Many businesses have been struggling during the pandemic, but the cannabis industry is not one of them. Cannabis businesses were deemed essential and therefore have been working throughout the stay-at-home orders. And their business has been booming. One need only look at California’s state tax revenues to see it, as those from cannabis businesses have doubled in Q3 2020 compared to Q3 2019, jumping from $171 million to $371 million. The president of the Long Beach Cannabis Association, Adam Hijazi, has witnessed multiple first-time buyers every single day.
Of course, it’s entirely possible that this growth is despite the pandemic and not because of it. It’s only been three years since recreational cannabis was legalized. There’s still plenty of room for the industry to grow, and more businesses are opening each year. The legal cannabis business is so fresh that the illicit market still accounts for a large portion of cannabis sales. The Long Beach Economic Development and Finance Committee is even considering making starting a legal cannabis business easier to encourage this highly profitable new market.
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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.
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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.
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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.
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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/
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The National Association of Home Builders (NAHB) now has data for Q2 of the year for its Housing Opportunity Index, which measures affordability of homes compared to median income. The US adjusted median income is currently $72,900. With these earnings, 59.6% of home sales were affordable in Q2 of 2020. This is down from 61.3% in Q1. This downward trend is largely expected, though, since the overall direction of movement has been down since NAHB introduced the Housing Opportunity Index in 2012, with occasional ups and downs. At its inception, the value was 78.8%.
What causes affordability to go down? The index looks at three factors: mortgage interest rates, median incomes, and home prices. Since interest rates are at historic lows right now, they’re not the culprit for falling affordability. Home prices are still rising more quickly than the median income, despite the rate of increase for home prices dropping in the last several years. Not to mention much of the recent boost to median income is not actually a result of increased wages, but rather job losses — since unemployed persons are not included in the median income figure, low-wage earners losing their jobs due to the recession and COVID-19 has artificially inflated the median income.
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Residential construction of both single-family residences (SFRs) and multi-family housing has been on a downturn since the most recent peak in 2018. SFR construction in particular is a long way down from the 2005 numbers when they started to nosedive, while multi-family housing construction has been relatively stable since the 1980s, albeit much lower than it should be.
The number of SFR starts in 2020 is projected to be about 53,000, 10% lower than in 2019 and less than a third of the 2005 number of 154,700. Multi-family housing construction has rebounded from the 2009 trough, but at an expected 48,000, is still down 5% from last year. For multi-family housing, the 50,300 value in 2005 was actually lower than the 2017 and 2018 peak of 53,800 both years.
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The US plan to start a trade war with China is bad news, predict economists and management experts at UCLA. This year saw a GDP growth of 3%, which President Trump optimistically expects to rise by 4-6% going forward. According to the experts, though, over the next two years, the rate is expected to drop to 2% and then 1%.
Job growth is predicted to dip from 190,000 per month to 160,000 per month by 2019 then fall off dramatically in 2020 to 40,000 per month. While the expected rate of unemployment is 3.5% in 2019, a fifth of a percent lower than the current rate of 3.7%, by the end of 2020 it could rise again to 4%.
The worry of the UCLA team of economists is that recent attempts by businesses to invest while interest rates are low to profit later will cause them to carry more debt than expected as trade tensions rise. Furthermore, it’s not just these businesses but the whole economy that will suffer because of rising prices coupled with slower growth.
Currently, people age 50 or older account for 63% of homeowners nationwide. Three quarters of them live in single-family homes and 76% own their own homes. Increases in both population and longevity mean that the percent of homeowners in their 70s, 80s, and 90s is increasing. Trends among those over 65 reveal some of the problems with these growing statistics.
A support structure unprepared for these rising numbers of seniors begets homeowners unprepared for retirement and housing costs, as they are unable to manage both healthcare costs and housing costs without a steady income. And more of them over 65 still have a mortgage after retirement, a statistic which nearly doubled from 1989 to 2016. A similar statistic holds for loan-to-value ratios, doubling to 51% for those age 50-64 and tripling to 39% for those 65 and over. The average home equity amount was $143,500. These values originate from what were at the time low interest rates and recently popularized home equity loans.
Social Security is going to be an important factor in enabling seniors to acquire safe, accessible, and affordable housing, since it is a main source of income for many of them. In 2016, 9.7 million of those over 65, nearly a third, were spending more than 30% of their income on housing costs, and 4.9 million were spending over half.
The California Association of Realtors (C.A.R.) is predicting a slowdown in the 2019 housing market. Interest rates will continue to go up, straining already weak affordability and reducing demand. The senior Vice President and Chief Economist of C.A.R., Leslie Appleton-Young, says that high prices despite our recovery from the housing shortage are fueling a period of uncertainty among homebuyers. Buyers will feel the need to stand back while he market figures out where it’s going — which is probably down.
Another issue that will be facing California in 2019 is outmigration. Many people no longer able to afford homes where they have been living are forced to move elsewhere. This is often another county with lower priced and less desirable homes, and sometimes even outside of California with its relatively high-priced home market.
C.A.R. has provided data for the prior five years beginning in 2013, this year’s projected numbers, as well as forecast numbers for 2019:
Year: 2013 2014 2015 2016 2017 2018 2019
Single Family Home resales, thousands: 414.9 382.7 409.4 417.7 424.1 410.5 396.8
% change: -5.9% -7.8% 7.0% 2.0% 1.5% -3.2% -3.3%
Median price, thousands: $407.2 $446.9 $476.3 $502.3 $538.0 $575.8 $593.4
% change: 27.5% 9.8% 6.6% 5.4% 7.2% 7.0% 3.1%
Housing Affordability Index*: 36% 30% 31% 31% 29% 28% 25%
30-year fixed rate: 4.0% 4.2% 3.9% 3.6% 4.0% 4.7% 5.2%
*The Housing Affordability Index is the percent of households who can afford a median-priced home.