Monday Morning Quarterback

Monday Morning Quarterback

(Monday, May 5, 2025)

Uncertainty about which imports will be socked with new tariffs and when they’ll go into effect has thrown a cloud over home builders and real estate developers trying to pay for new construction throughout Southern California (including neighborhoods scorched by the January wildfires). LA Times reports that builders are trying to budget for rising costs but are frustrated because they don’t know what construction materials and appliances, such as stoves and air conditioners, will cost in the months ahead. Questions surrounding the tariffs are already forcing contractors to make quick purchasing decisions, especially for windows, doors, plumbing and lighting fixtures and other materials made or manufactured in China (which are subject to duties of 145%). Prices for their customers are already going up. “We’re padding a 5% to 10% contingency for what we’re calling ‘market volatility’ into the budget,” said Cory Singer, a general contractor working on 10 rebuild projects in Pacific Palisades, including the first home under construction there since fire tore through the neighborhood. He says a tile supplier told him last week that if he didn’t place an order immediately the new price would be 10% higher, and Singer is telling rebuilding homeowners to prepare for higher costs. The wildfires (which burned an estimated 16,000 homes, businesses and other structures) will ignite a massive construction boom around Los Angeles. But builders are already bracing for material shortages and potentially higher costs for such items as lumber and bathtubs. Singer says some of his clients are considering putting containers on their properties so they can buy materials over the next few weeks and store them until they’re needed. Architects, developers and contractors working in fire-affected areas says the most worrying part of the tariff debate is not knowing which levies will remain as they take on one of the largest rebuilding projects in L.A. history. The National Association of Home Builders estimates that $204 billion worth of goods were used in the construction of both new multifamily and single-family housing in 2024. In other real estate investor news, let’s get under the hood…

L.A. Housing Construction Plunged At Start Of Year. Let’s start with the latest on housing construction. LA Times reports that housing construction in Los Angeles plunged during the first quarter of 2025 (according to a new report), a drop-off that could ultimately worsen the city’s affordability crisis. The city approved permits for only 1,325 new homes during the first three months of 2025, down nearly 57% from the same period a year earlier. In the report released Tuesday, research firm Hilgard Analytics blamed the sharp decline on a variety of factors that have made it more difficult for developers to turn a profit, including high interest rates, tariffs and economic uncertainty, as well as a property-transfer tax known as “Measure ULA.” Hilgard principal Joshua Baum said the January wildfires probably also played a role by causing widespread business disruptions. Declines in the first quarter were reported in most areas of the city, but the steepest drop-offs were in council districts that cover the west Los Angeles and northeast portions of the San Fernando Valley. A sustained pullback in housing development could have big implications for a city in the throes of an affordability and budgetary crisis. In general, economists say, building more homes reduces upward pressure on home prices and rents, and new development also tends to boost tax revenue. Some developers say Measure ULA, a new Los Angeles tax on large property sales, has made the environment worse in the city compared with the rest of the county and nation, and caused even more projects to be killed. “If we aren’t building now, from a long-run perspective, that says higher prices and higher rents at some point in time in the future are inevitable,” said Christopher Thornberg, founding partner of consulting firm Beacon Economics.

Housing Starts Declined in March. As described above, US homebuilding continues to whipsaw as builders deal with all sorts of headwinds, tailwinds, and crosswinds. After unusually cold weather and California fires held back homebuilding in January, new home construction rebounded sharply in February, topping even the most optimistic forecast from any economics group surveyed by Bloomberg. Then in March (see above), homebuilding contracted by the most in a year, falling 11.4% to a level even lower than the weather-constrained month of January. Already hamstrung by high home prices and relatively high mortgage rates, builders must now contend with the uncertainty of new tariffs and how they’ll impact their building costs. Looking at the details, single-family construction led the decline, falling 14.2%, the biggest decline for the category since the COVID lockdown. The overall drop was split amongst regions, with the South and West responsible for the entirety of the decline (homebuilding in the Midwest and Northeast rose in March). Looking at the trend, home construction has stagnated in recent years, with starts down 1.3% compared to two years ago and hovering around levels reminiscent of 2019. That said, it appears that part of the reason why homebuilding has lagged is due to builders focusing on completing projects. Home completions declined 2.1% in March, but the 1.549 million annualized pace was faster than all but two months from 2020-2023. Moreover, completions have run above a 1.5 million pace (estimation of annual homes needed to keep up with population growth and scrappage) in eleven out of the last twelve months. With strong completion activity and tepid growth in starts, the total number of homes under construction continues to fall, down 15.2% in the past year. That type of decline is usually associated with a housing bust, but economists don’t see that happening. With the brief exception of COVID, the US has consistently started too few homes almost every year since 2007. As a result of the shortage of homes, economists think housing is far from a bubble and expect housing prices to continue higher for the remainder of 2025 in spite of some broader economic headwinds.

New Single-Family Home Sales Increased in March. Now, let’s transition from new construction to new single-family homes. New home sales surprised to the upside in March, beating even the most optimistic forecast by any economics group surveyed by Bloomberg, and rising for the second month in a row. Looking at the big picture, buyers purchased 724,000 homes at an annualized rate, well below the highs of the pandemic and essentially unchanged from 2019. Looking at the details, most of the gain in March was driven by a 13.6% jump in sales in the South (the largest region) where activity reached the highest level in four years. Though economists expect a modest upward trend in sales for the second half of 2025, the housing market continues to face challenges. The biggest (and most obvious) is financing costs. While March sales probably benefitted from a temporary dip in mortgage rates, that has recently reversed with the average 30-yr fixed rate back near 7%. Further, the Fed has recently paused their rate cuts, meaning the housing market is on its own for the time being. One piece of good news for investors is that median sales prices are down 7.5% in the past year, and down 12.3% from the peak in October 2022. The Census Bureau reports that from Q3 2022 to Q4 2024 (the most recent data available) the median square footage for new single-family homes built fell 3.4%. So, it looks like at least part of the drop in median prices is due to smaller, lower-cost homes along with a drop in the price per square foot. Supply has also put more downward pressure on median prices for new homes than existing homes. The supply of completed single-family homes is up over 280% versus the bottom in 2022. While the future cost of financing remains a question, lower priced options and an abundance of inventories will help fuel new home sales in the remainder of 2025.

Existing Home Sales Declined in March. MarketWatch reports that existing home sales remained sluggish in March, with broad-based declines across all major regions causing the largest monthly decline since 2022. Sales activity has been characterized by fits and starts since 2022, with any positive upward trend eventually running into a ceiling of around 4.300 million. Big picture, sales are still well below the roughly 5.250 million annual pace that existed pre-COVID, let alone the 6.500 million pace during COVID. Affordability remains the biggest headwind to sales, but the good news is that 30-year mortgage rates fell roughly 30 basis points in March. However, interest rates have begun to climb again recently and are back near 7%, meaning financing costs aren’t likely to deliver a sustained tailwind to sales. Meanwhile, home prices are rising again with the median price of an existing home up 2.7% from a year ago. Speaking of price, it looks like the housing market has bifurcated. While the sales of homes worth $500,000 and above are up in the past year, sales for homes below this threshold are flat or have continued to fall. On a positive note this demonstrates that, at least at the higher end of the market, both buyers and sellers are beginning to adjust to the new reality of higher mortgage rates. However, it also suggests that at the lower end of the price spectrum inflation has priced many Americans out of the existing home market. Existing home sales also face significant competition from new homes, where in many cases developers are buying down mortgage rates to compete and move inventory. Finally, many existing homeowners remain reluctant to sell due to a “mortgage lock-in” phenomenon, after buying or refinancing at much lower rates before 2022. This remains a major impediment to activity by limiting future existing sales (and inventories). However, there are signs of progress with inventories rising 19.8% in the past year. That has helped push the months’ supply of homes (how long it would take to sell existing inventory at the current very slow sales pace) to 4.0 in March, a considerable improvement versus the past few years, but still below the benchmark of 5.0 that the National Association of Realtors uses to denote a normal market. A tight inventory of existing homes means that while the pace of sales looks like 2008, we aren’t seeing that translate to a big decline in prices.

What Lipstick And Underwear Sales Tells Us About Our Economy. Is the country heading towards a recession? Ask 10 economists and you’ll likely get 10 different answers. Which is why some people have given up on the traditional data – GDP, jobs, etc – and have instead recently been tinkering with more unusual economic indicators to help them guide their investments. Here are two that I’ve seen:

Men’s underwear. Ask any guy about underwear, and they’ll usually admit the same thing. When times are good, we’re buying the good stuff. When money’s tight, we’re wearing those things until they literally fall off. So do men’s underwear sales mirror the economy overall? Some (including former Federal Reserve chief Allan Greenspan) think so. If you want to check out how the men’s underwear business is doing you can look at Hanesbrands or PVH Corp (which owns several leading brands, including Calvin Klein and Tommy Hilfiger), or Ralph Lauren Corporation. “Bottom” line: men’s underwear sales have been sinking over the past 6 months.

Lipstick. For the most part, lipstick is a relatively inexpensive accessory, with a typical tube costing anywhere from $5 to $20. History has shown that women will cut back on more expensive beauty goods like makeup and perfume when times are tight. But lipstick? Don’t even go there. When lipstick sales increase as luxury beauty item accessories decrease, that’s another potential sign of economic headwinds. Where to research lipstick sales? Try the big cosmetics companies like L'Oreal, Estee Lauder, and Ultra Beauty. All three companies have shown sagging revenue over the past months.

Coachella Began As A Typo. Congratulations to those of you that survived and returned from the Coachella Music Festival (and/or Stagecoach). Did you know that The Coachella Valley Music and Arts Festival made its debut in early October 1999. But did you also know the name “Coachella” was actually a typo mistake? As the City of Coachella's website explains, the Southern Pacific Railroad laid the first tracks throughout the valley in 1876, linking it to a growing network of railways across California. A secondary track, called a side spur, was built in present-day Coachella. A railroad employee named Jason Rector was tasked with clearing the trees in that area, which became known as Woodspur. Rector is credited with becoming the town's first permanent resident and "unofficial mayor" for the rest of his life. He also helped name it. According to the city's website, during the process of laying out the townsite in 1901, Rector proposed "Conchilla," which means "little shell" in Spanish and references the fossils that were found in the area. The developers, in agreement, designed a prospectus that would announce the opening of the new town. But the brochures they got back from the printer misspelled "Conchilla" as "Coachella." Rather than delay the announcement, the founders decided to roll with the name — which the valley itself went on to adopt. The town, however, didn't become a city until 1946. "'Coachella' was a mistake," Crider says. "They decided just to keep the name, even though 'Coachella' itself does not mean anything. It doesn't mean anything in Spanish, it doesn't mean anything in English, other than the place that we know as Coachella." In the decades that followed, the region's dry, sunny climate and fertile soil attracted both farmers and celebrities. Crider says it's been "an escape for the elite literally for a century" — and the Coachella Festival has only made the area more famous since then.

The History of the Middle Finger. Well, now, here's something I never knew before. And now that I know it, I feel compelled to share with my intelligent readers in the hope that you too will feel blessed in having gained this knowledge. History is way more fun when you know more fun facts about it, don’t you agree? Before the Battle of Agincourt in 1415, the French, anticipating victory over the English, proposed to cut off the middle finger of all captured English soldiers. The French soldiers reasoned that without the middle finger it would be impossible to draw the renowned English longbow and therefore they would be incapable of fighting in the future. This famous English longbow was made of the native English Yew tree, and the act of drawing the longbow was known as “plucking the yew” (or for short “pluck yew”). But, much to the bewilderment of the French, the English won a major upset at the Battle of Agincourt and began mocking the French by waving their middle fingers at the defeated French, saying, “See, we can still pluck yew!” Over the decades Americans have changed up the words, the “pluck yew” is now "f**K you" and the words often used in conjunction with the one-finger-salute! It is also because of the pheasant feathers on the arrows used with the longbow that the symbolic gesture is known as “giving the bird.” And yew thought yew knew every plucking thing.

How to Invest in Commercial Real Estate. One of the exploding areas of real estate investing is commercial properties. And it's easy to see why. The properties are generally better quality, the tenants are responsible businesses, the leases are triple net (tenants pay for everything!), and your profits are larger. What more could you ask? Plus, commercial properties are easier to find, value and buy - if you know where to look. The expert authority who will show you how to find, value and buy commercial properties is the renown Joseph James. And he's exclusively ours on May 8, 2025. Don't miss this special event! Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Culver City CA. FREE Admission. Please RSVP at our website, LARealEstateInvestors.com.

Vendors Expo Returns! Our world-famous "Vendors Expo" returns in 2025, on Thursday night, May 8, 2025. The Vendor Expo opens starting at 6:30 pm. We'll have 30+ of the finest vendors featuring real estate products and services you will want to utilize as a successful investor. Our Vendor Expo will be held at the Iman Cultural Center, 3376 Motor Avenue (between National and Palms), Culver City CA. FREE Admission. Please RSVP at our website, LARealEstateInvestors.com.

Basic Training Investing Boot Camp. Our super-duper semi-annual Basic Training Boot Camp will be held on Saturday, May 31, 2025, 9:00 am to 6:00 pm. Everything you ever wanted to know about real estate investing but were afraid to ask. Plus special guest speaker! Iman Cultural Center, South Hall, 3376 Motor Avenue (between National and Palms), Los Angeles, 90034.The cost of the Boot Camp is $149.00 per person if paid before May 24. On May 24, the prices jumps to $249.00 per person. So don’t wait to register. (Gold Members and former Boot Campers can attend for FREE, but still need to register.) Plus free parking. Please register at our website, LaRealEstateInvestors.

This Week. Investors will continue to look for additional information about tariff policies. The next Fed meeting will take place on Wednesday. Most investors do not expect a reduction in the federal funds rate, but they will be eager for guidance for later in the year. For economic reports, the ISM national services sector index will come out on Monday and the Trade Deficit on Tuesday.

Weekly Changes:

10-Year Treasuries: Rose 005 bps

Dow Jones average: Rose 999 points

NASDAQ: Rose 500 points

Calendar:

Monday (5/5): ISM Services

Tuesday (5/6): Trade Deficit

Wednesday (5/7): Fed Meeting

For further information, comments, and questions:

Lloyd Segal

President

Los Angeles County Real Estate Investors Association, Lloyd@LARealEstateInvestors.com

310-792-6404