Monday Morning Quarterback

(Monday, December 23, 2024)

Homelessness has been a challenge in the United States since before it was a country, as the early colonies struggled to address the “wandering poor.” Today, it is a full-on crisis. And as real estate investors we must focus on solving the homeless crisis. The Department of Housing and Urban Development reports that in 2023, more than 650,000 in the U.S. were unhoused due to factors including rising housing costs, immigration, unemployment, mental illness, and the end of COVID-19 relief programs. Among the states, California, of course, tops the charts, with nearly 30% of America’s homeless and 50% of the nation’s unsheltered homeless. However, innovative new solutions are bringing fresh glimmers of hope. Founded during the pandemic, nonprofit DignityMoves is developing interim supportive housing communities in California on temporarily vacant land with prefabricated, relocatable “tiny home” structures, to give every resident their own room with a door that locks. In these communities, service providers offer critical case management, supporting residents in achieving the stability and security needed to transition out of homelessness. As a new model, this “interim supportive housing” is proving to be a lynchpin solution to homelessness. Of the 610 formerly unhoused individuals who’ve resided in the first four DignityMoves communities, 307 have transitioned to more permanent housing so far. Part of DignityMoves’ innovation is that they identify vacant or under-utilized land that they can “borrow” for a few years, rather than purchasing permanent property for the communities. In this way, an unused half acre (such as a parking lot, odd-sized parcel, or future development location awaiting entitlements) can quickly become a community of 70 rooms, complete with ample common areas. Using emergency building codes to cut through red tape and modular materials to build quickly and at scale, these communities are designed to be temporary and transportable; they can be moved to a new neighborhood in need when the time is right. DignityMoves is partnering with cities throughout California to bring their model where it is needed most and they’re leading the movement to integrate sustainable and scalable interim housing solutions into the toolkit for addressing homelessness. Plus, DignityMoves is partnering with companies like Azure Printed Homes, who are using recycled materials, energy-efficient design, and 3D printing to rapidly deploy modular constructions. Headquartered in Los Angeles, Azure prints sustainable and cost-effective tiny homes from eco-friendly polymer waste. By automating the construction process, they can significantly reduce labor costs and construction time, which is a game-changer in the homelessness crisis, where the needs are dire and rapid intervention is vital. In other real estate investors news, let’s get under the hood…

Housing Starts Declined in November.  November was another tough month for homebuilders, as housing starts missed consensus expectations and declined 1.8%, falling to a four-month low. However, the details for November were not quite as bad as the headline. The decline in starts in November was entirely due to a 23.2% drop in the volatile multi-family category, which more than offset a 6.4% rebound in single-family construction as hurricane weather delayed activity in the South and Northeast regions the previous month. Another silver lining is that permits for new builds jumped 6.1% in November to a nine-month high, although that was driven by a 19.0% jump in the multi-family category. Still, building permits and housing starts appear to be stuck in low-gear, down 0.2% and 14.6%, respectively, from a year ago, and sit at roughly the same levels as 2019. The same cannot be said for completions. Despite a third straight monthly decline, completions are up 9.2% in the past year and were at a faster pace in November than any month from 2021-2023. With strong completion activity and tepid growth in starts, the total number of homes under construction continues to fall, now down 14.6% since the start of 2024. That type of decline is usually associated with a housing bust or recession. The home building sector seems strangely slow given our population growth and the ongoing need to scrap older homes due to disasters or for knockdowns. Economists think government rules and regulations are likely the major hurdle for builders in much of our country. But home construction might also be facing headwinds from a low unemployment rate (which makes it harder to find workers) as well as relatively high mortgage rates. Notably, while mortgage rates were trending lower leading up to the first rate cut announcement from the Federal Reserve in September, these rates are up roughly 50bps since then. That said, there are some tailwinds for housing construction, as well. Many owners of existing homes are hesitant to sell and give up their fixed sub-3% mortgage rates, so prospective buyers will often need newly built homes. In addition, Millennials are now the largest living generation in the US and have begun to enter the housing market in force, which represents a demographic tailwind for sales activity. Putting it together, economists don’t see housing as a major driver of economic growth in the near term, but they’re not expecting a housing bust like the 2000s, either.  

Home Sales Rebound as Buyers Seize a Dip in Mortgage Rates. U.S. existing-home sales rose to an eight-month high in November as home buyers seized relatively lower mortgage rates. But that rebound could be called into question in the coming weeks as mortgage rates and home prices are moving higher, making it more difficult for home buyers to afford properties. Sales of previously-owned homes rose 4.8% to an annualized rate of 4.15 million in November, the National Association of Realtor reports. That’s the highest level since March. (That’s the number of homes that would be sold over an entire year if sales took place at the same rate in every month as it did in November. The numbers are seasonally adjusted.) Home sales in November rose by 6.1% from a year ago, which is the biggest annual gain in over three years, since mid-2021. The sales number refers to deals closed in September and October, as the data is reported 30 to 60 days after a contract is signed. Meanwhile, the median price for an existing home in November rose 4.7% to $406,100, as compared with the year before. Eighteen percent of homes were sold above list price, which is down slightly from 19% a month ago. Homes received an average of 2.1 offers. The total number of homes listed on the market in November rose 17.7% from last year, to 1.33 million units. There is a 3.8-month supply of unsold inventory. Listed homes remained on the market for 32 days on average, up from 29 days in the previous month. All-cash buyers (i.e. investors) made up 25% of sales. The share of second-home buyers was 13%. Thirty percent of homes were sold to first-time home buyers. But it’s unclear if that momentum can be sustained, as the 30-year mortgage has since remained closer to 7% in the weeks following. 

Foreclosure Filings Eased Nationwide in November. ATTOM, a leading curator of property data, released its November 2024 “U.S. Foreclosure Market” Report, which shows there were a total of 29,390 U.S. properties with foreclosure filings (i.e. default notices, scheduled auctions or bank repossessions) down 9 percent from a year ago, and down 5 percent from the prior month. “The slight decline in U.S. foreclosure activity during November most likely reflects the seasonal ebb we often see this time of year,” said Rob Barber, CEO at ATTOM. “While foreclosure filings are down both month-over-month and year-over-year, the data highlights areas of the country, such as Nevada, Florida, and Connecticut, where foreclosures remain relatively high. As we move into 2025, we’ll be closely monitoring how economic pressures and market dynamics may influence a potential rebound in activity.” Nationwide one in every 4,795 housing units had a foreclosure filing in November 2024. States with the highest foreclosure rates were in: Nevada (one in every 2,941 housing units with a foreclosure filing); Florida (one in every 3,047 housing units); Connecticut (one in every 3,210 housing units); Maryland (one in every 3,535 housing units); and Indiana (one in every 3,567 housing units). Among the 224 metropolitan statistical areas with a population of at least 200,000, those with the highest foreclosure rates in November 2024 were Modesto, CA (one in every 1,890 housing units with a foreclosure filing); Reading, PA* (one in every 2,133 housing units); Bakersfield, CA (one in every 2,155 housing units); Riverside, CA (one in every 2,207 housing units); and Chico, CA (one in every 2,270 housing units). Those metropolitan areas with a population greater than 1 million, with the worst foreclosure rates in November 2024 were: Cleveland, OH (one in every 2,385 housing units); Philadelphia, PA (one in every 2,414 housing units); Miami, FL (one in every 2,551 housing units); and Las Vegas, NV (one in every 2,645 housing units). Those major metropolitan statistical areas (MSAs) with a population greater than 1 million that saw the greatest number of REOs in November 2024 included: New York, NY (198 REOs); Chicago, IL (177 REOs); Baltimore, MD (88 REOs); San Francisco, CA (83 REOs); and yes, you guessed it, Los Angeles, CA (80 REOs). 

Landlords Beware: Rent-Shamers Are Calling Out Overpriced Listings. The LA Times reports that “rent shaming” has become a modern, perhaps inevitable, phenomenon that’s sprouting up across Facebook housing groups and other platforms as rent continues to soar across Southern California. Landlords see it as a headache, a needless trend of cyber-bullying that exacerbates well-meaning efforts to find tenants. Renters see it as a higher calling — a form of resistance and a way to call out overpriced listings. For better or worse, the internet has transformed the real estate industry over the last few decades, removing traditional gatekeepers and allowing sellers and landlords to connect directly with buyers and tenants. House-hunters once had to call the phone numbers on “For Rent” signs or hire real estate agents just to see what was available, but in the age of information, they can compare the prices of everything on the market. In other words, it’s much easier to gauge whether something is a steal or a rip-off. So when the listing goes live on public forums such as Facebook or Nextdoor, people can make their thoughts very clear, turning ads into virtual battlegrounds between landlords and tenants. “Your greed is sickening,” a user wrote under a post advertising a one-bedroom rental in Venice for $4,600 a month. One user told a landlord listing a one-bedroom unit for $2,200 in Woodland Hills to “you can take your ADU and firmly insert it up your . . . “ Sometimes, the comments are meant to shame a landlord or real estate agent for asking such a high price. Other times, they’re trying to protect unwitting newcomers from overpaying. In the last decade, rent prices have nearly doubled. In 2014, the average price for an apartment in L.A. County was $1,471, the LA Times reports. Today, the median rent in the L.A. metro area is $2,796, according to Zillow. Last year, L.A. held 18 of the 100 priciest ZIP Codes for renters in the country, according to a RentHop study. Usual suspects such as Santa Monica and Malibu ranked toward the top, but even supposedly more affordable neighborhoods, such as Koreatown and Downtown L.A., ranked in the top 100.

Office Markets Still Hit Hard in Cities. Are U.S. cities facing a “doom loop”? Office markets in urban cores around the U.S. have been more deeply impacted by the post-pandemic hybrid working environment than their global peers. In fact, in Q3 2024, while U.S. office vacancy reached a record high of 20.9%, vacancy was even higher in Central Business Districts (23.7%). How does this impact cities, their economies and public finances? In “Reimagining Cities: Disrupting the Urban Doom Loop,” Cushman & Wakefield and Places Platform, LLC explored these questions, finding that yes, many U.S. cities (especially downtowns) are facing what appears to be an episodic doom loop. There are early signs of reversal, however, and good policy and quick private sector action can ensure cities do not become entrenched over the long term. The last four years have been difficult for the real estate market – cities and “WalkUPs” (walkable urban places) have not been immune to these challenges. Between 2019 and 2023 total real estate price per square foot values declined in over three-fifths of WalkUPs. When excluding for-sale housing, which has been an outperformer over the past four years, commercial real estate price per square foot values declined in nearly three-quarters of WalkUPs. Closer to home, Downtown Los Angeles Class A office buildings of over 100,000 square feet sold for an average of around $450 per square foot before the pandemic (2017-2019). Fast forward to 2023 and 2024 and these larger, high-end buildings have sold for closer to an average of $130 per square foot, a sharp decline. Notably, no Class A buildings of over 100,000 square feet traded in DTLA in 2021 or 2022. WalkUPs face a significant challenge as they have violated portfolio theory in their real estate inventory allocation. Currently, their square footage inventory distribution across the 15 cities studies stands at 34% in “Live” (rental and for-sale housing), 52% in “Work” (office, industrial, owner-occupied space, GSA, university), and 14% in “Play” (hotel, retail, museums, theaters, convention, professional sports). Downtowns are even more office-centric with 70% of real estate square footage dedicated to Work. DTLA is slightly better, but still heavy on office with 60% of square footage dedicated to Work.

The World’s Most Liveable Cities. How do you measure liveability? Well, Economist Magazine came up with a formula to help companies calculate hardship allowances when relocating their staff. The annual survey rates 173 cities across five categories: stability, health care, culture and environment, education, and infrastructure. Vienna took the top spot once again in 2024, earning the title of the “Most Liveable City in the World” for a third consecutive year. The Austrian capital received perfect scores in four of the index’s five categories, but a lack of major sporting events contributed to its lower tally of 93.5 out of 100 in the culture and environment category. Three other European cities made the top five: Copenhagen, Zurich and Geneva. All three are notable for their modest population size, which tends to lead to lower crime rates and less crowded roads and public-transport systems. Two Canadian cities (Calgary and Vancouver) and four in Asia-Pacific (Melbourne, Sydney, Osaka and Auckland) complete the top ten. After a sharp drop and rebound over the covid years, globally the average liveability score increased by just 0.06 points over the past year, compared with 2.84 in the 12 months to June 2023. Civil unrest troubled Europe, as French farmers blocked motorways into Paris and protests against immigration policies sprung up across the continent. Riots in Noumea, in New Caledonia, and campus protests across America (which happened after the survey took place) do not bode well for next year’s index.

What Is The Least Liveable City In The World? From the sublime to the ridiculous. Every year much is made of the world’s most liveable city (see story above), even if the top of the ranking by Economist Magazine remains mostly unchanged. Far less attention is paid to the cities at the bottom of the ranking, where residents often endure conflict and economic hardship. The global index includes 173 cities judged on five categories: stability, health care, culture and environment, education, and infrastructure. But there is one city has been stuck in the same place since 2013. Damascus, Syria’s war-torn capital, has ranked as the least liveable city for 11 straight years because of the instability caused by 13 years of war and now the over-throw of the Assad regime. It suffers from perennial blackouts and an economic crisis, worsened by a devastating earthquake in the north of the country in 2023. The city’s overall score is nearly ten points lower than that of the next-worst city, Tripoli, Libya’s capital. (And if you’ve ever been to Tripoli, it’s difficult to imagine a city less liveable!) Three other countries in the Middle East and Africa have cities that feature in the bottom ten. Algiers, Lagos and Harare rank 171st, 170th and 167th, respectively. Sub-Saharan Africa’s economic-growth prospects are dimming amid a population boom. The strain is already showing: youth-led protests, sometimes deadly, have swept the region. Even South Africa, the most developed county in the region, has problems. Johannesburg and Pretoria moved up in the rankings, although neither made it into the top 100 cities. Both registered improvements in education, although schooling in the country is generally poor. More than 75% of ten-year-olds fail reading-comprehension exams, according to a standard international test. And the country remains troubled by other common factors: the unemployment rate is 32% and the murder rate is at its highest in 20 years. By the way, the war between Israel and Gaza has lowered the ranking of Tel Aviv, which used to have a relatively high score. The Israeli city fell 20 places down the ranking to 112th, the biggest movement in this year’s survey. (Cities in Gaza, which have been largely destroyed by Israeli bombardment, are not included in the index.)

Vendors Expo Returns! Our world-famous "Vendors Expo" returns in 2025, on Thursday night, January 9, 2025. The Vendor Expo opens starting at 6:30 pm. We'll have 30+ of the finest vendors featuring real estate products and services you will want to utilize as a successful investor. Our Vendor Expo will be held at the Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Culver City CA. FREE Admission. Please RSVP at our website, LARealEstateInvestors.com.

“Wholesaling” When it comes to wholesaling, there is only one guy you need to learn from. His name is Daniel Tromello. Daniel has not only wholesaled hundreds of properties throughout Southern California, he has traveled the country preaching the virtues of wholesaling. Daniel will be our special guest speaker at our first general meeting of 2025. The title of Daniels’s presentation is “How to Wholesale Like a Pro.” Don’t miss Daniel’s presentation. Thursday night, January 9, 2025, 6:30 to 9:30 pm. And be sure to come early (6:30 pm) and enjoy our Vendors Expo. Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034 (Culver City adjacent). FREE Admission. Metered and free street parking. RSVP at our website, LARealEstateInvestors.com.

Basic Training Investing Boot Camp. Saturday, January 25, 2025, 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 January 18. After January 18, the prices jumps to $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.) Plus free parking. Please register at our website, LaRealEstateInvestors.com.

This Week. Investors will continue to look for additional guidance from Fed officials on their plans regarding future monetary policy. For economic reports, it will be a very light schedule for the remainder of the year. New Home Sales and Durable Orders will come out tomorrow. Markets will close early on Tuesday and will be closed on Wednesday for Christmas. 

Weekly Changes:

10-Year Treasuries:             Rose  010 bps

Dow Jones Average:           Fell    1,500 points

NASDAQ:                            Fell    600 points

Calendar:

Tuesday (12/24):                 Durable Goods

Tuesday (12/24):                 New Home Sales

Tuesday (12/31):                 Confidence Index

For further information, comments, and questions:

Lloyd Segal

President

Los Angeles County Real Estate Investors Association, LLC

Lloyd@LARealEstateInvestors.com

310-792-6404