Bubble Watch: Will soaring inflation harm real estate?

Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.

Buzz: A warming economy heats up the cost of living in Southern California and the nation, and raises fears of rising interest rates that could hurt real estate values.

Source: The Consumer Price Index and its regional slices.

The trend

How hot is it? Well, inflation in May in the Inland Empire ran at an annual rate of 5.9% vs. 3.9% in Los Angeles and Orange counties. Nationally, CPI was up at a 5% rate — a 13-year high.

It’s a big change for shoppers adjusting to the economy’s reopening.

A year ago, businesses and jobs were iced by virus-driven lockdowns, a period that saw merchants cut prices to lure customers. May 2020’s inflation across the four-county region was 0.9% vs. 0.1% nationally.

And if you can recall the good ol’ days of May 2019, when the economy was in full stride, we saw 2.9% inflation in the I.E.; 3.1% in L.A.-O.C.; and 1.8% nationally.

The dissection

A return to some normalcy in life is a big culprit.

The urge to spend grows as limits to business designed to slow the spread of coronavirus were loosened and vaccinations made more consumers comfortable with going out. The increased demand for many products and services upped prices, notably two tied to renewed travel: gasoline and used cars.

Locally, stronger inflation in the Inland Empire reflects its more robust economic rebound compared to, say, Los Angeles County with an 11% unemployment rate in April vs. 7% in the rest of the state.

A breakdown of Southern California by key consumer-spending categories — Riverside and San Bernardino counties compared with the L.A.-O.C. metro area — shows where prices are hot and hottest.

Start with the largest expense, housing …

Rent of primary residence: Up 1.8% in a year in inland communities vs. 0.9% coastal.

Household energy: Up 13.5% inland vs. 10.6% coastal.

Household furnishings, operations: Up 6% inland vs. 2.1% deflation coastal.

Then look at food …

Groceries: 2.3% inflation in both inland and coastal communities.

Dining out: Up 2.1% inland vs. 4.4% coastal.

Alcoholic beverages: Up 7.3% inland vs. 3.1% coastal.

Driving is far pricier …

New vehicles: 2.9% inflation inland vs. 1.8% coastal.

Used vehicles: Up 29% inland and coastal.

Gasoline: Up 49% inland vs. 46% coastal.

Other purchases …

Apparel: 5.2% inflation inland vs. 7.2% coastal.

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All services: Up 4% inland vs. 2.2% coastal.

Medical care: Up 3% inland vs. zero coastal.

Recreation: Up 2.5% inland vs. 2.1% coastal.

Tuition/child care: Up 2% inland vs. 2.6% deflation coastal.

Caveat

The economic recovery was clearly boosted by historically cheap interest rates created by the Federal Reserve. The discounted financing clearly led to the recent homebuying binge.

But do not forget that the Fed watches inflation, too. If inflation becomes too problematic, the central bank could act in ways that could make home-loan bargains go away.

Note that some economists watch an odd CPI metric — the cost-of-living minus food and energy — that tracks what is seen as “core” inflation. In the past year, it’s up 4% inland vs. 2.1% coastal. Now, if you could only live without food and energy!

How bubbly?

On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … FOUR BUBBLES!

The “current wisdom” is that this spring’s inflation spike — the highest levels since before the Great Recession — may be a brief blip reflecting the economy’s solid recovery from the pandemic era’s worst days.

Let’s hope that glass-half-full guess is correct.

Why? Think back to another time when inflation surpassed 5%: early in the 1990s — just as the previous decade’s housing bubble was bursting. That bout of inflation didn’t end well for the local economy or home values.

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com

Too hot? Orange County home sales suffer rare May decline

Orange County’s skyrocketing home prices outpaced any savings low mortgage rates created, resulting in a rare, mid-spring sales drop.

In another pandemic era oddity, house hunters pulled back as affordability waned and homes that were on the market sold swiftly. Traditionally strong May saw transaction counts drop from April across Southern California.

Here’s what my trusty spreadsheet found within DQNews/CoreLogic’s report on closed transactions in May for Orange County …

Sales: 3,491 existing and new residences sold, an 11% drop from April. The month of May has averaged a 5.6% gain since 1988, a period in which sales increased in 25 of the last 34 years.

To be fair, last month’s sales were up 113% from the locked-down May 2020, hitting a three-year high for a May. It was also 9% above the 10-year average buying pace.

Past 12 months? 40,570 Orange County sales — 25% above the previous 12 months and 17% above the 10-year average.

Prices: The countywide $895,000 median was up $145,000 or 19% over 12 months. Over 10 years, gains averaged 7.7% annually. The latest 12-month gain ranks No. 35 of 389 periods since 1988. The latest median breaks the record of $872,250 set in March.

Past 12 months? Seven records set. The median rose $145,000, an increase equal to $16.55 for each hour over 12 months.

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Here’s a look into key slices of Orange County’s market for May …

Existing single-family houses: 2,139 sold, up 105% in a year. Median of $1.02 million is up 28% over 12 months.

Existing condos: 1,033 sales, up 142% over 12 months. Median of $620,000 is up 19% in a year.

Newly built: Builders sold 319 new homes, up 92% in a year. Median of $1.05 million is up 9.8% over 12 months.

Builder share: 9.1% of sales vs. 10.1% a year earlier. Orange County builders’ slice of the market ranks No. 3 among SoCal’s six counties.

How cheap is money? Rates on a 30-year, fixed-rate mortgage averaged 3.03% in the three months ending in May vs. 3.33% a year earlier. That translates to 4% more buying power for house hunters.

At these rates, a buyer with 20% down would pay $3,032 a month on the $895,000 median sale vs. $2,637 on last year’s $750,000 median. So during the past year, the typical house payment is 15% pricier.

How swift is the purchasing pace? Homes that sold averaged just eight days on the market in the Inland Empire; 10 days in Los Angeles and Orange counties, Zillow reported.

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Around Southern California, according to DQNews’ latest report on closed sales in May compared to a year earlier …

Six-county region: 23,956 sold, down 8% for the month, but up 95% in a year. Median? record $667,000 — a 25% increase in 12 months.

Los Angeles County: 7,800 sold, down 7% for the month, but up 117% in a year. Median? record $775,000 — a 25% increase.

Riverside County: 4,358 sales, down 7% for the month, but up 82% in a year. Median? record $502,250 — a 23% increase.

San Bernardino County: 2,960 sold, down 10% for the month, but up 61% in a year. Median? $432,000 — a 17% increase.

San Diego County: 4,222 sold, down 7% for the month, but up 82% in a year. Median? record $725,000 — a 23% increase.

Ventura County: 1,125 sold, down 6% for the month, but up 129% in a year. Median? $701,500 — a 21% increase.

Jonathan Lansner is business columnist for the Southern California News Group. He can be reached at jlansner@scng.com

Will Blackstone’s $6 billion on house rentals hurt homebuyers’ chances?

By Patrick Clark | Bloomberg

Blackstone Group agreed to buy single-family rental company Home Partners of America for $6 billion, betting the demand for suburban housing will stay hot even as the pandemic eases.

Home Partners, which is being acquired by Blackstone Real Estate Income Trust, owns more than 17,000 homes across the U.S., according to a statement on Tuesday. The company gives tenants the option of buying their rental, making it unique among its peers.

Single-family rentals have been a favorite bet over the past year, as real estate investors seek new places to invest during a pandemic that kept Americans away from offices, hotels and malls. At the same time, remote work and school created strong demand for suburban homes by buyers and renters alike, pushing prices up and inventory down.

“Clearly the tenant demand is still robust, and that’s driving significant cash flow increases at the property level,” said Jeff Langbaum, an analyst at Bloomberg Intelligence. “Smart people with smart money want to get a piece of that.”

Investors including Brookfield Asset Management, Nuveen Real Estate and JPMorgan Chase & Co.’s asset-management arm committed billions in new capital to single-family rentals, which only began attracting Wall Street interest a decade ago.

Blackstone, which built Invitation Homes Inc. into the largest single-family landlord following the U.S. foreclosure crisis, has rekindled its interest. Last August, it led a group of investors that acquired a minority stake in Toronto-based Tricon Residential Inc., which owns and operates more than 31,000 homes and apartments.

For Blackstone, there may also be a case of seller’s regret. The company exited its stake in Invitation Homes in 2019, selling the last of its position at $30.10 per share.

Blackstone made about $7 billion on its stake in Invitation, more than doubling its money, Bloomberg reported at the time. But shares in the company have increased by 25% since then.

The flood of investor capital comes as low inventory pushes prices higher at the fastest pace ever, and tenants opt for rental houses over apartments. Invitation Homes posted an occupancy rate of more than 98% in the first quarter, allowing the industry giant to increase rents on new leases at a record rate.

Rising rents and low inventory have also made single-family landlords a target across the political spectrum. Conservative book author J.D. Vance started a firestorm on Twitter recently by arguing that Wall Street investors were making it hard for regular Americans to buy homes.

In 2019, Democratic Sen. Elizabeth Warren blasted Blackstone for “shamelessly” profiting from the U.S. foreclosure crisis, arguing that Wall Street’s investment in single-family homes was a “huge loss for America’s renters.”

Home Partners of America, which received backing from KKR & Co. and BlackRock, has a business model that may help its new owner sidestep some criticisms. The company’s leases give tenants an option to buy their home, and Blackstone said it intends to continue the program.

The option allows Home Partners of America, which explored an initial public offering in 2018, to charge above-market rents, according to a recent ratings company report.

“The fundamental premise of the HPA platform is to provide residents with the opportunity to live in their chosen home with the option to purchase it,” said Jacob Werner, Blackstone Real Estate Senior Managing Director, in a statement. “We intend to build on that goal and expand access to homes across the U.S.”

Blackstone Real Estate Investment Trust, known as BREIT, is a non-public real estate investment trust externally managed by a Blackstone subsidiary.

Oh, Canada! World’s 2nd hottest housing market starts to cool

Ari Altstedter/Bloomberg

One of the world’s bubbliest housing markets appears to be slowing down.

Canadian home sales dropped for a second straight month in May as both buyers and sellers appeared to pull back from the frenzied pace that has made the country’s housing market among the hottest in the world. It places second in the Bloomberg Economics global bubble ranking, behind only New Zealand, so everyone from policy makers to homeowners will be tracking how any slowdown in Canada proceeds.

“We now have two months of moderating activity in the books, and that goes for demand, supply and prices,” Cliff Stevenson, chair of the Canadian Real Estate Association, said in a statement Tuesday. “More and more, there is anecdotal evidence of offer fatigue and frustration among buyers, and the urgency to lock down a place to ride out Covid would also be expected to fade at this point given where we are with the pandemic.”

While Canada has been subject to the same combination of low interest rates and lockdown-induced demand for bigger homes that have spurred real estate demand around the world, a constrained supply of housing in the northern nation has made the bidding wars and price appreciation its seen among the most intense anywhere. That prompted a stern warning from Bank of Canada Governor Tiff Macklem and tweaks to mortgage qualification rules from both the main financial regulator and Prime Minister Justin Trudeau’s government.

The record surge in home values has pushed prices in Canada further ahead of both rents and and incomes than any country among the 23 tracked by Bloomberg Economics, except New Zealand. With valuations so stretched, though, buyers are starting to find themselves priced out of the market, particularly as mortgage rates begin to tick up with bond yields. Canada is also seeing lockdown measures ease in many jurisdictions, with rising vaccination rates starting to shift some of the dynamics that fueled the last year’s real estate frenzy.

National home sales fell 7.4% in May from the month before, after a revised 11% drop in April, according to data released Tuesday by the national real estate association. Benchmark prices still rose 1% as the number of new listings also fell, though it was the slowest monthly price gain since June of last year.

Developers also appear to be responding to the tight market created by the pandemic with plans to bring new supply online. New home construction rose in May, according to a separate report Tuesday from Canada Mortgage and Housing Corp. All those gains were in the condo segment of the market, however, with construction of the single family homes that have driven much of Canada’s price gains over the pandemic down 12% nationally on the month. In urban areas, they recorded an 18% drop.

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“Maybe we all finally have something else to think about other than housing and being stuck at home all the time,” Shaun Cathcart, the real-estate board’s senior economist, said in a press release. “With the light at the end of the tunnel so close, it feels like housing may take a back seat to us all starting to get our lives back to normal this summer.”

Real estate prices around the world are flashing the kind of bubble warnings that haven’t been seen since the run up to the 2008 financial crisis, according to Bloomberg Economics.

New Zealand, Canada and Sweden rank as the world’s frothiest housing markets, based on the key indicators used in the Bloomberg Economics dashboard. The U.K. and the U.S. are also near the top of the risk rankings.

“A cocktail of ingredients is sending house prices to unprecedented levels worldwide,” economist Niraj Shah wrote in the report. “Record low interest rates, unparalleled fiscal stimulus, lockdown savings ready to be used as deposits, limited housing stock, and expectations of a robust recovery in the global economy are all contributing.”

1031 property sales: Do they deserve the tax break?

One of the perks of our profession is we get insights into future legislation at the state and federal level that can affect our livelihood.

You see, the commercial real estate lobby is quite influential. Recall, the enormous push that occurred last year in California to defeat Proposition 15 which would have altered the way property taxes are calculated for commercial properties.

Presently, there is talk in Congress to gut tax deferred exchanges that are accomplished through section 1031 of the Internal Revenue code. Payback for the enormous infrastructure plan must come from somewhere and wealthy commercial real estate owners are a likely target.

As a quick review, tax deferred exchanges allow title holders of commercial real estate to defer capital gains taxes upon the sale of an income producing property. Certain criteria and time frames must be met. Otherwise, if a sale occurs approximately 50% of the appreciation is consumed by federal and state tax collectors. Therefore, motivation to sell would be stripped except in extreme cases.

A webinar hosted by David E. Franasiak, attorney at Williams and Jensen, PLLC and Julie Baird, president of First American Exchange Co., discussed the Biden Administration’s American Families Plan and the end of a special real estate tax break, “which allows real estate investors to defer taxation when they exchange property — for gains greater than $500,000.”

With a limit of $1 million for couples filing jointly, Section 1031 would effectively be killed, and if the proposal became law it could take effect for deals closed after December 2021.

I’d like to look at exchanges from a different view: Do they really matter to those without commercial real estate ownership? As I’m admittedly biased — I’ll simply offer three thoughts to consider.

Commercial real estate transactions employee a significant number of people. My premise? Elimination of transactions lured by tax deferral would also crater all the jobs associated with those deals.

I once calculated 32 different folks were involved in a purchase. Specifically, escrow agents, title officers, environmental surveyors, roof inspectors, general contractors, sub-general contractors — air conditioning, electricians, plumbers, flooring. Not to mention professionals such as CPAs, attorneys, and wealth advisors. Loop in a few brokers and the ensemble is complete. Dollars earned by those involved are circulated back through the economy and groceries are purchased, rent is paid and college funds established. And state and federal income taxes are paid from their earnings.

Small business owners who reside in commercial real estate through ownership use the tax deferred exchange mechanism to expand their operations. Keep in mind, business owners use the IRS section 1031 to purchase larger facilities and grow their businesses. Operational growth means equipment is purchased, workers are hired and taxable revenue is created.

Elimination of the tax deferred exchange mechanism would reportedly generate $19.5 billion over 10 years on a $2.4 trillion stimulus package. Unfortunately, the increment is so small, it’s akin to a rounding error. Too often, we lose sight of the unintended consequences of actions we take.

As an example, when access to home loans was expanded two decades ago, the sub-prime meltdown resulted. Granted, there was more to that story. But you get the idea.

Allen C. Buchanan, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.