Monday Morning Quarterback

Los Angeles County Real Estate Investors Association, LLC

Your investing starts here...

Published Jun 19, 2023

(Happy Juneteenth)

California’s housing crisis and climate crisis are often treated as if they are unrelated issues. But, in reality, they are deeply intertwined. California must add at least 2.5 million new homes by 2030 to meet its needs. Decades of underproduction have exacerbated skyrocketing rental prices, put homeownership increasingly out of reach for most Californians and pushed more of our neighbors into homelessness than in any other state. The housing shortage is driven in part by local government policies that prevent new housing from being built in existing neighborhoods (“Nimbys”), forcing more and more developments into ex-urban and rural areas. As a result, without enough affordable housing near jobs, schools, transit and other resources in existing communities, Californians are increasingly forced into long commutes from remote areas that are often more vulnerable to wildfires, flooding, and other climate-accelerated disasters. In fact, between 1990 and 2022, half of the housing developments in California were at the edge of wilderness areas, euphemistically known as the “wildland-urban interface.” As a result, about 25% of Californians now live in areas at high risk of catastrophic wildfire. Expanding new housing into these natural lands not only puts more people in harm’s way; it also increases the likelihood, frequency and devastation of fires, floods and other disasters. Why? Because human activities spark most wildfires. Worse, housing developments often pave over floodplains (that could otherwise absorb rainfall and runoff), making floods more destructive. As a consequence, California has lost more than one million acres of natural habitat to development over the past 20 years. As you know, forests, wetlands, coastal areas, grasslands and rivers provide clean air, fresh water and access to green spaces for all of us. But constructing housing in these remote regions fragments wilderness, reduces community resilience and exacerbates the global bio-diversity and climate crises, affecting every Californian. This is why I say we need to reframe the way we think about the relationship between housing policies and climate change. First, we need to significantly increase the number of homes we build. But if we build in the undeveloped wildland-urban interface, we will only worsen the climate crisis. Building housing far from jobs doesn’t just require longer commutes and new roads (increasing the pollution that causes climate change). It also reduces the landscape’s ability to store carbon by paving over natural and agricultural lands that would otherwise remove it from the atmosphere. Worse, these developments destroy wildlife habitat and increase water demand in areas where wells are already running dry. The solution is what housing advocates have been crying about for years. Rapid development of housing must be increased in the cities, in urban centers, near jobs, schools, transit, and other urban resources. As you can see, these problems are inextricable from each other, and need to be tackled together with a clear vision for our future. In other real estate news, let’s dig into the details…

The Fed Is Mixed Up. Last Wednesday, the Fed remained focused on its target for short-term interest rates, which it decided to keep temporarily unchanged in the 5.00 to 5.25% range. However, at the same time that it decided not to raise rates it decided to amend the “dot plot” to show two more quarter-point rate hikes later this year. It also changed the language in the policy statement to make it clear it’s looking for more information to decide “how much” to raise rates later this year, not “whether” to raise rates later this year. (Notably, no one on the FOMC – the Fed’s rate-setting committee – predicted a rate cut this year.) In one way, this makes sense: the Fed is now forecasting better economic growth and lower unemployment this year, so a higher peak rate makes sense. But if the Fed expects to raise rates twice later this year, why not raise them at least once now? Fed Chairman Powell noted at the press conference that core measures of inflation remain stubbornly high, suggesting the Fed is discounting recent lower readings on inflation, which have been largely driven by lower energy prices. So, again, why not raise rates last week? And once again, the Fed uttered not one peep about the money supply in its policy statement, nor did any journalist broach the topic.

Producer Price Index Declined In May. To paraphrase hockey legend Wayne Gretsky, go to where the puck is going, not where it is. In other words, while the media focuses on the Consumer Price Index, real estate investors should pay attention to the Producers Price Index (“PPI”). Why? Because the PPI shows us where the CPI is going (not where it is). And this is important because the producer prices declined for the third time in four months, falling 0.3% in May. The year-ago comparison for producer prices, now up 1.1%, has been moderating since the 11.7% peak in March 2022. Keep in mind, though, part of the moderation is due to outsized jumps in inflation immediately after the invasion of Ukraine last year, which are now rolling off year-ago calculations. Taking a look at the details of the report shows that “core” prices (which excludes the typically volatile food and energy components) rose 0.2% in May and are up 2.8% in the past year. The services sector led prices higher in May, rising 0.2%. Meanwhile, goods prices fell 1.6% in May, led by a 13.8% decline in the costs for gasoline. While some good news on inflation is welcome, data from CPI Report shows the Fed’s job is not yet over. Our economy is in the grips of a battle between the ongoing impacts from the tsunami of money that hit the system in 2020-2021 (and is still being absorbed), while at the same time starting to show signs of the riptide from the Fed and Treasury Department now pulling money out of the system. Economic growth remains modestly positive, but a recession looks likely in the not-too-distant future. How the Fed will respond if/when a recession appears is very much an open question. The Fed’s failures in the 1970s should be a stark reminder of the painful results of easing before the battle against inflation is fully won.

Foreclosure Activity Spikes In May 2023. ATTOM data services released its May 2023 U.S. “Foreclosure Market Report,” which shows there were a total of 35,196 properties with foreclosure filings (i.e. default notices, scheduled auctions or bank repossessions) up 14 percent from a year ago. The recent increase in foreclosure filings nationwide indicates a trend that has been observed throughout the year. Nationwide one in every 3,967 housing units had a foreclosure filing in May 2023. States with the highest foreclosure rates were Illinois (one in every 2,144 housing units with a foreclosure filing); Maryland (one in every 2,203 housing units); New Jersey (one in every 2,257 housing units); Florida (one in every 2,470 housing units); and Ohio (one in every 2,478 housing units). Among the 223 metropolitan statistical areas with a population of at least 200,000, those with the highest foreclosure rates in May 2023 were Lakeland, FL (one in every 1,361 housing units with a foreclosure filing); Elkhart, IN (one in every 1,621 housing units); Cleveland, OH (one in every 1,622 housing units); Palm Bay, FL (one in every 1,647 housing units); and Ocala, FL (one in every 1,671 housing units). Those metropolitan areas with a population greater than 1 million with the worst foreclosure rates in May 2023, including Cleveland, OH, were: Jacksonville, FL (one in every 1,699 housing units); Baltimore, MD (one in every 1,908 housing units); Chicago, IL (one in every 1,991 housing units); and Orlando, FL (one in every 2,049 housing units). Lenders repossessed 4,020 U.S. properties through completed foreclosures (REOs) in May 2023, up 41 percent from last year!

Westfield Walks Away From San Francisco Downtown Mall. It’s called “Deed in Lieu of Foreclosure.” It’s when a borrower/owner gives back its property to the foreclosing lender rather than suffering through the foreclosure. It happened last week in San Francisco. The owners of the Westfield San Francisco Centre Mall have stopped paying their loan and are giving up the property to the lender, adding to deepening real estate pain in a city struggling to bring back workers and tourists after the pandemic. The mall, co-owned by Unibail-Rodamco-Westfield and Brookfield Corp., has $558 million in outstanding mortgage debt. Management will be turned over to a receiver. The move comes a month after Nordstrom Inc. said it was closing its store at the site, citing a dramatic drop in customer traffic and the changing dynamics of the city. The mall is in the heart of San Francisco’s Union Square district one of the downtown’s main shopping and tourist areas. Westfield San Francisco Centre is the city’s biggest shopping center and features the historic Emporium department store dome rebuilt after San Francisco’s devastating 1906 earthquake and painstakingly restored for the mall’s 2008 opening. San Francisco has been among the hardest-hit cities since the pandemic as office vacancies soar, retail vacancies rise and concerns about safety deter visitors. Sales at Westfield San Francisco Centre fell to $298 million last year from $455 million in 2019, while foot traffic dropped 43%. The company last year sold the Westfield Santa Anita mall for $537.5 million to Southern California real estate investor Wen Shan Chang, who changed the Arcadia shopping center’s name to the Shops at Santa Anita. It was the largest mall sale in years.

The Broad (2015) by Diller Scofidio + Renfro. In many ways, the architects at Diller Scofidio + Renfro are modern-day magicians. Take, for example, their design of The Broad in downtown Los Angeles. The structure itself holds a nearly 2,000-piece collection of contemporary art, making it, in theory, like any other museum in the world. Yet, that's where the similarities abruptly end. The 50,000-square-foot building acts as a seamless buffer between the inside and outside world. "Most museums are opaque to the street and inwardly focused. The Broad uses a semi-porous system—dubbed 'the veil'—to foster more of an urban interface," says Elizabeth Diller, partner and cofounder of the New York–based firm, DS+R. "The veil's porosity suggests two-way vision. It tempts you from the street through its lifted corner, while views from within the gallery are oblique so visitors are not distracted, without being entirely cut off from the world." This honeycomb-like design also enhances the artwork housed within the structure, making the striking exterior multifunctional in its aesthetics. "The veil's walls are also engineered so that, despite the movement of the sun, no direct sunlight will ever penetrate the space. The cellular structure all around acts like a sponge absorbing and transmitting light as needed."

Obsolete Lighthouses For Sale. If you’ve ever dreamed of owning into your own lighthouse, then the government might just help your dream come true. The General Services Administration is selling four lighthouses through public auctions and giving away six others to nonprofits and government entities. It’s a record number of lighthouses up for grabs during a summertime period the GSA refers to as “lighthouse season.” Lighthouses were once powerful beacons that helped sailors and ships safely navigate dangerous waters and rocky coastlines. But technology and GPS have replaced these coastal watchtowers, and they’ve fallen into disrepair, the GSA says. Bidding for the Stratford Shoal Middle Ground Light Station, which sits on a submerged reef in the middle of Long Island Sound midway between New York and Connecticut, starts at $10,000. The Penfiled Reef Lighthouse off Fairfield, Conn, with its 19th century aesthetics and two-story keepers quarters, starts at $50,000. Also available for bidding is the Cleveland Harbor West Pierhead Light, which offers views of the Cleveland skyline, starting at $25,000, and the Keweenaw Waterway Lower Entrance Light an early 20th century structure with 1,000 square feet of interior space at the southern end of the Portage River in Chassell, Mich., starting at $10,000. Six others are also coming up for sale. If no organization applies or is approved for ownership, then the six lighthouses also will be auctioned. Congress passed the National Historic Lighthouse Preservation Act in 2000 to protect lighthouses and help transfer them to new owners. More than 150 lighthouses have been saved, including 81 transferred at no cost to local governments and nonprofit entities and about 70 sold at auction, raising more than $10 million for the U.S. Coast Guard. New owners should expect to have to paint, clean and possibly restore broken or missing items in the lighthouses or set up utilities to make them livable, the GSA says.

Mayor Bass Wants To House 17,000 Angelenos. L.A. Mayor Karen Bass promised to house 17,000 unhoused Angelenos by the end of her first year in office. Last week she shared a progress update: 14,381 people have been housed since her term began in December. That puts her about 80% of the way toward her goal. About 70% of these people were housed through temporary housing programs like Inside Safe and tiny homes. The 14,381 number reflects the number of people who have been placed into housing since December 2022, not the total number of unhoused people in housing. It also does not reflect people who have left a housing program (data the Bass administration has promised to collect and make public). But clearly these numbers mark a significant increase from the mayor’s last update in March for her first 100 days in office. At that time, she said only 3,873 people had been housed. This weekend she said that number from March was an undercount because they did not include several temporary housing or voucher programs in that calculation.

Sherpa Carries Malaysian Climber To Safety In Everest Rescue. If you sometimes have difficulty keeping real estate investing in perspective, I need only tell you about Sherpa guide Gelje. Gelje, 30, was guiding a Chinese client to the 8,849 metre Mt. Everest summit on May 18 when he saw a Malaysian climber clinging to a rope and shivering from extreme cold in the area called the "death zone" (where temperatures can dip to -30 C or lower). The hiker, identified as 33-year-old Malaysian national Ravi, was wrapped up and strapped together in a cocoon-like contraption. Gelje hauled the climber 600 metres down from what's known as the Balcony (an area close to the summit - to the South Col — a rocky, wind-swept area at about 7,924 metres) over a period of six hours, where Nima Tahi Sherpa, another guide, joined the rescue. "We wrapped the climber in a sleeping mat, dragged him on the snow or carried him in turns on our backs to Camp III," Gelje said. Gelje saddled him on his shoulders and carried him down to Camp IV, where a rescue team awaited them. A helicopter using a long line then lifted him from the 7,162-metre high Camp III down to base camp. Gelje said he convinced his Chinese client to give up his summit attempt and descend the mountain, saying it was more important for Gelje to rescue the climber. "Saving one life is more important than praying at the monastery," said Gelje, a devout Buddhist. Ravi is alive today thanks to Gelje and the other Sherpas, who risked their lives for a stranger. BTW, Nepal issued a record 478 permits for Everest during this year's March to May climbing season. At least 12 climbers have died (the highest number in the past eight years) and another five are still missing on Everest's slopes.

Basic Training Boot Camp. Saturday, June 24, 2023, 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 $249.00 per person. 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 carbon-neutral, bio-degradable, gluten-free, super-duper "Vendors Expo" returns on Thursday night, July 13, 2023. The Vendor Expo opens 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. Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, CA 90034 (Culver City adjacent). FREE Admission. Please RSVP at www.LARealEstateInvestors.com.

An Evening with Rick Sharga. We have a very special guest for our July meeting. There aren’t many celebrities in the real estate world, but there is one very special individual who stands out. When CNN or Bloomberg need a real estate expert, there is only one person they interview. When CBS or NBC News need analysis of a difficult real estate issue, there is only person they call. When CNBC or ABC News need a real estate authority on a breaking story, there is only one person they turn to. When NPR or the Wall Street Journal need a quote from a real estate expert, there is only one person they ask. Heck, other than Kim Kardashian, probably no one appears on TV, radio, online, or in print more frequently than Rick Sharga, the number #1 authority in real estate economics. And we have him exclusively at our July 13th meeting. The title of Rick’s presentation will be “Real Estate Investing in an Uncertain Economy.” Thursday night, July 13, 2023. Iman Cultural Center, 3376 Motor Avenue, Los Angeles, CA 90034. FREE Admission. Please RSVP at www.LARealEstateInvestors.com.

“LARealEstateInvestors.com” Podcast. We are so very excited to announce our new podcast, "LARealEstateInvestors.com" (named after our domain) hosted by our very own Bill Gross. Bill has been a Realtor, broker and real estate investor forever! 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 for real estate investors. Every Tuesday live 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. Although the Fed did not raise interest rates last week, they indicated they will have two more rate hikes for the remainder of the year. It will be a light week for economic data with a focus on the housing sector. Housing Starts will be released on Tuesday by the Commerce Department and Existing Home Sales on Thursday from the National Association of Realtors. Mortgage markets will be closed on Monday in observance of Juneteenth.

Monday Morning Quarterback

Los Angeles County Real Estate Investors Association, LLC

Your investing starts here...

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