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.
As 2020 ended, it looked like the real estate industry here in the Los Angeles South Bay was going to run right through the pandemic with prices climbing the whole way! It didn’t happen. January put the brakes on sales across the board. Every area showed a drop in the number of sales, with Palos Verdes dropping the deepest at 40% below December’s transaction volume.
Along with a decline in the number of sales, The South Bay showed a 35% drop in sales dollars from December to January. Monthly statistics can be misleading though. With a year like 2020 we need to look at the wider perspective. On a year to year basis, we’re still riding high with a 33% increase across the area.
Keep in mind these are relatively small volumes of data, dealing only with the “hyper-local market” here in the South Bay, so some large percentile swings are unavoidable.
Month-to-Month sales volume indicates a general softening of the market with a significant drop in the number of purchases. In addition, the price side of the chart hints at a pending drop in prices.
Much is being said about the January sales decline, most of it anecdotal. There is a seemingly hopeful general consensus that a pandemic peak, combined with the political climate, were the main drivers keeping people from buying real estate. Theoretically, now that spring is in the air and “herd immunity” is in sight we might again see those scorching increases of last year.
The Beach cities showed a 12% decline in January sales prices compared to December, however we need to remember that December 2020 was a record month for median prices at the beach. In fact, for much of the year, high-end sales dominated the charts for Beach area sales.
There’s good reason to hope for stabilizing volume and pricing, though. Even at the comparatively modest 2% monthly increase we’re seeing in PV and the Inland areas, the annual increase is nearly 25%. That far exceeds the 2% annual increase the Federal Reserve Bank is targeting. These numbers are reminiscent of the lead-in to the Great Recession.
On the year over year side, things look somewhat different. In January of 2020, before the pandemic became front page news, overall sales volume was 13% higher than 2019. Building on that impressive growth, this January shows a similar 18% sales increase for the South Bay. The pandemic has taken a negative toll in many aspects of life, but real estate here in the South Bay is prospering throughout it all.
While the number of sales has increased over last January, price growth has been equally impressive. Beach areas and the Palos Verdes cities came in at 10% and 11% respectively. Boosted by the record low interest rates, the lower priced Harbor and Inland areas were up an even greater 14% and 15%. Recent inching up of the mortgage loan interest rates threatens to dampen sales as the least qualified buyers slip out of the market.
We’ve looked to the Beach area more and more often in recent years as an early indicator of where the market is going. We do that because a large percentage of the transactions in the Beach cities are primarily for investment value as opposed to being simply homes. Right now it’s looking like investors are taking a pause. The coming three to six months should tell us how long it’ll be until they come back into the market.
Long Beach, San Pedro, Harbor Gateway and similar locales have benefited greatly from the currently low interest rates. The month to month sales volume has had the least impact of the South Bay, with only a 25% decline compared to 30% across the board.
Similarly, prices have maintained nicely. Up 1% from December and up 14% from last January puts homes there in competition with the Inland cities for being the most marketable homes.
Prices are up 2% on the hill compared to December, and they’re up 11% over last January. A very respectable performance considering that month to month sales are off 40% and annual sales are only up by 5%.
It’s always important to note that homes on the peninsula are quite diverse in nature and in size, and the market is relatively small, so one or two transactions can distort statistics.
While the Beach cities are known to be havens for investment, the Harbor certainly has it’s own share of investment dollars. Many of the remodeled tract homes flying off the market in the Inland areas have already been purchased off-market by developers who refurbish and resell them. This has been especially prevalent over the past year as sales burgeoned in the entry level markets.
Despite dropping 35% from December, sales volume was up 24% over last January. At the same time there was a tidy 15% improvement in pricing over the same month last year.
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.
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.