee our economy gaining momentum in the final months of 2020, especially with COVID-19 cases on the rise and unemployment still high.
New Home Sales. New home sales occurred at a seasonally-adjusted, annual rate of 959,000, the U.S. Census Bureau reports. That represents a 3.5% drop from August. But compared with last year, new home sales are up 32%! The decline in September aside, year-to-date new home sales are running nearly 17% ahead of the pace set this time last year. The national median sales price in July was $326,800, up from August’s median price. The inventory of new homes was 284,000, representing a 3.6-month supply at the current pace of sales. (A 6-month supply is considered the benchmark for a balanced market.) Beyond the headline figures, the non-seasonally adjusted sales numbers sharply declined in September, falling roughly 8.5% on a monthly basis. An analysis of past sales data found that since the government began tracking this data in 1963, non-seasonally adjusted new home sales have only increased between August and September on four occasions. Nevertheless, the significant decline in not-seasonally-adjusted sales was unusual, given the strength of other housing market data that has been released in recent weeks. The number of homes sold but not yet started was up in September from the previous month, a sign that builders are struggling to keep pace with the demand for new homes. The monthly decline aside, low mortgage rates continue to fuel demand among buyers. And with the inventory of existing homes for sale dropping to record lows, many buyers will be forced to turn to newly-constructed properties. Looking ahead, builders are already delivering homes featuring today’s top desirable amenities: more space, new kitchens, home offices and gyms, as well as outdoor access. The only challenge for builders is navigating the rising costs of land and building expenses. Especially lumber costs, which are through the roof!
Home Prices Rise. The S&P CoreLogic Case-Shiller “20-City Price Index” posted a 5.2% year-over-year gain in August, up from revised 4.1% in the previous month. The separate national index released with the report noted a 5.7% increase in home prices across the U.S. over the past year. This is the fastest pace in more than two years. The strength was consistent nationally. All of the 19 large cities tracked by Case-Shiller posted increases in housing prices in August. Phoenix once again led all other markets nationwide with a 9.9% annual price gain in August, followed by Seattle with an 8.5% increase and San Diego with a 7.6% increase. Phoenix has been the strongest housing market for 15 months. While the rest of our economy struggles, the housing sector continues showing strength across the board resulting from a combination of low mortgage rates, rising demand, and shift in consumer preferences to the suburbs as a result of the pandemic. Economists expect some moderation in home price growth in the fourth quarter as the pace of home sales cools in the face of a resurging pandemic, a faltering recovery, and low inventory.
Landlords Sue to Halt Eviction Ban
Earlier this year, the city passed emergency orders banning evictions if renters were unable to pay because of hardship related to the coronavirus pandemic. In late August, Gov. Gavin Newsom signed a California state law known as the Tenant Relief Act of 2020. Under the new law, no tenant can be evicted before Feb. 1, 2021 because of rent owed due to COVID-19 hardship. In response, a federal lawsuit [has been filed] against the City, alleging L.A.’s “unconstitutional and overreaching abuse of power” has forced landlords to absorb the financial losses suffered by their tenants during the coronavirus pandemic. Last month, lawyers filed a motion for an emergency order halting the city’s moratorium. After two hours of testimony, Federal Judge Pregerson expressed disappointment over the standoff. “It’s a tragedy that the lack of an economic solution has caused essentially what we’re dealing with, which is economic warfare,” Pregerson said. “It’s a tragedy that fine people on both sides of this lawsuit have to be pitted against each other.” A ruling on the motion is upcoming. By the way, a recent UCLA study found that approximately 365,000 households in L.A. County are at high risk of eviction because of the economic recession triggered by COVID-19.
Foreclosures. ATTOM Data Solutions released its Q3 2020 “U.S. Foreclosure Market Report,” which shows there were a total of 27,016 U.S. properties with foreclosure filings — default notices, scheduled auctions or bank repossessions — in the third quarter, down 12 percent from the previous quarter and down 81 percent from a year ago to the lowest level since ATTOM began tracking quarterly filings, 2008. Foreclosure activity has ground to a halt due to moratoriums by federal, state and local governments and the mortgage forbearance program initiated by the CARES Act. However, the numbers we’re seeing today are artificially low because the number of seriously delinquent loans continues to increase. Most likely, we’ll see a significant, and probably quite sudden, burst of foreclosure activity once these various government moratoriums expire. Lenders started the foreclosure process on 15,129 properties in the third quarter — the 21st consecutive quarter with a year-over-year decrease in foreclosures. Lenders repossessed 6,076 properties through foreclosure (“REO”) in Q3 2020, down 82 percent from a year ago. You will certainly see more repossessions by lenders once the foreclosure moratoriums have ended, but maybe not as many as people might expect. Why? Because given the record amount of homeowner equity (over $6.5 trillion), many homeowners in financial distress will likely take advantage of strong demand among buyers and sell their property (rather than risk losing it at a foreclosure auction). States with the highest foreclosure rates include South Carolina (one in every 6,430 housing units with a foreclosure filing); Florida (one in every 7,797 housing units); Illinois (one in every 7,875 housing units); Alabama (one in every 8,016 housing units); and Maine (one in every 9,013 housing units). So, if you’re looking for out-of-state deals, maybe you should focus on South Carolina, Florida, Illinois, Alabama, and Maine.
Net Lease Properties. With net lease commercial properties, tenants still sign a lease. But unlike traditional leases where owners handle associated costs and property issues, net lease tenants cover costs and maintenance. With COVID-related uncertainty top of mind for many investors, net lease properties have become one of the most in-demand real estate asset types in Los Angeles County. Offering an appealing combination of steady income and hands-free management, net lease properties accounted for 20.2% of total commercial sales in the third quarter, compared with 13.3% the previous quarter, according to research from CBRE Group. In fact, the L.A. market ranked No. 3 in the nation for total net lease investment volume during the third quarter. Driving that gain was the industrial sector, which saw net lease investment increase 48%, while activity in the office and retail sectors dramatically decreased. When you’re looking at all the commercial asset classes for investors to select from — whether it’s multi-residential, hospitality, retail, office, industrial — the net lease sector has been the investment class of choice. Single-tenant properties with triple-net leases have increased in popularity due to the risk-adjusted returns compared with other asset types. Net lease properties are also attractive to investors because they have been more reliable at a time when bond market yields are low and the stock market has been unpredictable. People are especially interested in properties housing essential businesses, but not office buildings (that have not done well during the pandemic). There are several reasons industrial is setting the pace with net lease properties. But the biggest reason is stability. After all, once an owner of an industrial warehouse locks a quality tenant (like Amazon or Walmart) into a long-term triple net lease with no management obligations, it is the very definition of stability. And while shopping centers are struggling, other types of retail real estate assets are in high demand, especially grocery stores, drug stores and properties with drive-through capabilities (i.e. Taco Bell, KFC & McDonalds).
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 a mortgage banker, author, real estate investor, mentor, and public speaker. He is also the author of four real estate reference books, including Everything You Wanted to Know About Chapter 11 Bankruptcy…but Were Afraid to Ask, Stop Foreclosure Now in California (Nolo Press), and Stop Foreclosure Now (American Management Association). 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://lareic.com.