Monday Morning Real Estate Update
Podcast Transcript for Monday, July 06, 2020
JUNE 2020 JOBS REPORT
The June Unemployment report exceeded expectations or as the White House stated, it shattered expectations with a gain of 4.8 million jobs and landing at a rate of 11.1%.
First, if you set your expectations low, you can shatter any record. Second, small wins should be celebrated cautiously because the unemployment rate is still higher than it was during the Great Recession, holding with a 7.8% increase compared to February.
Reading beyond the first 2–3 paragraphs of the US Bureau of Labor Statistics, Employment Situation Summary of those returning to work, Blacks, Hispanics and Teenagers make up the largest block at 53.1%.
As reported by the Wall Street Journal, The Congressional Budget Office (CBO) is predicting that the unemployment rate is likely to remain in double digits through the year’s end at around 10 to 11% and that the economic downturn will be more severe than previously forecast with a reduction in the GDP shrinking 5.9%.
The pandemic and its subsequent mismanagement is predicted to scar the economy for a decade and likely move us from the status of recession to depression.
The IMF is predicting nothing short of a global economic disaster, stating in its World Economic Outlook Update For June, that it is, “A Crisis Like No Other, An Uncertain Recovery.” The report does leave a lot of room for error and directly states it as such. In other words, they really don’t know how bad it can get or if things will turn around and get better.
In the United States, the virus is raging and as it continues to rise, regardless of what the White House says, additional lockdowns may be coming.
In a personal level, you can actually see it with your own eyes. Any store you walk into will have shortages on their shelves and odd brands you’ve never seen before. Manufacturing and shipping has been disrupted from China, Italy and many other countries.
In the real world of business decisions, what is needed is accurate information that contains no spin. The jobs report and its subsequent affect on Wall Street has become more a tool of politicians as justification for reelection. Taking what only appears to be good news, running with it as justification for making business decisions on everything from the stock market to purchasing real estate, is a recipe for disaster. You need real information.
We can’t blame everything on the virus. Oxfam America reported in 2016 that US wages were staggeringly low with some 50% of those employed making under $15 an hour. Four years later and there is still great reluctance and feet-dragging when it comes to the issue of raising the minimum wage. The point here being that the economy, prior to the pandemic, was not great for everyone. In fact, it was an ongoing struggle for approximately 40 to 50% of the US workforce.
Besdey Stevenson, a professor at the University of Michigan, stated: “The virus drives the economics.”
Okay Bessey, this may be true for the moment but I have a question: if the virus is truly driving the economy, then why did the stock market rally on the news (for 2 months in a row) of a jobs report that Wall Street knows are sugar coated and all the while the virus and the US government response to it, is essentially the biggest failure in modern history?
We have to keep ourselves well informed and then keep our own council when it comes to making financial decisions.
WHO ARE WE, AMERICA?
Everything seems to be dividing to polar opposites with no room for the in-between. We have polar opposites. Two legal systems, one for the rich and one for the poor. We have 2 economies, income inequality and two medical systems, one for those with insurance and one for those who can’t afford it but have no public alternative.
Are we turning into Brazil? You may have heard about a lot of the bad press that Brazil gets about its poverty-stricken streets and crime. While you can’t classify many as homeless, they are living in impoverished neighborhoods in houses that would never pass even the most permissive building ordinances in the US. That’s only half the story. In comparison, the other half in Brazil lives in luxury surrounded by natural beauty and modern structures.
Here in the US, we have wealth right next to growing poverty. Homelessness is an amorphous condition that varies from year to year but between 500,000 and 600,000 people are homeless on any day that you find yourself reading this article.
Anyone that lives in Los Angeles or the Bay Area (especially in San Francisco, Oakland and San Jose) understands what income inequality looks like, because not only do we have homeless encampments and tent cities in the shadow of multi million dollar victorian townhomes but also people who are doubled, triple and quadrupled up in apartments. Avarice next to squalor. Bounty next to want. Abundance next to need. This is where we are heading as a society, if we let it…
HOME SALES: Manhattan
According to the NY Times, Manhattan home sales have dropped 54% and the median price fell to $1 million (which is an approximate 17 to 18% drop). June new apartment contracts in Manhattan are down 76%.
HOME SALES: San Francisco
Meanwhile San Francisco, there exists and odd set of circumstances where the housing market is concerned.
A record number of condos came on the market in June, well over 300. which reflects a 70% increase when compared to normal times. So, normally there are a little over a hundred for sale.
As for the 200 condo increase, there is no data on how many of these condos were illegal Airbnb’s or rentals vs. being occupied by owners. But my bet is that more than 75% of them previously fit into the airbnb / rental category.
Perhaps not a surprise, the prices of condos are falling, with over a 100 of them registering a price reduction in June.
Tell me, are we in trouble yet?
Year over year, there are 57% more Single Family Homes on the market! The number of price reductions for single family homes was double what it was last year.
The number of actual sales has been holding steady, which when you consider the increase in the number of properties on the market, there has actually been a reduction of sales statistically.
SAN FRANCISCO LANDLORDS ARE FACING SEVERE HARDSHIPS
If you own a property, let’s say a 3 bedroom victorian that was renting for $8,000 per month and you have a small mortgage on it of, let’s say $700,000, your monthly payments and taxes may be somewhere in between $4,000 — $4,200 per month. You bought the property because it would rent for $8,000 per month, netting you around $3,500+ per month after expenses.
As of today, the rents are dropping rapidly and regularly each week. Last week the rental for a nicely-renovated 3 bedroom victorian was $5,500 and this week, it’s $4,950 (pending neighborhood).
The math is pretty obvious. The only choice for landlords is to sell if they can’t carry the difference. Remember, there is no guarantee of profit when you buy a rental property and of course, no one could have predicted the pandemic and the ensuing embracement of remote work on the part of tech companies.
What does this mean for the long term single family market in larger cities? Condo owners have a long road ahead but single family homes will always fair well.
AFFORDABLE RENTS = DESIRABLE CITIES
I grew up in Philadelphia in the 70’s and 80’s. Philadelphia had high-end rental buildings and also affordable rentals. The newer buildings and high rise buildings were luxury priced and the older buildings or buildings with fewer amenities were affordable. This was pretty much the same for almost any city up until the late 80’s / early 90’s.
With the decrease of fill-in properties, the rising cost of building and renovations and the increase in population and demand, priced rose to unimaginable levels in large popular cities.
Yet, what’s happening in San Francisco, while painful for those more recently invested in rentals, it is in homeowners best interest to have a highly affordable rental market in the city, because otherwise, when things get back to “normal”, services will suffer.
An affordable rental market helps students, part time workers, young couples and elderly people who do not have large resources to live and enjoy with city. An affordable rental market opens the door to help people save for homeownership. In addition, it offers a short commute for restaurant and other service industry workers to serve the city.
FORECLOSURES & EVICTIONS
Outside of the luxury markets, some experts are predicting a wave of foreclosures and evictions. The initial wave is predicted to start this month. As long as our government continues to stick their head in the sand with respect to dealing with the Corona Virus and additional stimulus, I believe this will happen.
GLOBAL ECONOMIC SOLUTIONS
The Hill Reported on a virtual meeting held earlier last month of The World Economic Forum to discuss a Global Great Reset of Capitalism. The Title of the article called the ideas, radical. But are they?
The ideas are simple. Capitalism must be regulated and contain socialistic features of the kind that Bernie Sanders espouses and also AOC with the New Deal. Attendees from Greenpeace to Prince Charles.
The Great Reset would also include revamping education, social contracts and working conditions.
This may seem like a fantasy but the global economy is teetering and changes must be made. With globalization, wealthy countries can’t continue to benefit from slave labor in impoverished countries. We can’t have children in India sewing our clothing or workers in China living in sardine-like conditions, while working in factories that produce disposable junk for other consumer-based countries.
If you would like to hear my Podcast of this article, please visit Never Too Late To The Game’s Monday Morning Real Estate Update for July 06, 2020. You can also find me on Spotify, Google or Apple Podcasts.
