The original BeachChatter discusses the housing market in the coastal communities south of the city of Los Angeles. Some articles are peculiar to a single city. Some discuss the region as a whole. The focus is on privately owned housing.
If you’re in need of rental assistance, now is the time. California opened the window for COVID-19 rent relief applications a few days ago, on March 15th, 2021. There are state, county, and city programs — be sure to look at all the possibilities, because they do have some differences. Also be aware of the application windows. Some close as early as March 31st.
Information about the California state program is available at www.housing.ca.gov, and you can get a personalized report from https://ucilaw.neotalogic.com/a/Cal-Covid-Info-App-for-Tenants-and-Landlords. If you are a landlord, you can also participate in the state program by waiving 20% of the rent in order to get reimbursed for 80% of the unpaid rent. Tenants whose landlords don’t wish to participate are given 25% of their unpaid rent. The state program also pays 25% of prospective rent and provides assistance with utility payments.
Statistically, single women purchase fewer homes than couples or single men, as a result of both economic and societal factors. The gap between single women and single men is only roughly 3-4%, but it’s still not negligible. Fortunately, it’s slowly shrinking, as women are beginning to have a larger share of home purchases. The percent of homes purchased by single women increased by 8.7% in Q4 2020 as compared to Q4 2019. The same statistic for single men is 4.6%. For couples, who may have dual incomes and/or better access to loans, the increase was 11.5%.
This doesn’t mean everything is great for women, though. The pandemic did disproportionately affect women, especially women of color. The industries hit the hardest were restaurants, retail, and healthcare, all of which statistically employ more women than men. What this actually demonstrates is the disparity between economic classes. Those single women who were able to buy in 2019 but held off were likely also able to buy in 2020, and simply had more incentive to purchase because of low interest rates. In some cases, these women were saving up with the intention of buying in the future, and took the opportunity to buy something less expensive to take advantage of interest rates. But those women that were struggling in 2019 definitely had no chance in 2020.
Covid-19 has kept the South Bay real estate market in disarray for a solid year now. So when we try to compare sales activity from 2020 to 2021 we find huge swings in the data that only tell us we’ve been living in a pandemic. We’re here to try to tease some intelligence out of that data and to guide our clients through buying and selling in these tempestuous times.
Month to Month
Let’s start by looking at the number of homes sold in the South Bay for February 2021. At the macro level sales volume is down -10% below January. Of course, that ignores the fact the number of sales last month (January) was down -30% compared to December, the prior month.
That’s the macro level. We start to see the range in sales volume when we step down to an area level. Looking more closely, the number of homes closing escrow in February versus January sales ranged from a decline of -18% in the Harbor area to an increase of 10% on the Palos Verdes peninsula. Comparing sales volume for the first two months of the year very much demonstrated the old maxim about the importance of location .
February against January for median price: Dollar-wise, the Beach dropped again, but by only 1% of the median price paid in January. However, note that this follows a 12% monthly drop in January from December 2020. From that scenario we can’t tell if prices are heading up, or still coming down. In other areas, the prices increased a robust 9% each for the Harbor and PV areas. Inland cities were down by -2%.
In total dollar sales, the South Bay was off by -1% from January activity. Once again, the detail was scattered with the high at 14% for Palos Verdes and the low -16% for the Harbor.
Compared to pre-Covid, these numbers are simply freakish.
Outrageously high! Compared to pre-Covid, these numbers are simply freakish. Back in 2019 any of the percentage statistics we look at on a monthly basis would have been in the range of +/-1%, occasionally a tad more. So, instead of Harbor area prices going up 9% in a month, we would normally be talking about .9%, one tenth the amount of increase.
Year to Year
Clearly the pent up demand from the past 12 months has had some impact. That, combined with the limited supply because so few people want to move during the pandemic. There’s always the question of what percentage of the buyers are home owners as opposed to investors. From speaking to other brokers in the area, we find a large number of the transactions are all cash.”
As always, one should note that ultra-local sales numbers are small in terms of mathematical models. As such, a single sale, high or low dollar, may make percentile statistics jump into outlier ranges. Similarly, a seasonal burst, or dearth of sales can seriously skew the numbers. Based on 25+ years of local real estate experience, I can assure you this is closer to a bubble than to a season burst.
Looking at it on a year over year basis doesn’t improve the image. Still the increases in every corner of South Bay, both in the number of sales and the median price increases, are beyond rational.
In response to the coronavirus pandemic, the Federal Reserve (the Fed) reduced the Federal Funds rate to near zero, which is the rate that the Fed charges banks for loans. Its lowest, and current, point was 0.09%. For comparison, it was at 1.55% in the beginning of 2020. Typically, the 10-year Treasury Note interest rate follows suit. However, the relationship is indirect, so we could see anomalies — which is what has happened.
The T-note rate correlates strongly with investors’ economic certainty, as T-notes are an extremely safe investment. In times of uncertainty, the rate drops as more people are buying T-notes. In more certain times, investors instead move their money to less secure investments with a higher return. While it did decrease from 1.76% to 0.62% in the first half of 2020, it bounced back in the second half. At 1.08%, it is still below the Jan 2020 rate, but is continuing to climb. The Feds meanwhile have no intention of changing the Federal Funds rate until 2023, at which point the T-note rate is virtually guaranteed to go up.
What does all this mean? Well, we can say for sure that the Fed’s decision to keep the Federal Funds rate at 0.09% means they aren’t hopeful for a recovery until 2023. There are a few possibilities as to what the increasing T-note rate means. It could be that investors are too hopeful about less secure investments, and they’ll experience losses. Maybe the Fed is being overly cautious, and the economy is actually about to start recovering soon. Or it could be that investors realized in the first half that they have been largely unaffected by the economic recession, and don’t particularly care that the overall economy is in a slump.
If you know architects, you may know Edward Killingsworth, a US architect who lived in Long Beach. One of the houses he designed still sits at 2 Laguna Place. The estate of the original owners sold it in 2018 with the original design for $2.6 million.
It’s no longer fully Killingsworth, as the new owners have remodeled it, but it retains some quintessential Killingsworth features: plenty of glass, floating stairs, stone countertops, and perhaps most importantly post-and-beam ceilings. It’s been updated with top-of-the-line new appliances and modernized master suite and bathrooms. There’s even an elevator. The new additions bring the price tag up to $5.179 million.
Real estate was halted only briefly as a result of pandemic lockdowns, but real estate is not the only aspect of the economy. Not all sectors were equally affected, so real estate won’t recover at the same rate for each sector. Retail was hit the hardest, with many businesses closing temporarily during lockdowns and some being entirely replaced by e-commerce. Success of retail is somewhat difficult to measure from a real estate perspective, but one obvious statistic is vacancy rate, which increased to 6.2% in Greater Los Angeles. It’s since dropped slightly to 5.9%, though restaurants still seem to be faring better than other retail establishments even with weakened restrictions.
Offices are essentially treading water after a steep dropoff. Many businesses have already recognized the need to transition to fully or mostly work-from-home, and already have plans in the works for how they’re going to adapt. Though they’ve certainly experienced losses, it’s unlikely to get much worse for them.
The residential market is still a flurry of activity, albeit predominantly from buyers trying to get a competitive edge. With how low inventory is, it’s inevitable that some of them will fail. Competition favors higher-income buyers, who were also less affected by the recession to begin with, so they haven’t experienced any pull to slow down. Nevertheless, it’s still clearly a seller-controlled market, and sellers don’t want to sell right now.
Meanwhile, the industrial sector has actually experienced gains. Contrary to brick-and-mortar retail, consumers don’t need to go anywhere to pull products out of warehouses. They just buy everything online. Currently, the industrial sector’s biggest roadblock is not having enough land to build even more warehouses to keep up with demand.
The lockdowns from the pandemic negatively affected several industries. With most flights being cancelled, you’d expect the aerospace industry to have suffered quite a bit. In reality, their employment numbers rose 6% during the shutdowns. How? They adapted, beginning to focus more on space technology and even on pandemic relief engineering.
Several aerospace companies aided the coronavirus relief effort by designing and manufacturing ventilators, face helmets, and face shields. These include Virgin Orbit, Virgin Galactic, and the Jet Propulsion Laboratory. Some focused more on the booming space industry. All in all, aerospace lost 1400 jobs but gained 3000.
It’s a well-known fact that Black and Latinx people tend to struggle economically more than whites and Asians in the US. The wealth gap may be larger than you think, though. Examining homeownership statistics demonstrates just how significant the difference is.
California’s housing affordability for Latinx people is 20% for single-family homes and 33% for townhomes or condos. Blacks fare even worse, at 19% and 30% respectively. By contrast, 38% of whites and 43% of Asians can afford an SFR in California, and 51% of whites and 56% of Asians can afford a condo or townhouse. Part of the problem is California’s high prices, but while affordability at the national level is higher for everyone, the disparity remains about the same, and possibly larger. 62% of whites and 70% of Asians can afford a home in the US. Only 51% of Latinx people and 42% of Blacks are able to.
Within California, the disparity is smallest in San Bernardino County, which is also the most affordable for Black and Latinx households at 46% and 54% respectively. The difference between Latinx and white households is only 3%. It’s not the most affordable for white and Asian households, though — those are actually Fresno County at 61% for whites and Kern County at 68% for Asians. The least affordable county for Blacks is San Francisco County at 8%, and for Latinx households it’s Santa Clara County at 11%.
Demand is so high compared to supply that many prospective buyers are finding competition to be a larger impediment to purchasing a home than lacking funds, even in the midst of a recession. In January 2021, 56% of prospective buyers had bidding wars. This number is up 4% from the prior month. Getting outbid is the primary reason that 40% of prospective home buyers’ searches have dragged on. Only a year ago, just 19% cited this as the primary reason, with 44% saying it was high prices that drove them out of contention. Prices don’t seem to be as much of an issue now, as buyers are willing to overpay in order to get their chance at slim inventory while mortgage rates are still low.
That 56% nationwide doesn’t tell the whole story, though. Competition is much fiercer in some areas. San Diego, San Francisco Bay, Denver, and Seattle all had numbers over 70%. Even beyond that is Salt Lake City, where a whopping 90% of offers had competition.
In many cases, a recession results in credit scores dropping as more people are forced to temporarily rely on credit to make routine payments. This is just one of the many ways that the current recession bucks the trends. Lockdowns, work-from-home, moratoriums, and federal relief packages have all resulted in people spending less and recouping more of their losses than their normally would during a recession. As a result, people are less reliant on credit and their credit scores go up.
The two credit scoring services lenders use the most are FICO and VantageScore. Generally, one’s FICO score is slightly higher than their VantageScore, since FICO requires a full six months of credit history to calculate a score and therefore counts fewer people. Both systems range from 300 to 850, with a FICO score of at least 660 or VantageScore of at least 670 being considered good credit. At the start of 2020, the average FICO score was 703. This increased to 711 by October 2020. Average VantageScore also went up from 686 to 690 from 2019 to 2020. VantageScore reports indicate that subprime scores — those below 600 — decreased by about 3% between January and November 2020, while prime and super prime scores went up. Near prime scores remained about the same.
Unfortunately, some of this is just delaying the inevitable. Some of those who did take out loans during the pandemic were able to negotiate deferring their payments, which also had the effect of protecting their credit scores. Once federal protections end, which will occur 120 days after the coronavirus emergency declaration is lifted, some people aren’t going to be able to repay their deferred loans. That’s going to result in credit scores plummeting.
New York construction company SQ4D may have the latest and greatest in construction technology. They’ve used a giant 3D printer to print houses from the bottom up out of concrete, right on the site. Their first demo house, as a proof of ability, was in Calverston, New York. The next one is already up for sale, despite not having been built yet. The 1400 square foot house will be located in Riverhead, New York and is listed at $299,000.
This isn’t just some publicity stunt. 3D printing has some real benefits. Most notably, construction is significantly shorter. SQ4D’s first house took just eight days to build — and that includes the planning process. The actual construction? 48 hours. Making the process this quick must incur significant expenses, right? Well, no, it was actually cheaper according to SQ4D. The transportation and labor costs associated with traditional construction mean that 3D printing is about 30% less expensive. The new method has been met with some skepticism, though. No one is sure exactly how this will affect the construction industry, as skilled tradesmen may suddenly find themselves replaced with printers.
WalletHub, normally a personal finance website, has released data of a somewhat different nature. They’ve decided to rank 182 of the most populated US cities according to various indicators of health. The categories measured are health care, food, fitness, and green space. On a scale from 0 to 100, the top scoring city averaged across all categories was San Francisco, CA, with a score of 69.11. The lowest score was 23.39, given to Brownsville, TX.
Half of the top 10 cities are on the west coast, with 3 of them being in California. Two through ten are Seattle, WA, Portland, OR, San Diego, CA, Honolulu, HI, Washington, DC, Austin, TX, Irvine, CA, Portland, ME, and Denver, CO. In addition to being #1 overall, San Francisco also takes the number 1 spot for two categories, food and green space. Top rank for the health care and fitness belong to South Burlington, VT, and Scottsdale, AZ, respectively. These cities are also in the top 20 overall, though South Burlington ranks rather low in green space.
Low mortgage rates have resulted in increased buyer demand, and shifting preferences in home features are specifically increasing the demand for new constructions. With sellers waiting out the pandemic, there aren’t many existing homes available for sale. In addition, they don’t always have the features that the new generation of buyers is looking for, such as home offices, larger spaces, and outdoor amenities.
Chief economist Robert Dietz of the National Association of Home Builders (NAHB) predicts a 5% increase in construction starts by the end of 2021. Even so, buyer demand is expected to continue to outpace construction, so sales of existing homes will likely also increase. Builders are going to have trouble keeping up, not only due to lack of time or labor, but also because of increasing costs. The cost of lumber has gone up 169% since April 2020, the month after lockdowns started. Construction companies also report significant issues with obtaining timely approval and navigating new construction ordinances.
Those who have been able to buy during the pandemic have enjoyed extraordinarily low interest rates. It seems like time may be running out, though. At 2.96% as of February 10th, the 30-year fixed rate is still below 3%, but it has started to go back up, from 2.92% the prior week. Because of the increasing rates, mortgage applications to buy dropped 5% in that week. Refinances also went down, by 4%.
It’s still not clear whether this trend will continue in the future, as it’s only just begun. And both applications to purchase and refinances are still up significantly from last year, by 17% and 46% respectively. The Mortgage Banker’s Association (MBA) is predicting that this was only a slight dropoff in total loan volume, as a greater percentage of the loans are for higher-priced homes, primarily because their availability is higher. Of course, even though this is a silver lining for mortgage bankers, it doesn’t help the general populace at all.
We’ve just talked about the Millennial generation’s impact on the luxury real estate market and their desire for updated, move-in ready homes (see: https://www.beachchatter.com/2021/02/11/millennial-preferences-reshaping-luxury-market/). It turns out there’s another type of home that Millennials are itching to buy, and it’s quite on the opposite side of the spectrum. They’re moving across the country to buy old, cheap houses in need of extensive renovation.
Not all Millennials have the income to enter the luxury market, so for those with budget constraints, the alternative is to expand the search radius. There are plenty of houses under $100,000 that are in need of some updating in historically less desirable areas. A Utah couple bought a Victorian-style 1885 house in Connecticut for $85,000. They’re expecting to spend about $100,000 to remodel it. This is still far below Utah’s median house price of about $575,000. It’s likely that this trend will continue, as work-from-home enables prospective buyers to look anywhere within the country. More expensive areas such as New York City have already had a significant exodus.
There may be a surprising answer as to why younger generations have seen increased rates of living with their parents. Popular belief is that they’re either too lazy to get jobs or simply saddled with too much college debt. While lack of employment and exorbitant tuitions definitely play a role for some of them, Millennials are actually the largest group of homebuyers, so what’s true for some won’t be true of all of them. It appears some contingent of them have simply been biding their time, waiting for the perfect opportunity to skip past starter homes and enter straight into the luxury real estate market.
College may have brought with it a mountain of debt, but as a result, Millennials currently are the most educated group of buyers in the US and are earning more than any prior generation. They are also set to inherit more than prior generations did. It takes time, but they are able to save up money to buy a house. And not even just a house — the first homes of some Millennials are multi-million dollar residences. Of course, this is partly because rising prices have meant that more areas have multi-million dollar homes for sale. But another reason is Millennials’ wishlist items: move-in ready, good walk score, high-tech green features. These all add value to a home, making Millennials’ tastes — while not ostentatious — expensive.
In a survey of 1000 people who either just bought their first home or were trying to, 68% were surprised by just how much they were able to afford — 47% pleasantly and 21% unpleasantly. It makes sense that first-time homebuyers would generally have a less refined sense of what they can afford, but in this case, there’s a reason for it. Much of it can be attributed to the sharp decline in 30-year mortgage rates, from 3.65% in March 2020 to 2.65% in January 2021, which was a record low. This allowed prospective buyers to afford more without stretching their budgets too much.
Even if you think you can’t afford your first house at all, like 44% of respondents, you may want to reconsider in the near future. Half of the successful buyers were able to save enough for a down payment in 3 years or less. There were various methods they used to save up, and didn’t use just one method. The most common were getting help from friends or family at 52%, setting aside a portion of their paycheck at 50%, cutting spending at 33%, and saving lump sum money, such as tax refunds, at 32%.
Nevertheless, with prices on the rise, recent buyers have still had to compromise to find something within their larger-than-expected budget. 21% expanded their search area to include less desirable, less expensive neighborhoods. 18% dropped some wish list items. 20% wanted to avoid compromising on their wish list, but ended up spending more than they initially hoped. Increased competition also meant that buyers didn’t get what they wanted immediately. 20% were outbid at least once and 20% made at least five offers.
One of the many effects of the pandemic was that a large segment of the population transitioned to work-from-home. In some cases, those were renters who had the fortune of being able to move back in with their families. Perhaps their rental home was closer to work, and the distance no longer mattered. Maybe they just wanted to be able to shelter in place with their family as opposed to alone. No matter the reason, this segment of the population suddenly is no longer worried about rent payments, yet still has a place to live and is still working. Depending on the prices in their area, this could be rather useful in saving towards a down payment on a house.
The national average of a down payment on a median-priced house is 5%, the US median rent for a one-bedroom is $1,533, and the average home price is $340,000. Given these numbers, it would take the average former renter approximately 11 months of not needing to pay rent to save up for a 5% down payment. Across the 20 largest metros in the US, the average is about 15 months. The numbers range from 11 months in Chicago for a median priced home of $327,000, to 22 months in Los Angeles at $999,000.
Of course, national averages don’t tell you everything. A down payment of less than 20% in California is going to result in increased mortgage premiums, so a 5% down payment isn’t ideal. It’s also unlikely that the entirety of the former rent payment is being put into savings. It’s true that a long-term work-from-home trend could be a boon for former renters who moved back in with family, but the effect is probably considerably lower than these statistics suggest.
According to a recent survey from finance magazine Kiplinger and wealth management organization Personal Capital, over 40% of those saving for retirement are less confident in their savings now. The pandemic triggered a significant economic recession with the highest number of job losses since the Great Depression, reducing the ability to save and in many cases, forcing people to withdraw from savings.
33% of respondents took a distribution or loan from their retirement account. 58% of loans through the CARES Act borrowed between $50,000 and the maximum allowed of $100,000, and 33% of those who withdrew money took out $75,000 or more. A third of respondents also said they plan to work longer and delay their retirement, and some were forced to do the opposite and retire early without the ability to find work at their age. This could pose an issue, since retirees are quite reliant on Social Security. 20% of retirees use Social Security for at least 90% of their income, and 50% use it for over half their income.
The survey also only included people with at least $50,000 in their retirement savings. The problems may be worse for those without much savings, which could be a large segment of the population. In 2019, almost half of those in the US between the ages of 32 and 61 have no retirement savings at all. The majority of those with savings had less than $21,000. And remember that this was pre-pandemic — the recession only would have exacerbated this issue.
Whenever a tenant is moving out, they’re always expecting to get back their security deposit. But they may not get back all of it, as landlords are looking to deduct part of the security deposit to recoup as much as possible. While there are not very many laws regarding security deposit deductions, there are a few, and there are several guidelines.
Legally, a landlord has 21 days to mail the Security Deposit Refund letter to the tenant’s forwarding address, counting from the day the tenant returns the keys. If repairs won’t be complete within 21 days, the landlord still needs to provide estimated costs, and must provide the actual costs within 14 days of completion of the repairs. In nine cities in California, landlords must pay interest on security deposits, to be paid each year and at the end of tenancy. The rates vary each year and the payment deadline varies by city, so if you are a landlord, be sure to check with your local rent control board or city government if you live in one of these nine cities — Berkeley, East Palo Alto, Hayward, Los Angeles, San Francisco, Santa Cruz, Santa Monica, Watsonville, and West Hollywood.
The types of expenses that can be deducted are unpaid rent, cleaning, repairs, and restoring or replacing items specifically mentioned in the lease. Before and after pictures are important in determining whether the landlord can charge for cleaning. As for repairs, normal wear and tear cannot be deducted, but major damages can. If something needs to be replaced, replacement costs are usually calculated based on the item’s expected remaining life expectancy, not the full value.
