During the lockdowns, businesses had an excuse to try out work-from-home models and see how well it works. Is it better than office spaces? Worse? Just different? Offices and and work-from-home models both have their advantages and disadvantages, and the experience will be different for different people. By surveying employees who had a chance to work from home, some companies are rethinking whether they want an office space at all. Those who are keeping their offices are also learning what they can do to make the office a better place to work.
The main advantage of office space has frequently been assumed to be that workers are more productive without the distractions of home. While this is true for some people, especially those with young kids, by and large productivity has actually been higher using a work-from-home model. Some of this can be attributed to employees specifically focusing on work because they don’t want to appear unproductive, but for the company, this achieves the same result.
According to employees at advertising and marketing firm R/GA, the purpose of the office was not productivity. It’s human connection and collaboration. Two of the biggest disadvantages they saw while working from home is that they missed seeing their coworkers and weren’t able to coordinate with them efficiently. Many of them wanted to keep working from home, but still be able to access the office a few days a week to meet with coworkers. R/GA saw that as a pointer for how they could change the office experience to prioritize it being a collaborative space. Individual desks and cubicles serve little purpose here — what’s needed is more informal meeting rooms. There are larger conference rooms, but those don’t allow for smaller teams to work together without interruptions from other groups coming and going.
There are many terms thrown around when talking about factory-built housing — manufactured home, mobile home, prefab, modular housing — and many of them are used interchangeably. These are all factory-built, but in some cases, there are important differences you should be aware of.
Two terms that actually do mean the same thing are manufactured home and mobile home. This refers to a home that was fully built in a factory and transported to the site whole, without any customization possible. The law varies by state, but in California, a mobile home must be registered with the DMV because it is a vehicle, not a house. There are legal provisions to consider it real estate if it is affixed to a foundation. In any case, being vehicles, mobile homes actually depreciate over time rather than appreciate. They also are not necessarily well-built to begin with, since the regulations that govern their construction are different and more lenient than the regulations for prefab housing.
Speaking of prefab housing, this is actually a category of types and not a single type. All prefabs have components that are built in a factory, then shipped to the site to be composed on-site. Modular housing is just one type of prefab, with the other being panel built housing. The modules of modular housing are large sections which can be quickly combined for more efficient construction, but they are less customizable than panel built homes, which are constructed one single panel at a time from the bottom up. Some prefabs combine both modules and panels to get the best of both worlds. Prefab houses are actually houses and are subject to the same rigors of quality as traditional stick-built houses, and may even be higher quality since they are factory-tested before being sold.
In many cases, high-profile construction companies will purchase large areas of land and build many homes at once. In theory, this ensures that once this project is finished, they will already have homes available to purchase while they start their next project. This theory has started to break down in the current market, as demand has far outpaced construction in the wake of the pandemic lockdowns.
In fact, many buyers not able to find what they’re looking for among the low inventory of homes are actually purchasing homes that haven’t even been built yet. New residential construction sales went up 20% between November 2019 and November 2020. In some cases, buyers will contract builders to build new homes on a plot of land they have bought, but this isn’t the norm and doesn’t explain the surge in new construction sales.
A big part of the problem is that builders aren’t building. During the past year, they simply couldn’t, as lockdowns and rising costs of business made it near impossible to finish construction projects. But the issue started long before then. California’s most recent peak in SFR construction starts was in 2018 at 62,600, but this pales in comparison to the 2005 number of 154,700. And this is just SFRs — multi-family construction is also dropping. Meanwhile, more and more homes are needed, as California’s population increased by 17% between 2000 and 2018.
With interest rates being low, many people are going to want to refinance or secure a new loan while they’re able to get a rate under 3%. They’re going to need to act quickly, though, since rates are starting to go up and the average is currently hovering around 3% for a 30-year fixed rate loan. But what if you’re in forbearance or were forced to declare bankruptcy as a result of economic pressures? Can you still refinance or get a loan? The answer is, well, maybe. There are different categories of lenders and different requirements.
If you’ve been able to keep up with your payments despite being in forbearance, you shouldn’t have issues qualifying, especially if your new loan is backed by the FHA or FHFA. You can also qualify immediately for an FHFA loan if you’re able to repay any missed payments in a lump sum, though FHA loans have a waiting period for lump sum repayment. If your new loan isn’t backed by a federal agency, the requirements could vary widely, but they’re generally more understanding about losses due to economic situations outside of your control.
If you had to file for bankruptcy, you will probably have a waiting period. If the pandemic was the sole cause of your bankruptcy, you may be able to get a new loan immediately from non-federal lenders, but the interest rate will likely be higher. For FHFA loans, the wait period is generally four years from the discharge or dismissal date for Chapter 7 bankruptcies. For Chapter 13 bankruptcies, it’s still four years from the dismissal date, but two from the discharge date. In either type of bankruptcy, the four years may be reduced to two if a one-time event out of your control is what caused the bankruptcy. The periods are lower for FHA loans — two or one year from a discharge, or zero from a dismissal for Chapter 7. It’s possible to qualify for a loan, with bankruptcy administrator approval, after being in the repayment period for at least one year of a Chapter 13 bankruptcy.
On Jan. 19th, the Long Beach City Council voted unanimously for preliminary approval of two ordinances designed to increase affordable housing. The policy is still subject to objections prior to final approval, but if it continues as written, 11% of rental developments and 10% of housing developments will need to be set aside for affordable housing, else be subject to a fee. This would apply only to developments of 9 or more units in certain areas of Long Beach.
The City doesn’t want this to be a temporary solution, so ideally the policy will be the best it can be. However, it’s already been the focus of some criticism, ironically that some aspects end after a certain number of years and the policy therefore looks a lot like a temporary solution. There were also objections to the long phase-in schedule and the rather lenient option of developers replacing nearby properties with affordable housing if they don’t want to include them in the development itself.
If a property is available to rent for a period of 30 days or less, this is called a short term rental. One common example is Airbnb. Various jurisdictions within California have laws limiting short term rentals and requiring permits. You may be wondering why short term rentals are treated differently from standard rentals. There is actually a good reason for this.
In many respects, a short term rental is actually more like a hotel stay than a rental. Even though the definition allows for stays up to 30 days, both short term rentals and hotel stays tend to be significantly less than a month. In both situations, the rooms change hands frequently. Being quite similar to a hotel in this respect, it makes sense that short term rentals would be regulated as a business rather than a real estate transaction. And in fact, hotels may actually be less of a problem for the real estate market — they were never designed to be stayed in for long periods, while short term rentals detract from available housing supply. With reduced supply, this also increases rent prices and forces out some longer term renters. That’s why large cities with high rent prices like Los Angeles and San Francisco require owners of short term rentals to restrict the number of days per year that the property is rented out, or to reside in the property themselves a certain length of the year.
We’re all aware that the pandemic has disproportionately affected lower-income residents, including renters. But there are many statistics to look at when examining trends in the rental market, and some of them may not be so obvious. Who, when, where, and how much are all questions to consider.
The when is the most obvious — as a result of the pandemic, there were very few rental applications in the spring when the lockdowns began. What you may not know is that this is approximately when rental application volume typically goes up, so the normal rental market was effectively delayed by about two months. The period was shorter as well, ending in July rather than August as usual.
In prior years, the most frequent age group for renters was Millennials, followed by Gen-Xers. While Millennials are still at the top, their percentage among renters is shrinking, and Gen-Xers have lost their second place spot to a new group, the Gen-Zers. This is particularly striking because most people in Gen Z are not actually old enough to sign a rental agreement. What happened is that Gen Z was the only group to have an increase in percentage of renters, as every other category dropped, including Boomers who still retain 4th place. 16 of the 30 largest cities in the US had an overall decrease in rentals, and even in those few cities where the percent of people moving in was increasing, the percent of people leaving accelerated even more.
The good news for renters is that average rent prices in expensive cities are dropping from last year, which is particularly important because average income for renters stagnated in 2020. Only one city among the 30 largest, Baltimore, had an increase in rent prices leaving it above $1300. All the others with prices above this figure had a drop in rent prices. The largest dollar increase was $62 in Phoenix, from $1120 to $1182. By contrast, average rent prices dropped $640 in San Francisco, from $3695 to $3055.
The year 2020 was very nearly the least predictable time in local real estate history. Seriously, what other time have we experienced massive unemployment and rising home prices simultaneously? All indications suggest 2021 will be a tad more conventional.
Home Values Grew in 2020
Despite “turmoil” being the watchword of 2020, the year produced some remarkable results in the Los Angeles South Bay. The Beach cities recorded a 28% increase in median price for December compared to December 2019. The cost of building didn’t rise at that rate, so clearly there was a heavy investment in anticipated value. As the chart below shows, Even with all the up and down motion, during the final half of the year buyers & investors were betting heavily that things were headed for calmer, more profitable waters.
That activity was spread across the spectrum of prices, as you can see tracing the community lines shown above.
Note that May reflects the sudden market contraction from the Covid announcement the beginning of March. This is a rare moment when the chart shows how much delay there is between signing a purchase agreement, and closing escrow. In April, 30 days after the announcement of a Covid pandemic, escrows were starting to drop off and were at or slightly down from March closings. By May, 60 days later, the number of closed sales had fallen by ~50K units in each of the four market areas. It took the classic 45 day escrow period to show that the pandemic took away nearly 30% of the business in the local real estate market.
How Many Sales? Where? Why?
While the Beach and the Harbor areas fought it out for the highest total sales dollars throughout the year, the Harbor clearly enjoyed the highest number of units sold every month as we see in the chart below. While the number of sales climbed across the South Bay, at the end of the year it was the Harbor with the largest increase in sales. Starting 2020 with 315 sales in January, the number climbed consistently through the year to a strong finish with 476 in December.
Two factors play into the volume of Harbor area sales. Part is the sheer number of homes in what is physically a larger area. The more interesting aspect of Harbor area sales increasing while the rest are relatively flat is the reason.
Homes in the Harbor cities are lowest priced in the South Bay by about $100K. Interest rates are currently running below 3%, and it’s in the lowest price points of the market where low interest rates are most effective. The low rates mean more buyers can afford to purchase at the same price point, on the same income stream. The larger number of buyers competing creates multiple offers and drives the price higher, which is a major factor pushing the market today. If we are to believe the Federal Reserve Bank, current interest rates are expected to remain historically low for the foreseeable future. The demand should hang around for just about as long.
Different Strokes for Different Folks
In the chart below, it’s interesting to note that the Inland and Harbor cities progress across the months with stability and only a slight change from beginning to end. At the same time, the Beach and PV cities gyrate through the year, sometimes with $200K jumps from one month to the next. One is tempted to say it’s the comparative size of the market area, but the Inland cities have very nearly the same number of homes as the Beach cities.
This difference is often thought of as reflecting the nature of the home buyer in these communities. Looking at stereotypes, it’s easy to imagine an owner in Torrance or Long Beach, for example, who buys in their early twenties and doesn’t move again until retirement–very stable. In the Beach and PV price ranges, where a home is often considered more as an investment vehicle than a residence, it’s easy to see where market forces can result in sudden changes to where one lives.
Moving From 2020 to 2021
The beginning of 2021 marked the end of some of the more impactful aspects of 2020. A ferocious political battle is ended, and a new Federal administration looks inclined to use “all the available tools” to bring our collapsed economy back on line quickly. Time will tell how much that helps us here in the South Bay.
The ever-changing story of the international pandemic may be coming to an end with the approval of multiple vaccines for Covid-19. Rumors still abound as to the actual efficacy of the drugs, and rates of infection are still climbing dramatically, especially here in Los Angeles county. It will end, whether sooner or later. The big question today is if the price increases we’ve seen as a result of bidding wars will sustain as the pandemic eases and government assistance is strengthened.
Looking at December activity, we see big increases in sales volume for Month over Month (M-M) and Year over Year (Y-Y) statistics. A continuance of this trend could make 2021 an exceptional year for real estate in the South Bay.
Median prices show a large variation from area to area, and importantly show a slowdown in the climbing prices. Y-Y price growth was strong in December, reflecting the high demand at current interest rates. However, M-M prices predominantly showed a reversal in price growth. Some of the slowdown could be seasonal, but if you’ve been reading our blog posts you already know there’s a growing backlog of homes poised on the edge of foreclosure. The only thing preventing a mass of short sale and foreclosure properties on the market is the forbearance rules put in place to prevent a sudden jump in homelessness during the pandemic.
December activity in Beach cities showed insane growth for M-M and Y-Y sales, both in the the number of sales, and especially in the prices of sold homes.
As if annual growth of 28% in median price wasn’t crazy enough, look at that monthly increase of 18.2%! Annualized, that would be over 114% growth! Statistics with this much reach can only be attributed to a profound belief that prices will continue to increase at a similar rate. Or, continue until the property can be flipped, that is.
Palos Verdes in December was almost a reverse image of the Beach cities. The explosive growth in PV came in the number of home sales which shot up 18%, bringing the annual number to a phenomenal 42% growth in volume for the year.
Median prices in PV showed modest increases, ending the year only slightly higher than the Fed’s target growth rate. The shift from positive growth to shrinkage in December hints at an overall market trending toward lower median sales prices.
A side note: Homes on the hill have not maintained the “investment quality” image of those on the Beach. PV was once considered the place to buy a home from a prestige angle and from an investment perspective. New money moving into the Beach cities has diminished that role in recent years. I predict a rebirth of property values in the Palos Verdes cities over the next few years, which will make having a home on the peninsula key in local business and society.
For the most part, Inland homes are family homes. They are the places with hoops in the driveway and lemonade stands at the sidewalk. Investment here is a long term concept.
So, when we see over 20% M-M growth in number of homes sold accompanied by nearly 30% Y-Y, we’re seeing market movement rather than shifts in investment strategy. As it is throughout South Bay, the cause of that movement appears to be the sub-3% interest rate which enlarged the entry level market segment. More buyers flooding in created bidding wars and drove sales and prices higher.
Compared to last December, median prices in the Inland cities were up 5.5%, peaking at $733K. That’s a good healthy increase, only slightly above the expected Consumer Price Index (CPI) numbers. Caution though–the M-M median is down 2.3%. It could be a momentary blip; a result of the holiday season, or the Covid surge. That year end drop may also indicate that the $750K median from November is the market ceiling.
In addition to the largest home sales volume in the South Bay, the Harbor area boasts the most entry level homes. There’s a good deal of lifestyle overlap with the Inland cities, to be sure. The Harbor dramatically displays the same message we see across most of the South Bay. Everything was going strong until December, then buyers put the brakes on.
Today’s environment in the Harbor points the direction to the future. Sales here had a stronger growth than the Inland cities over the months leading up to December, and show a more pronounced decline in December.
Some of the slowdown will ultimately prove to be driven by the holiday, and some the election, and some by the pandemic. Even then, it’s hard to avoid the feeling that some of the decline is a recession held back by a thin wall of regulations temporarily preventing foreclosure and eviction.
We can certainly hope for better news from the new year, but as of the end of 2020 many of our indicators are calling for a deeper recession in coming months. It’s possible. Somewhere in the range of 20%-40% of homeowners are in forbearance now, and a roughly equivalent number of tenants are building up deferred rent payments. If adequate measures are taken to protect both sides of the debt, all of this will amount to footnote in history. Otherwise, it’ll be the second worldwide recession in this generation.
There’ve been plenty of articles written about the ever-changing details of the eviction and foreclosure moratoriums. Less has been said about other forms of pandemic relief, such as federal rent relief stimulus. While the stimulus was passed already in December, there are still some things you may not know about it.
The federal pandemic relief bill includes $25 billion in rent relief, approximately $2.6 billion of which is going to California. We haven’t yet heard the details on how to apply for rent relief, except that there is an option to give your consent to your landlord to allow them to apply on your behalf, but there is information about who qualifies. One need not be a citizen of the US or have documents to qualify, though it’s possible that individual states and jurisdictions could limit this. The main qualification is that the pandemic have caused you risk of homelessness or housing instability. Qualifying households must make 80% of the area’s median income or less, and there must be at least one person in the household who qualifies for unemployment or has experienced financial hardship as a result of the pandemic.
A qualifying household can get a maximum of 15 months worth of relief, as determined by their need, usable for unpaid and future rent and utility payments. It’s possible that some of the money could be used for other purposes, however, because the money is intended to be primarily for rent and utilities, it will be paid to the landlords and utility companies. Only if the landlord refuses it will the tenant be paid directly.
California’s housing market saw multiple shifts during 2020 as different sectors reacted differently and regulations changed with the times. When 2020 began, we already had high home prices and a construction deficit. The lockdowns of the pandemic propelled an economic recession that was already in the making, causing it to arrive faster than expected. Normally recessions cause a drop in prices, but the circumstances of this recession were forced, and therefore not necessarily subject to the same natural tendencies.
In the beginning of the lockdowns, real estate agents were not able to meet with clients or show property, causing the market to grind to a sudden halt. As the year progressed, regulations loosened somewhat, allowing showings under safe conditions. That prompted a spike in demand, as people who were itching to buy, especially with low mortgage rates, were finally able to start looking again. However, that did nothing to change available inventory. Inventory is low as a result of lack of construction, and what little construction there was being halted by lockdowns. In addition, most of the construction being done was for higher-end single-family residences, even as many prospective buyers were losing income due to the pandemic. With high demand and low inventory, prices simply continued to go up.
The market itself isn’t the only thing that changed, though. Prospective buyers are no longer looking for the same types of properties they wanted before 2020. If people are going to spend more time at home, they want the type of home that they’ll be happy living in. Move-in ready. Plenty of space. Home offices. Room versatility. It even extends to the outdoor amenities — houses with pools and outdoor living space are selling quickly, since people are able to be outside without leaving the confines of their property.