The Alternative to Mortgage Forbearance

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.

Photo by Felix Mittermeier on Unsplash

More: https://journal.firsttuesday.us/the-jingle-mail-strategy/75030/

How Does GDP Reflect Economic Health?

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.

Photo by Matthew Lancaster on Unsplash

More: https://journal.firsttuesday.us/the-interplay-between-home-sales-volume-gdp-and-employment/34485/

Renters and Homeowners Alike Unsure of Their Economic Security

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.

Photo by Sandy Millar on Unsplash

More: https://journal.firsttuesday.us/over-one-half-of-renters-one-third-of-homeowners-arent-sure-they-can-pay-next-months-housing-payment/74941/

Most Younger Generations Still Can’t Afford to Buy

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.

Photo by Georg Bommeli on Unsplash

More: https://journal.firsttuesday.us/homeownership-remains-elusive-for-young-adults-amid-recession/74939/

Understanding Labor Force Participation

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.

Photo by Kemal Kozbaev on Unsplash

More: https://journal.firsttuesday.us/the-labor-force-participation-rate-continues-to-shrink-with-poor-implications-for-real-estate/74804/

LA County Tightens COVID-19 Restrictions


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

Photo by Bill Oxford on Unsplash

More: https://covid19.lacounty.gov/covid19-news/los-angeles-county-to-implement-tighter-safeguards-and-restrictions-to-curb-covid-19-spread/

CFPB Plans to Replace Debt-To-Income Requirement

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.

Photo by Igal Ness on Unsplash

More: https://journal.firsttuesday.us/cfpb-sets-crosshairs-on-dti-requirements-for-new-qm-criteria/74918/

2021 Tax Rate Information Now Available

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/

Photo by qi xna on Unsplash

Businesses Are Preparing for Smaller Thanksgivings

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.

Photo by Annie Spratt on Unsplash

More: https://www.lancasterfarming.com/farm_life/food_and_recipes/smaller-turkeys-yams-to-go-or-a-thanksgiving-lobster-covid-19-will-transform-holiday-meals/article_b68d5e9c-54ea-53a0-a571-2207005ed16a.html

Real Estate Sales, Oct. 2020

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.

Photo by Nathan Dumlao on Unsplash

Palos Verdes

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.

Photo by Dominik Lückmann on Unsplash

Harbor Cities

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.

October2020September2020ChangeM-M
Med Sales $Sales #Med Sales $Sales #Med Sales $Sales #
Beach1,407,5001671,500,000209-6%-2%
PV1,682,750981,600,00095+5%+3%
Inland759,000163719,000183+6%-11%
Harbor656,000457636,000435+3%+5%
So Bay820,000885799,500922+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.

October2020October2019Change %Y-Y
Med Sales $Sales #Med Sales $Sales #Med Sales $Sales #
Beach1,407,5001671,202,00011517%45%
PV1,682,750981,233,0006536%51%
Inland759,000163680,00016412%-1%
Harbor656,000457600,0003979%15%
So Bay820,000885699,00074117%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.

Crystal ball image by Jamie Street on Unsplash