Currently, approximately 4 million homeowners in the US are in forbearance, which means that the lender has agreed to delay foreclosure on a property. Many others are delinquent in their payments and will be suffering the consequences when the foreclosure moratorium ends in February 2021. It may be too late for some of these people, but if you act quickly enough, you may be able to avoid the most serious of complications by utilizing a strategic default, also known as voluntary foreclosure or, more colloquially, the “jingle mail” strategy.
In a strategic default, the homeowner voluntarily initiates a foreclosure on their home in exchange for avoiding responsibility for some of the debt owed. When this happens, the homeowner is not responsible for what is called nonrecourse debt, which includes a mortgage funding the purchase or construction of an owner-occupied residence with no more than four units, as well as credit sales in which debt is secured solely by the sale of real estate. Even if the debt is recourse debt, the mortgage holder may or may not be able to pursue the homeowner for the loss. Be aware, however, that there are some drawbacks to a strategic default. It comes with a significant drop to one’s credit score, which can make securing new loans and finding a new home more difficult.
GDP, or Gross Domestic Product, is defined as the total final value of all goods and services produced, and is one of the most frequently used indicators of economic health. But how much does it actually tell you, and how can that information be used? For the most part, GDP is simply a broad overview of a state’s economic health, and tells little about how the residents of that state are doing. There are, however, strong correlations that enable the direction of change in GDP to be a good indicator of the direction of change in fiscal wellbeing of the people, even if the exact value of GDP is largely irrelevant for that purpose.
This is because the interplay of GDP, employment, and home sales volume tends to form a continuous economic cycle. If more new homes are sold, this directly increases GDP, which is generally followed by an increase in employment with a delay of usually about a year. In turn, increased employment means more people are able to afford to buy homes, thereby increasing home sales volume and continuing the cycle. Any one factor increasing can trigger the cycle to begin, and it also works in the negative, so a decrease in any triggers a decrease in the next. Of course, as with any economic cycle, certain events can cause it to derail — for example, unusually high sales prices can result in inflated GDP numbers without increased sales volume. It is also important to note that GDP includes only new products, which means that reselling homes doesn’t increase GDP, and with construction being as slow as it is, a great many home sales are resales.
Despite their limitations, GDP growth and decline numbers are still useful for big picture assessments. But if you really want a good idea of the local economy in a region, the most important statistic to look at is employment. Other statistics that directly affect peoples’ lives are also valuable, such as home sales volume as well as home prices.
As of September, California had lost about 1.5 million jobs in the prior 12 months, resulting in many people falling behind in house payments. This includes both renters and homeowners with a mortgage, who are both reporting various degrees of certainty about their ability to pay. Of those renters who are still paying rent despite the moratorium on evictions, about 48% don’t have high confidence in their ability to pay next month. Less than 70% of homeowners think they can pay their mortgage.
All this uncertainty is leading to a very static market. Buyers simply don’t have the income to purchase a home. Sellers are raising prices to recoup some of their losses, or just not listing right now. A stimulus package isn’t going to be enough to solve this problem — the people need more confidence before they will want to buy or sell. This means we need job recovery. While the unemployment rate may make it appear as though the situation isn’t dire, that’s largely because of the manner in which unemployment is calculated. Those who aren’t actively looking — as many are not currently during the pandemic — aren’t included in unemployment numbers, as they have dropped out of the labor force (See this article for more information about the labor force participation rate and its connection to unemployment: https://www.beachchatter.com/2020/11/23/understanding-labor-force-participation/). We’re not likely to see a recovery until 2023 at the earliest at the current rate.
Many would-be homeowners in the Millennial and Gen Z generations are going to need to wait. Despite the fact that some who wished to buy are instead renting, apartment vacancies are on the rise as 27.7 million have moved back in with parents or other relatives, if they ever left home at all. The good news is that this number is dropping, but only the luckiest of them will be able to snatch an opportunity in the coming months amid heavy competition.
11% of renters were excited to make the transition to homeownership in the beginning of 2020, but the COVID-19 pandemic and the recession squashed those dreams for many of them. Those who experienced income loss as a result of the pandemic are twice as likely to have trouble with paying bills, rent, or mortgage, or need to withdraw savings or retirement or borrow from friends or family. That isn’t the whole of the problem, though: California has been lacking affordable housing for decades as a result of mere population growth, an issue that was only accelerated by the recession and lockdowns, which have slowed or halted construction.
Labor force participation (LFP) and unemployment may seem like direct inverses of one another, but that isn’t the case. LFP measures the percent of employed people plus the percent of unemployed people actively seeking employment. Those who are unable to work or have chosen to leave the workforce are not included in LFP, and in fact such people aren’t even included in the unemployment count. This includes many people affected by the COVID-19 pandemic who either can’t work from home or have decided that continued employment isn’t worth the risk of infection. This has actually decreased the unemployment rate, but not because people are getting their jobs back, rather because a smaller percent of people are under consideration for employment. The California LFP has been roughly 2% below the US total for nearly two decades, with a few exceptional years. They most certainly are not static, though, as both have been trending downward, with the first half of 2020 demonstrating a steep decline before partially recovering.
The number of COVID-19 cases spiked dramatically in November, spurring LA County to increase safeguarding measures, effective tomorrow, November 20th. The number of customers at any time can be no more than 50% maximum outdoor capacity at outdoor restaurants, breweries, wineries, cardrooms, outdoor mini-golf, go-karts, and batting cages. This number is 25% at businesses permitted to operate indoors, such as retail stores, offices, and personal care services. In addition, restaurants, breweries, wineries, bars, and all other non-essential retail establishments must close from 10:00 p.m. to 6:00 a.m. At personal care service locations, both staff and customers must wear a mask at all times, disallowing services that would require the mask to be removed, and these establishments cannot serve food or drinks. The maximum number of people at outdoor gatherings is 15, with a limit of 3 households. LA County has also established potential future guidelines that will be implemented if the number of cases or hospitalizations increases beyond certain levels.
The Consumer Financial Protection Bureau (CFPB) is planning to make some changes aimed at widening the accessibility of mortgage loans by allowing lenders more freedom in determining a borrower’s ability to repay. Currently, one of the requirements for a qualified mortgage (QM), the loan type preferred by both lenders and consumers, is a debt-to-income ratio of no more than 43%. This criterion is designed to be an indicator of the borrower’s ability to repay. However, there are other methods of determining this that can broaden the range of QMs. The CFPB’s solution is to compare the loan’s annual percentage rate (APR) to the average prime offer rate (APOR). Because a borrower with a high DTI would likely also have a high APR compared to APOR, DTI considerations are still indirectly included, but there will also be people with a high DTI but low risk of default that are able to get a good APR to APOR ratio and therefore successfully get a QM loan.
The IRS released the new numbers for 2021’s tax rates in October. The lowest individual bracket has shifted from $9,875 or less to $9,950 or less, and the highest went from $518,400 or more to 523,600 or more. The majority of people will fall in the second or third bracket, up to $40,425 or $86,375. The standard deduction has increased by $100, to $12,500. Also going up are the capital gains tax rates and alternative minimum tax (AMT) exemption and phaseout thresholds. See this article for information about those amounts, as well as amounts for married couples filing jointly: https://journal.firsttuesday.us/irs-announces-new-tax-rates-for-2021/74936/
Throughout the US, COVID-19 is threatening to put a damper on people’s Thanksgiving celebrations. Families don’t want to break tradition, but many will have to settle for smaller gatherings of only close family members. With fewer people, the normal Thanksgiving fare will surely create plenty of leftovers, even with the tradition of stuffing yourself to overfull. Luckily, businesses are ready for it, so you don’t have to buy a 25 pound turkey.
Some companies are offering measly four-pound turkeys — wouldn’t cut it during your traditional festivities with all your distant relatives, but perfect for a family of six. Restaurants are preparing full meals, available for takeout, serving four to six people. Others are banking on people bucking the trend and buying prime rib, pork, sausage, ground beef, or even lobster. Vegan restaurants are also making necessary preparations. One thing is for sure, though: grocers and restaurants are definitely not going to be losing money. They’re actually expecting far more sales, since there will be a greater number of smaller celebrations.
Cold weather is coming and with Covid still keeping us more or less restricted to the house, it’s time for comfort food. What could be more comforting than your own personal hot savory pie?
One thing I really like about this recipe is the absence of a bottom crust. You know–the one that never quite cooks properly and then is thoroughly soggy by the time you reach it. This is adapted from a recipe by Deb Pearlman of Smitten Kitchen. You can find the original here: https://smittenkitchen.com/2014/10/better-chicken-pot-pies/
Makes 4 2-cup pot pies
Pastry Lid
2 cups all purpose flour 1/2 teaspoon salt 13 tablespoons cold unsalted butter, diced 6 tablespoons sour cream or Greek-style yogurt 1 tablespoon cider vinegar 1/4 cup very cold water 1 egg, beaten with 1 teaspoon water, for egg wash
In a large, wide bowl, combine the flour and salt. Add the cold butter. Working quickly so the butter doesn’t melt, use a pastry blender or a couple of table knives held side-by-side to cut the butter into the flour mixture. The result should be coarse texture with no visible butter. In a small dish, whisk together the sour cream, vinegar, and water, and combine it with the butter & flour mixture. Using a flexible spatula, stir the wet and the dry together. Knead the dough mixture into one big ball. Wrap it in plastic wrap, and chill it in the fridge for 1 hour or up to 2 days.
Filling
Salt and freshly ground black pepper 3 1/2 to 4 pounds bone-in, skin-on chicken parts (breasts, thighs and drumsticks are ideal) 3 to 4 tablespoons olive oil 2 medium leeks, white and light green parts only, cut in half lengthwise and then into 1/2-inch slices 1 large onion, diced small 1/4 cup dry sherry (optional) 3 cups low-sodium chicken broth 1/4 cup milk or heavy cream 1 bay leaf 1 teaspoon minced fresh thyme 3 tablespoons unsalted butter, at room temperature 4 1/2 tablespoons all-purpose flour 1 cup fresh or frozen green peas (no need to defrost) 2 large carrots, diced small (about 1 cup carrots) 2 tablespoons chopped flat-leaf parsley
Make filling: Generously season all sides of the chicken parts with salt and freshly ground black pepper. If your chicken breasts are particularly large, halving them can ensure they cook at the same pace at the other parts. Heat half the olive oil over medium-high heat in the bottom of a large Dutch oven (minimum of 4 quarts; mine is 5). Brown chicken in two parts, cooking until golden on both sides. Transfer to a plate and repeat with second half of chicken. Set aside.
Heat the second half of olive oil in the same pot. Add onions and leeks, season with salt and pepper, and saute them until softened, about 7 minutes. If using, pour in sherry and use it to scrape up any bits stuck to the bottom of the pan. Simmer until mostly cooked off. Add milk or cream, chicken broth, thyme and bay leaf and bring to a simmer. Nestle the browned chicken and any accumulated juices into the pot. Cover and gently simmer for 30 minutes, after which the chicken should be fully cooked and tender.
Transfer the chicken to a cutting board to cool slightly. Discard the bay leaves. Allow the sauce to settle for a few minutes, then skim the fat from the surface.
In a medium bowl, mash butter and flour together with a fork until a paste forms and no flour is still visibly dry. Pour one ladle of filling over it, and whisk until smooth. Add a second ladle, whisking again. Return this butter-flour-filling mixture to the larger pot, stir to combine, and bring mixture back to a simmer for 10 minutes. The broth should thicken to a gravy-like consistency. Adjust seasonings to taste.
Add carrots and peas to stew and simmer for 3 minutes, until firm-tender. Shred or dice the chicken, discarding the bones and skin. Add the shredded chicken to stew and re-simmer for 1 minute. Stir in parsley.
Assemble and bake pies: Heat your oven to 375 degrees F.
Divide chilled dough into quarters. Roll each quarter out into rounds that will cover 4 2-cup ovenproof bowls or baking dishes with a 1-inch overhang. Cut vents into rounds. Ladle filling into four bowls, filling only to 1 to 1 1/2 inches below the rim to leave room for simmering. Whisk egg with water to make an egg wash. Brush edges of bowls with egg wash. Place a lid over each bowl, pressing gently to adhere it to the outer sides of the bowl. Brush the lids with egg wash. Bake until crust is bronzed and filling is bubbling, 30 to 35 minutes.
Do ahead: The dough for the lids can be made up to 3 days in advance and chilled. The filling can be made up to a day in advance and re-warmed before assembling and baking the pot pies.
We’re looking at sales in the South Bay area of Los Angeles a little differently than usual this month. Typically we analyze the area as a single entity. This month we’ll divide the South Bay into four parts, allowing you to see a greater level of precision about those four areas.
Within each area the homes will be more similar, both in style and in pricing. We started by combining the four beach cities, El Segundo, Manhattan Beach, Hermosa Beach and Redondo Beach. Each of the cities has it’s own unique character, but they share many common traits. (If your home is in Hollywood Riviera, you can consider yourself one with the beach cities.)
The cities on the Palos Verdes Peninsula come together naturally, so we’ve combined Palos Verdes Estates, Rolling Hills Estates, Rolling Hills and Rancho Palos Verdes.
While Torrance does have it’s own beach, most of the city has more of an inland character, so we’ve combined it with Lomita and Gardena. One immediate benefit is the median prices are more representative of actual prices in those three communities.
Finally, we conjoined San Pedro, Long Beach, Harbor City, Wilmington and Carson, collecting the harbor area cities together.
Beach Cities
Prices have been trending up at a pretty rapid pace for most of the year, so it was a real surprise to find the median price in the Beach Cities had dropped by 6% from the September numbers. Last month the median price was $1.5M, while October only came in at $1.41M. Likewise, the number of sales dropped by a surprising 20%, from 209 sales in September, to 167 in October.
Year over year, beach prices increased by an impressive 17%, from $1.2M last October to $1.4M this October. Over the same time frame, sales volume went up by 45%, climbing from 115 units in October 2019, to 167 units in October of 2020.
On the Peninsula is where you really want to be in 2020. Prices and sales volume increased month to month and year to year. From last month to this month was on par with most of the South Bay, with the October median price of $1.68M coming in 5% above September’s median of $1.6M. The sales volume increase was a modest 3%, going from 95 units to 98.
The real treat for the PV cities is the 2020 over 2019 sales prices. October of last year showed a median price of $1.2M versus $1.68M this year. That’s a whopping 36% median price increase in 12 months. At the same time, October unit sales jumped 51% from 65 homes sold in 2019 to 98 sold in 2020.
Inland Cities
Going just a short distance away from the sandy shores of the beach, or from the bluffs of Palos Verdes, makes a huge difference in property prices. Like the coastal cities, the inland cities showed a 6% increase in prices from September to October. In contrast to the beach and the hill, the median price only went up $40K, from $719K to $759K. Like the beach cities, fewer inland homes were sold in October falling 11% from September. The drop wasn’t as great, going from 183 units in September to 163 in October of 2020.
October of 2020 versus October of 2019, the inland cities had median prices go up by 9%, from $600K to $656K. At the same time, the number of sales dropped by unit, from 164 homes sold, to 163 homes sold this October.
Median price in the harbor cities is typically lower than anywhere else in the South Bay. Similarly, price increases are slower. For example, while the rest of the areas saw 5-6% increases in month to month sales prices, the harbor came in at 3%. From September to October, the median increased from $636K to $656K. During the same time frame, the number of homes sold climbed 5%, from 435 to 457 units.
Comparing last October to this October, homes in the harbor area enjoyed a slightly more sustainable 9% rise in median price. The median for October 2019 was $600K compared to $656K this October. Sales volume jumped by 15%, from 397 units last year to 457 this year.
Why These Crazy Numbers?!
They are crazy, you know. There is no way prices can continue to climb at 5-6% per month. That’s more like what we would expect on a year over year increase.
October
2020
September
2020
Change
M-M
Med Sales $
Sales #
Med Sales $
Sales #
Med Sales $
Sales #
Beach
1,407,500
167
1,500,000
209
-6%
-2%
PV
1,682,750
98
1,600,000
95
+5%
+3%
Inland
759,000
163
719,000
183
+6%
-11%
Harbor
656,000
457
636,000
435
+3%
+5%
So Bay
820,000
885
799,500
922
+3%
-4%
It’s been a long time since we’ve seen Beach Cities prices decline. We’ll be watching November closely.
The answer lies in the interest rates. One the borrowing side, mortgage interest rates have been under 3% for some time now. With rates that low, many people who couldn’t afford to buy a home before, now qualify for a loan. Those who are still employed despite Covid-19 are buying homes if at all possible.
The demand created by that phenomenon has created a plethora of bidding wars. Homes with 20 offers on them are not uncommon. All those offers are pushing prices up at clearly unsustainable rates.
October
2020
October
2019
Change %
Y-Y
Med Sales $
Sales #
Med Sales $
Sales #
Med Sales $
Sales #
Beach
1,407,500
167
1,202,000
115
17%
45%
PV
1,682,750
98
1,233,000
65
36%
51%
Inland
759,000
163
680,000
164
12%
-1%
Harbor
656,000
457
600,000
397
9%
15%
So Bay
820,000
885
699,000
741
17%
19%
Adding to the entry level buyers who are driving the market at the low end, there is another group who have cash in the bank. Unfortunately, that cash is only earning 1%, or less. Those buyers are watching the price of real estate climb astronomically, and are hoping to cash in on a windfall profit. Some of them will.
The Crystal Ball
Watching the median price drop at the beach by 6% is a hint at what’s coming next. We can’t be sure when it will happen, but steeply escalating prices inevitably plummet in a subsequent correction. Current increases are reminiscent of the rapid run-up of prices in 2006-2007 which resulted in the Great Recession.
Further complicating matters, today we have government and consumer response to Covid-19 as a uncontrollable factor. The third quarter of 2020 looked really good compared to the second quarter, until we remember the coronavirus struck in March. Business during the second quarter was essentially nil.
We can’t forget the election. Fallout from the presidential election could push the economy in any one of several directions depending on who the President is, and the degree of polarization in the Federal government.
One would need a crystal ball to forecast this winter, but I predict a volatile ride for the real estate market.
In a previous post (found here: https://www.beachchatter.com/2020/10/29/post-covid-real-estate-predictions/) we made some predictions about which trends during the pandemic may be permanent and which may be temporary. In that article, we predicted that the drop in urban desirability as a result of being able to work from home would be temporary, and though people would be moving South, others would eventually take their place in urban industry centers. Investors seem to be willing to bet on remote work, though. We do see people moving away from industrial centers such as San Francisco to cheaper areas like Sacramento, at the same time that commercial investors are putting money into Sacramento. The consensus appears to be that even though job centers will recover slightly after the pandemic is over, there are enough businesses embracing remote work that putting money into cheaper areas now before their popularity skyrockets is a worthwhile investment, and expensive urban areas aren’t a solid investment anymore.
As we’re approaching the winter months, we’re likely to see an increase in precipitation. Most areas of California don’t get snow, but rain could be an issue if it’s able to cause water damage. Fortunately, there are several things you can do to prevent water damage from the rain. Preventative maintenance does cost money, but it’s usually a worthwhile investment, since repairing damage after the fact can often cost even more.
One thing you can do yourself if you don’t want an extra expense is to clear gutters and drains of debris that could prevent the rainwater from draining, though you can also hire a professional to do this for you. The same is true of tree trimming in wind-prone areas. You can hire a contractor to inspect your windows, doors, skylight, and roof to ensure tight seals and detect any potential issues. Something you’ll definitely want a trained professional for is inspecting the foundation, retaining walls, and concrete sloping for defects.
For the past year, Southern California Gas Co. has been using renewable natural gas (RNG) sourced from out of state. Now, they’ve partnered with a California company, Calgren, to source their RNG from in-state. Calgren is the largest dairy biogas company in the US. Incentive programs in California will likely bring other companies to do similar, and it’s expected that California will have over 160 RNG facilities with the next three to four years.
The RNG Calgren produces is derived from methane from cattle waste. This is doubly effective because it not only is a source of renewable energy, but also prevents large amounts of methane from reaching the atmosphere, where it would function as a greenhouse gas to accelerate climate change, unlike the renewable fuel produced from it. California has also recently enacted legislation to allow for other sources of renewable natural gas, such as dead trees, which will help the process of becoming carbon-neutral.
Climate change has been a hot topic for debate for decades, but what no one seems to be discussing is how it has affected real estate. Climate change can drastically affect the frequency and severity of natural disasters. Natural disasters such as wildfires and hurricanes are known to temporarily displace evacuees, but in many cases displaced people remain in their new location much longer than expected, either because they are unable to return or simply choose not to. Even the threat of a natural disaster that hasn’t occurred yet can prompt people to move away from a disaster-prone area.
What does this mean for real estate? It means that disaster-prone areas are losing significant value, and less prone areas are gaining an influx of new residents that they may not have the ability to house. After all, the housing shortage is still in full effect and the displaced residents may not be able to afford much, due to the likely lesser value of their previous home. People across the real estate industry need to work together to identify the key factors of where people may want to leave, where they may want to go, and how they’re going to acquire housing, as well as work to reduce our environmental impact.
Joseph G. Allen is an Assistant Professor of Public Health at Harvard and Director of their Healthy Buildings program. The New York Times has worked with him as well as several other professors to explain the process behind masks, to demonstrate that they do indeed work. In essence, particles get bounced around inside the fibers and trapped there. Interestingly, in the case of most masks, which are generally made of tightly woven cotton, the particles least likely to get trapped are medium size particles, as they’re big enough to be less influenced by surrounding air molecules yet small enough to not randomly make contact with the fibers as often. Large particles are most likely to get trapped, followed by small particles. Coronavirus particles are small and often get carried inside large particles, so they are in the two categories more likely to be caught by the fibers.
Los Angeles County and the City of Long Beach have been working with Project Homekey, a California state project designed to create more affordable housing by converting hotels into homeless housing. The project was started during the pandemic. The purchase of a Holiday Inn location in Long Beach had already been approved on October 13th, and on October 20th another location was approved in Los Angeles, the Motel 6 on 5665 E. Seventh St.
Long Beach is aiming to purchase another yet undisclosed location as well. The city has asked for up to $36 million from the Project Homekey fund, majority funding for which is from Coronavirus Aid Relief Funds. The city council isn’t expecting to be approved for the full amount, but is hoping to get at least $15 million to go toward acquisition and operating costs.
You’ve probably heard of a W-shaped recovery, even if you don’t know what it means. This refers to a false start in recovery, whereby the economy is improving in one sector, but doesn’t have the momentum to continue recovering, so it wobbles a bit. This has been what experts believed the current recovery would be like. Now, though, some people are wanting to call the recession and recovery K-shaped. What does this mean? It means that some sectors will recover and retain their momentum, while other sectors haven’t yet left the recession and continue downward. In other words, the recession has very clearly disproportionately affected various groups.
More specifically, this recession has had comparatively little impact on wealthy individuals. People with higher paying jobs are more likely to work in fields that can be done from home, so they haven’t been out of work during the pandemic. People who have the capital to invest in stocks as their primary means of income don’t have to worry so much about the pandemic, since stocks can’t get sick. They’ve actually been on an upward trend since before the lockdowns even began. Even those higher-income workers who did experience losses won’t have as much necessary expenditure proportional to income as those living paycheck to paycheck. This means that the recession has significantly widened the already large income inequality gap.
