Author Archives: Bone Fish

California Faces “Financial Collapse” As It Moves To Allow Businesses To Walk Away From Commercial Leases

One of the bedrocks of modern US capitalism – which is now mutating by the day if not hour as the Fed scrambles to preserve at any cost its the towering edifice after decades of malinvestment, even the nationalziation of the very capital markets that made America great – and one of the constants along with death and taxes, is that residential debt is non-recourse, meaning one can simply walk away from one’s mortgage if the bill is untenable, while commercial debt is recourse, or pledged by collateral that has to be handed over to the creditor if an event of default occurs.

However, in the aftermath of the sheer devastation unleashed upon countless small and medium commercial businesses which will be forced to file for bankruptcy by the thousands, this may all change soon.

As the Commercial Observer reports, last Friday, the California Senate Judiciary Committee advanced a bill that would allow small businesses — like cafes, restaurants and bars — to renegotiate and modify lease deals if they have been impacted by shelter-in-place orders and economic shutdowns. If an agreement isn’t reached after 30 days of negotiations, the tenant can break the lease with no penalty, effectively starting a revolution in the world of credit by retroactively transforming commercial loans into non-recourse debt.

Landlord advocates have, predictably, been mobilizing in opposition, arguing that the proposal is unconstitutional, and that it would “upend” leases around the state. Justin Thompson, a real estate partner with Nixon Peabody, told Commercial Observer that it was illuminating to see so many industry organizations come out “so vehemently opposed” in a short period of time. Having heard from industry groups all week, Thompson said the general consensus in the commercial real estate community is that the bill is “overly broad, overreaching, and it is a bit of a sledgehammer” when something less blunt would do.

“Everyone recognizes that restaurant tenants and smaller non-franchise retail tenants in particular really are in dire straits and in need of assistance,” Thompson said. “But I think the implications of SB 939 are really laying it at the feet of landlords, and putting them in the situation where, even if they have tenants that were going to make it through this, they might now rethink that and leave the landlord in the lurch.”

Senate Bill 939 was initially introduced as a statewide moratorium that would prohibit landlords from evicting businesses and nonprofits that can’t pay rent during the coronavirus emergency. But it was amended in the week to also give smaller businesses the ability to trigger re-negotiations if they have lost more than 40 percent of their revenue due to emergency government restrictions, and if they will be operating with stricter capacity limits due to continued social distancing mandates.

If the parties do not reach a “mutually satisfactory agreement” within 30 days after the landlord received the negotiation notice, then the tenant can terminate the lease without liability for future rent, fees, or costs that otherwise would have been due under the lease.

One of the bill’s authors, Sen. Scott Wiener, said during the hearing that the bill is focused on the hospitality sector, which has been most devastated. The renegotiation provision will not apply to publicly owned companies or their businesses. The law would be in effect until the end of 2021, or two months after the state of emergency ends, whichever is later.

Quoted by the Commercial Observer, Wiener argued that the state faces “a mass extinction event of small businesses and nonprofits in every neighborhood,” and the “very real prospect” of them permanently closing due to prolonged mandates that reduce capacity, “chopping in half someone’s business.”

“This would change the face of our state permanently,” he said. “It would severely hamper our ability to recover.”

So, the choice facing California is either a “mass extinction event of small businesses” or “financial collapse.” Sounds about right.

* * *

“This postponement of rents will cause … landlord’s financials to crumble and lead to lenders putting out cash calls to lower loan balance and foreclose when landlords cannot pay, and cripple landlords’ abilities to keep their properties open and maintained,” the letter read. CBPA also argued it is unconstitutional for a state to pass a law impairing the obligation to contracts, and warned it would “allow one party to unilaterally abrogate real estate leasing contracts.”

CBPA is the designated legislative advocate in California for the International Council of Shopping Centers, the California Chapters of the Commercial Real Estate Development Association, the Building Owners and Managers Association of California, the National Association of Real Estate Investment Trusts, AIR Commercial Real Estate Association, and others. Those groups also warned members and clients about the bill, and voiced opposition during the hearing on Friday.

Thompson added that the bill risks crushing foundational landlord-tenant relationships throughout the state. Worse, if it passes in California and is adopted in other states across the country, the very foundations of modern finance would be shaken resulting in catastrophic consequences.

“Everything we do, especially in real estate, runs on relationships,” he said. “I think that when you tip the balance so far in favor of the tenant the way that [SB 939] does, it certainly strikes at the heart of the idea that we are in this together. … This does not make it feel like landlords and tenants are in this together anymore.”

The law firm Buchalter, which has offices in L.A., Orange County, San Francisco and around the West Coast, warned clients that the bill sets a “terrible precedent” that will “upend all your leases.”

“The rights afforded under SB 939 would effectively rewrite every commercial lease in California”other than publicly traded companies, the firm said. It “negates all current commercial leases to the benefit of one business over another.” 

Instead, Buchalter said the state should provide assistance to tenants impacted by the stay-at-home orders, and pointed to the “more reasonable” renter relief proposals introduced by Senate Pro Tem Toni Atkins

Wiener said they are sensitive to the needs of property owners in terms of their loan obligations.

“It’s a complicated issue. We don’t want these property owners to default on their loans,” he said. “But we also need to be clear: these landlords aren’t going to be able to collect the pre-COVID rents from these restaurants, bars and cafes. That is not the reality. The choice is not between full rent and reduced rent. The choice is between reduced rent and no rent.”

He argued current leases negotiated before the pandemic reflect a “different financial reality.”

“Restaurants, bars, and cafes are expected, frankly, to just suck it up, and magically come up with the high rent that was obtained in pre-COVID circumstances,” he said. “This provision is not for leases to be terminated. It is to provide space and incentive to actually get the renegotiation done. … We know that overwhelmingly, these businesses don’t want to close down. This is their life’s work, they want to find a way to survive.”

Wiener said many commercial landlords are already working with renters, waiving back rents, and restructuring leases.

“It’s not in anyone’s interest where the landlord gets no revenue,” he said. “Sadly, on the other hand, all too many commercial landlords are refusing to renegotiate; are insisting that the pre-COVID, unrealistic rent be paid; are invoking lease-rent escalators; are imposing late fees on backrent. That is happening all over the state.”

During a press conference Thursday, Roberta Economidis, a partner with GE Law Group hospitality law practice, said that in order to survive, “hospitality-related businesses need long-term rent relief, not simply a deferral of high rents now that will become an insurmountable debt later.”

Governor Gavin Newsom already gave local governments authority to halt commercial evictions, and some cities like San Francisco and Los Angeles quickly did soBut SB 939 would cover all California businesses and nonprofits from eviction, whether their local jurisdictions have acted to do so or not.

SB 939 will be heard in the Senate Appropriations Committee this month; if passed it will trigger the next wave of devastation in the commercial real estate space.

Source: ZeroHedge

From Ice-Cold to Hot: Daily Pending Home Sales in May so Far, 15 Cities Around the US

A near-real-time roller-coaster of home sales during the pandemic via charts.

(Wolf Richter) On May 28, I reported how the National Association of Realtors’ Pending Home Sales Index for the US had plunged 34% in April. These are sales where contracts were signed in April, and were expected to close over the next month or two. The index gives a preview of what closed sales in May might look like. In the comments, some people said that sales in their bailiwick were jumping while others said that sales were slow. Real estate is local.

So here are pending sales – with contracts reported as signed in May through May 24th, for 15 big metro areas in the US, computed daily and shown as a 7-day moving average. The data is compiled by real-estate brokerage Redfin, from local multiple listing service (MLS) and Redfin’s own data, and was released at the end of the week. The charts are also from Redfin. However, the data is not available for every major city. The percentage in red indicates the change of the 7-day moving average through May 24 this year compared to the same period last year.

And let me assure you that real estate is local, that “nothing goes to heck in a straight line,” as it says on our WOLF STREET beer mugs, and that sales are headed in astonishingly different directions depending on the local market, from red-hot to ice-cold, with whiplash effect, sometimes in the same state as in Texas.

WTF?!? Did pent-up demand from people who’d gotten stir-crazy suddenly collide with the oil bust? Will Houston show a similar phenomenon in a week or two? A mystery for now.

I couldn’t find Miami data in the Redfin data base, so Tampa will do.

I couldn’t pull up the pending sales data for New York City. So here is Nassau County, on Long Island:

I couldn’t get the data for Boston, so west we go. 

I couldn’t get Redfin data on Nashville, St. Louis, Detroit, and Kansas City. But here is Minneapolis.

So this was the grand tour of the pending home-sales roller-coaster during the pandemic, with whiplash and all.

Source: by Wolf Richter | Wolf Street 

40+ Million Americans Unemployed: Misery continues as 2.1 million new jobless claims filed last week

(Emily Craine) The unemployment toll caused by COVID-19 layoffs continues to rise with another 2.1 million American filing new jobless benefit claims last week – even as more businesses reopened and rehired some laid-off employees. 

More than 40 million new claims for unemployment benefits have been filed in the past two months ever since the coronavirus started paralyzing the US economy. 

It is the 10th straight week that new claims have been above 2 million, figures released by the Labor Department on Thursday show.  

While claims have declined steadily since hitting a record 6.867 million in late March, they have not registered below 2 million since then. 

Although the total figure for claims in more than 40 million, not all of them are still unemployed. The number of people currently receiving unemployment benefits is 21 million, which is a rough measure of the number of unemployed Americans. 

States are gradually restarting their economies by letting some businesses – from gyms, retail shops and restaurants to hair and nail salons – reopen with some restrictions. 

As some of these employers, including automakers, have recalled a portion of their laid-off employees, the number of people receiving unemployment benefits has fallen.

The unemployment toll caused by COVID-19 layoffs continues to rise with another 2.1 million American filing new jobless benefit claims last week. It is the 10th straight week that new claims have been above 2 million, figures released by the Labor Department on Thursday show.

More than 40 million new claims for unemployment benefits have been filed in the past two months when the coronavirus started paralyzing the US economy

The weekly jobless claims report, the most timely data on the economy’s health, is being watched to assess how quickly the economy rebounds after businesses shuttered in mid-March to control the spread of COVID-19 and almost ground the country to a halt. 

The number of claims – stuck at an astonishingly high level even as non-essential businesses are starting to reopen – suggest it could take a while for the economy to dig out of the coronavirus-induced slump despite signs from the housing market and manufacturing that the downturn was close to bottoming. 

Economists fear a second wave of private sector layoffs and job cuts by state and local governments whose budgets have been crushed contributed to last week’s unemployment claims.  

‘I am concerned that we are seeing a second round of private sector layoffs that, coupled with a rising number of public sector cut backs is driving up the number of people unemployed,’ said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania.

‘If that is the case, given the pace of reopening, we could be in for an extended period of extraordinary high unemployment. And that means the recovery will be slower and will take a lot longer.’

The second wave of layoffs could grow bigger with Boeing announcing on Wednesday it was eliminating more than 12,000 US jobs and also disclosing it planned ‘several thousand remaining layoffs’ in the next few months.  

Meanwhile, Amazon.com Inc announced on Thursday it has plans to offer permanent jobs to about 70 percent of the workforce it has hired temporarily to meet consumer demand during the pandemic.

The world’s largest online retailer will begin telling 125,000 warehouse employees in June that they can keep their roles longer-term. The remaining 50,000 workers it has brought on will stay on seasonal contracts that last up to 11 months, a company spokeswoman said.

California, Washington, New York and Florida saw the biggest increases in new claims, according to the latest Labor Department report. 

In California, where claims increased by 31,764, layoffs were most prominent in the service industry.

Layoffs in insurance, educational services and public administration industries were most common in Washington state where claims rose by 29,288.

The majority of layoffs in New York, which saw its claims increase by 24,543, were felt in the transportation and warehousing, educational services, and information industries. 

Florida’s layoffs increased by 2,322 and impacted industries included agriculture, forestry, fishing, and hunting, construction, manufacturing, wholesale trade, retail trade and service industries. 

Economists cautioned the 40 million figure does not represent the number of jobs lost due to the pandemic, citing technical difficulties and procedures at state unemployment offices.

The focus, instead, should be on the number of people still receiving unemployment benefits. These so-called continuing claims could shed light on the effectiveness of the government’s Paycheck Protection Program.

The PPP, part of a historic fiscal package worth nearly $3 trillion, offered businesses loans that could be partially forgiven if they were used for employee salaries.

The job cuts reflect an economy that was seized by the worst downturn since the Great Depression after the virus forced the widespread shutdown of businesses.  

‘Now is a good time to think how many of those people who lost their jobs are going to get them back, my sense is 25 percent will not and that’s what gives us the double digit unemployment rate well into 2021,’ said Joe Brusuelas, chief economist at RSM in New York. 

‘The bankruptcies of small and medium enterprises will result in a much higher rate of permanent layoffs.’

While claims have declined steadily since hitting a record 6.867 million in late March, they have not registered below 2 million since then. Pictured above in an unemployment office in Arkansas in April

The economy shrank at an even faster pace than initially estimated in the first three months of this year with economists continuing to expect a far worse outcome in the current April-June quarter. 

The Commerce Department reported Thursday that the gross domestic product, the broadest measure of economic health, fell at an annual rate of 5 percent in the first quarter, a bigger decline than the 4.8 percent drop first estimated a month ago. 

It was the biggest quarterly decline since an 8.4 percent fall in the fourth quarter of 2008 during the depths of the financial crisis. 

Analysts are monitoring incoming economic data to gauge how consumers are responding as many retail establishments gradually reopen.

Jobs won’t return in any significant way as long as Americans remain slow to resume spending at their previous levels. 

Data from Chase Bank credit and debit cards shows that consumers have slowly increased their spending since the government distributed stimulus checks in mid-April. 

Consumer spending had plunged 40 percent in March compared with a year earlier but has since rebounded to 20 percent below year-ago levels.

Most of that increase has occurred in online shopping, which has recovered to pre-virus levels after having tumbled about 20 percent. 

But offline spending, which makes up the vast majority of consumer spending, is still down 35 percent from a year ago, according to Chase, after having plummeted 50 percent at its lowest point.

Atlanta Fed Predicts A 50%+ GDP Collapse in 2Q20

Source: By EMILY CRANE FOR DAILYMAIL.COM

Pending Home Sales Plummet 35% YoY – Biggest Drop Ever As Buyers Forfeit Deposits

Existing home sales collapsed but new home sales rebounded in April, which leaves pending home sales to break the tie and analysts expected a 17.3% MoM drop. However, pending home sales disappointed notably with a 21.8% MoM collapse, sending YoY sales crashing 34.6% – the most ever…

“The housing market is temporarily grappling with the coronavirus-induced shutdown,” which reduced listings and purchases, Lawrence Yun, NAR’s chief economist, said in a statement.

So while all sorts of narratives about lower rates were puked out to defend new home sales outlier data, it seems pending home sales did not get the message…

Every region crashed…

  • Northeast fell 14.5%; Feb. rose 2.8%
  • Midwest fell 22%; Feb. rose 4.2%
  • South fell 19.5%; Feb. fell 0.2%
  • West fell 26.8%; Feb. rose 5.1%

That is the lowest level of pending home sales since records began in 2001…

Source: ZeroHedge

Will You Be Able To Get Cash From Banks In A Crisis?

If there’s a crisis will you be able to get any cash out of the bank? Will the banks even have any cash? Because, as of last March, it is no longer a requirement – the banks aren’t required to have a single dollar bill in their vaults and drawers. 

Wait, what?

Signs Of V-Shaped Housing Recovery In May

Summary

  • U.S. equity markets surged this week, buoyed by positive vaccine data and on renewed hopes of a V-shaped economic recovery as countries around the world begin the reopening process.
  • The S&P 500 ended the week higher by 3.1%, closing nearly 35% above its lows in late March despite another slate of ugly unemployment data that looms over the recovery.
  • Real estate equities led the gains this week, propelled by a bounce-back in many of the most beaten-down property sectors including retail and hotels that were ravaged by the lock downs.
  • Home builders continued their recent resurgence as high-frequency housing data has indicated that the housing industry may indeed be leaders of the post-coronavirus economic rebound.
  • Fresh data from Redfin showed a “stunning” rebound in housing market activity over the last month as home buying demand is now 16.5% above pre-coronavirus levels while home values have seen accelerating growth.

Real Estate Weekly Outlook

(via Hoya Capital) U.S. equity markets surged this week, buoyed by news of positive clinical trial results from Moderna (MRNA) and Inovio Pharmaceuticals (INO) and on renewed hopes of a V-shaped economic recovery as most states and countries around the world have begun the post-coronavirus reopening process. Contrary to the predictions of some experts, the virus has remained on the retreat even in states that were among the first to reopen, while emerging evidence – detailed in a report by JPMorgan – suggests that lock downs may have actually aggravated rather than mitigated the impacts of the disease. Uncertainty remains, however, over how quickly the economic damage can be reversed and the “shape” of the economic recovery in the back half of 2020.

Following a decline of 2.1% last week, the S&P 500 ETF (SPY) ended the week higher by 3.1%, closing nearly 35% above its lows in late March. Real estate equities led the gains this week, reversing almost all of last week’s steep declines, propelled by a bounce-back in many of the most beaten-down property sectors that were ravaged by the economic lock downs. Closing roughly 30% off its lows in March, the broad-based Equity REIT ETFs (VNQ) (SCHH) surged 7.0% with all 18 property sectors in positive territory while Mortgage REITs (REM) jumped 10.8% on the week, closing 55% above its March lows amid clear signs of stabilizing in the mortgage markets.

The more pronounced strength this week was seen in the recently lagging Mid-Cap (MDY) and Small-Cap (SLY) indexes which delivered strong out performance, surging by 7.3% and 8.8% respectively. The gains this week came despite another round of ugly economic data including Initial Jobless Claims data that showed that another 2.43 million Americans filed for unemployment benefits last week, bringing the eight-week total to over 38 million. However, flashes of strength have become increasingly more evident in recent weeks – particularly in the all-important U.S. housing market – and commentary from corporate earnings reports over the last two weeks indicated that the economic rebound is already beginning to take hold in many segments of the economy. The Industrials (XLI), Energy (XLE), and Consumer Discretionary (XLY) sectors joined the real estate sectors as top-performers on the week while Healthcare (XLV) was the lone sector in the red.

Home builders and the broader Hoya Capital Housing Index were among the standouts this week as recent high-frequency housing data has indicated that the housing market may indeed be the leader of the post-coronavirus economic rebound. The gains came following fresh data from Redfin (RDFN) that showed a “stunning” rebound in housing market activity over the last month as home buying demand is now 16.5% above pre-coronavirus levels on a seasonally-adjusted basis, gains which have been “driven by record-low mortgage rates as pent-up demand is unleashed.” This data was broadly consistent with recent commentary from home builders and data released earlier this week from the Mortgage Bankers Association which showed that home purchase mortgage applications rose for the 5th straight week and are now lower by just 1.5% from last year compared to the 35% decline in April.

As goes the U.S. housing market, so goes the U.S. economy. Residential real estate is by far the most significant asset on the aggregate U.S. household balance sheet and the value of the U.S. housing market is larger than the combined market capitalization of every U.S. listed company. As we’ve discussed for many years, it’s impossible to overstate the importance of the U.S. housing market in forecasting macroeconomic trends for the broader economy and just as it was impossible to avoid a deep and lasting economic recession from the sub-prime housing crisis, it is difficult to envision the “depression-like” economic environment forecasted by some analysts without first seeing substantial instability in the housing market. While very early in the economic recovery, we’re so far observing quite the opposite as the combination of favorable millennial-led demographics, record-low mortgage rates, and a substantial under supply of housing units after a decade of historically low levels of new construction continue to be relentless tailwinds.

Real Estate Earnings Season Wrap-Up

While the residential real estate sector may be an area of relative out performance during the post-coronavirus economic recovery, other areas of the commercial real estate sector face a more uncertain future. Real estate earnings season wrapped up this week with a handful of late-reporting stragglers, so the final numbers for rent collection are now in. Rent collection has been largely a non-issue for residential, industrial, and office REITs, as each sector has collected over 90% of April rents. For retailers, if you’re not essential, you’re not probably paying the rent. Collection among mall REITs averaged around 22% while shopping center REITs collected roughly 60% of April rents and net lease REITs collected 73% of rents.

Even among the commercial REIT sectors that reported solid rent collection in April, there are some areas of concern regarding their respective long-term outlook in the post-coronavirus world. Earlier this week, we published Office REITs: Coronavirus Killed Corporate Culture. Office REITs have been pummeled during the coronavirus pandemic amid mounting questions over the long-term demand outlook as businesses become increasingly more comfortable with “remote work” environments as reports surfaced this week that Facebook (FB) and others plan to permanently shift workers to work-from-home arrangements. Zoom (ZM) and “work-from-home” technology suites have emerged as the bigger competitive threat to the office REIT sector as more than half of the companies expect to shrink their physical footprint.

Two more equity REITs were added to the Coronavirus Dividend Cut list this week: net lease REIT VEREIT (VER) and Braemar Hotels (BHR). We’ve now tracked 50 equity REITs in our universe of 165 names to announce a cut or suspension of their dividends, the vast majority of which have come from the retail and hotel REIT sectors. Apart from their sector affiliations, the equity REITs that have cut or suspended their dividends have been almost exclusively companies in the smallest third of market capitalization within the REIT sector and in the highest third in terms of leverage metrics as the “outperforming factors” that we discussed earlier this year in The REIT Paradox: Cheap REITs Stay Cheap have been on full display in 2020.

Among the handful of stragglers to report results this week were four hotel REITs including the aforementioned Braemar Hotels along with Apple Hospitality (APLE), CorePoint (CPLG), and Ashford (AHT). While Q1 occupancy and Revenue Per Available Room (RevPAR) metrics were understandably ugly across the hotel REIT sector, commentary on earnings calls this week suggested that we’ve likely seen the worst of the occupancy declines as Ashford’s management noted that “occupancy continues to increase on a weekly basis. We are seeing pick-up of room nights on a short-term basis and the pace of that pickup is increasing almost daily.”

All 18 REIT sectors finished in positive territory this week as hotel and casino REITs including Gaming & Leisure Properties (GLPI) and VICI Properties (VICI) were among the top performers this week as a growing number of hotels and casino properties across the country have announced plans to re-open over the next several weeks. Shopping center REITs, particularly those focused on the big-box segments like Retail Properties of America (RPAI), Kimco Realty (KIM), and SITE Centers (SITC), were also leaders this week after generally positive commentary on reopening plans from several big-box retailers including Best Buy (BBY). The technology REIT sectors – data centers and cell towers – were among the laggards this week, but remain the only two REIT sectors in positive territory on the year.

This week, published Apartment REITs: No Rent Strike, But Fears Of Urban Exodus. We discussed how apartment REITs reported limit issues with rent collection in April and early-May amid the depths of the pandemic-related shutdowns as more than 95% of rents were collected. Ultra-dense metros like NYC, Chicago, and San Francisco, however, may see lasting pain as residents flee to lower-cost and “safer” semi-urban and suburban markets, including faster-growing Sunbelt metros. Several REITs are more exposed than others from this trend and we detailed the geographical exposure of the nine largest multifamily REITs. As one of the more defensively-oriented and counter cyclical REIT sectors, we remain bullish on long-term rental fundamentals.

Mortgage REITs

Strong housing market data over the last several weeks has been good news for mortgage REITs as well as residential mREITs jumped another 10.6% this week while commercial mREITs gained 12.0%, each rebounding more than 50% from their lows in early April. New York Mortgage REIT (NYMT) was among the leaders this week after reporting solid Q1 results. New Residential (NRZ) was also among the leaders after providing an interim update in which it noted that had bolstered its liquidity position through an additional capital raise and noting that forbearance requests have continued to be lower than previously forecasted.

Helping the residential mREITs this week was news the FHFA has issued temporary guidance that should make it easier for homeowners who have taken advantage of COVID forbearance programs to refinance or buy a new home. Borrowers will be allowed to get a new mortgage three months after their forbearance period ends and they have made three consecutive payments under their repayment plan. Roughly 9% of mortgage loans representing roughly 4.75 million homeowners are now in forbearance, according to data released this week from Black Knight (BK), but a recent survey from LendingTree found that the majority of these borrowers chose to enter forbearance not out of necessity but simply because it was offered and available without any apparent penalty under the CARES Act.

Real Estate Economic Data

Below, we analyze the most important macroeconomic data points over the last week affecting the residential and commercial real estate marketplace.

Housing Recovery Has Already Begun

Home builder Sentiment data released on Monday showed that confidence among home builders – particularly in the Southern region where the majority of publicly-traded home builders are based – has begun to bounce back from the lows in April. The NAHB Housing Market Index climbed to 37 from last month’s reading of 30, driven by a 12-point rebound in Future Sales expectations and an 8 point bounce in Buyer Traffic. Consistent with recent reports from other home builders, Meritage Home (MTH) announced this week that it believes that May orders could be “in line” with last May’s as the strong sales momentum seen during the last two weeks of April has carried over into early May.

The U.S. housing industry was red-hot before the onset of the coronavirus crisis with Housing Starts, Building Permits, and New Home Sales all eclipsing post-cycle highs in early 2020. Backward-looking data released this week by the U.S. Census Bureau showed the magnitude of the decline in construction activity in April amid the worst of the pandemic. On a seasonally-adjusted annualized basis, housing starts and building permits fell to the lowest level since 2015 in April at 891k and 1,074k units, respectively, following a relatively solid March. Single-family starts and permits were actually quite a bit stronger than expected while the always volatile multifamily construction activity showed sharper declines in April.

Existing Home Sales also beat expectations in April, coming in at 4.33 million versus expectations of 4.30 million. Home purchase mortgage applications – a leading indicator of Existing Home Sales – rose for the 5th straight week and are now remarkably lower by just 1.5% from last year compared to the 35% decline in April according to data released this week by the Mortgage Bankers Association. The 30-Year Mortgage rate remains lower by roughly 90 basis points from the same week last year, a level of decline in mortgage rates that has historically been strongly correlated with robust growth in housing market activity under normal conditions.

2020 Performance Check-Up

REITs are now lower by roughly 24.0% this year compared with the 8.2% decline on the S&P 500 and 14.1% decline on the Dow Jones Industrial Average. Consistent with the trends displayed within the REIT sector, mid-cap and small-cap stocks continue to under perform their larger-cap peers as the S&P Mid-Cap 400 and S&P Small-Cap 600 are lower by 17.7% and 23.9%, respectively. The top-performing REIT sectors of 2019 have continued their strong relative performance through the early stages of 2020 as data centers and cell tower REITs remain the real estate sectors in positive territory for the year, while industrial and residential REITs have also delivered notable out performance. At 0.66%, the 10-Year Treasury Yield has retreated by 126 basis points since the start of the year and is roughly 260 basis points below recent peak levels of 3.25% in late 2018.

Next Week’s Economic Calendar

A busy two-week stretch of housing data continues next week with Home Price data from the FHFA and S&P Case-Shiller on Tuesday which is expected to show a steady rise in home prices in March during the early stages of the pandemic. New Home Sales data for April is also released on Tuesday while Pending Home Sales data for April is released on Thursday. Initial Jobless Claims data on Thursday will again be another “blockbuster” report with expectations that we will see another 2.5 million job losses, but we’ll be watching closely to the continuing claims for indications that temporarily-unemployed Americans are returning to work.

Source: Hoya Capital | Seeking Alpha

Santa Barbara Real Estate Remains Strong

One of Cristal Clark’s newest listings is a single-level French Country-style home in Birnam Wood designed by Michael L. Hurst, combining contemporary finishes and amenities with French Country elegance. Ms. Clark has remained busy throughout the pandemic, with an average of 10 or more showings a week.

Despite economy, Santa Barbara agents are busier than ever

When Santa Barbara County was sent into lock down in mid-March to combat the growing coronavirus crisis, the residential real estate industry held its breath and expected the worst. Buyers and sellers faced serious fears as jobs were in jeopardy and the prospect of opening one’s house to strangers kept homes off the market.

“Basically in both directions buyers and sellers backed off. It became a real concern,” said Village Properties owner Renee Grubb.

Now it appears those fears have been alleviated.

Over the last two months, real estate activity has remained strong in the Santa Barbara area, and agents are busier than ever despite the transition to virtual showings.

Natalie Grubb of Village Properties at one of her listings on the Mesa. Village Properties is preparing to reopen their offices after two months, while continuing to utilize virtual tours.

“I would have to say at least for now things are getting better. When I go on my calls for the California Association of Realtors, and they report on all of California, it’s looking better everywhere,” Ms. Grubb told the News-Press.

“I chose not to lay off any of my staff, and I feel fortunate that now the market is doing better and so my losses haven’t been as great as I thought they were going to be, which makes me happy of course.”

At the end of March and going into April, the forecast was bleak. Village Properties saw a significant dip in closings and properties fall out of escrow. Compared to 2019, they saw a 50% decline in business.

“Things started to pick up around mid-April. I think more people had gotten used to what was going on. We’ve been doing this for a month,” said Ms. Grubb.

“You never know until they close of course, but there are showings of high-end properties three, four, five times a week now. That kind of high-end activity actually started maybe two and a half to three weeks ago to where my agents who sell high end have been very busy.”

While the flurry of activity has been surprising, some agents, like Cristal Clark, did not even see business slow.

“For me there was no lag time,” said Ms. Clark.

“It was constant. I mean long hours working. It’s been nonstop.”

Ms. Clark was concerned at first, but soon saw a lot of interest from buyers from Los Angeles and San Francisco, especially in the under $10 million market.

“I think people want to be here. They see the beauty that Montecito and Santa Barbara has to offer and they’re not thinking about ‘I’d love to live there in the future’. They’re really putting it into place now, be it primary homes or secondary homes,” said Ms. Clark.

Kyle Kemp, district manager for Berkshire Hathaway, believes the slowing of activity in the first week was in part due to the uncertainty around using virtual tools to conduct business. Fortunately, many of his agents were already well versed in digital showings, and those that weren’t quickly caught on.

Lorie Bartron of Bartron Real Estate Group, a real estate team under Berkshire Hathaway HomeServices California Properties, shows off a property at 1060 Cieneguitas Road. Despite a short setback, Berkshire Hathaway is back on track for breaking its record for best year ever.

Although they were down 60% in sales in the first week, Mr. Kemp said his agents have rallied and are now only 20% behind, with a 206% increase in property inquiries in California compared to 2019.

“Once that stopped everybody started to feel comfortable, started to get their feet on the ground, realized Santa Barbara wasn’t going anywhere, the sun wasn’t going away, and all of a sudden people started coming back to real estate again,” said Mr. Kemp.

Mr. Kemp said most buyers seem to be in the technology sector, interested in getting out of Los Angeles and San Francisco and into the open spaces of Santa Barbara and Montecito.

“Those buyers don’t seem to be affected. In fact, a lot of them are telling us their businesses are doing better. We’re hit by the service industry for sure, because Santa Barbara is such an escape for everybody, so we tend to have a lot of hospitality, but that hasn’t for some reason affected the real estate,” said Mr. Kemp.

While the majority of interest and sales have been from California, agents are speaking to a lot of buyers from around the country looking to purchase homes in the area as soon as it is safe to travel.

“There are a lot of clients who want to live here, but they live somewhere where they have to take a plane ride, so they’re just kind of waiting until their areas open up more and they feel comfortable coming. I have a lot of clients coming next month in June from different parts of the U.S.,” said Ms. Clark.

“We would be selling houses all day long if people could get here physically,” said Mr. Kemp.

“They can do as much as they can do on a visual tour but if you’re going to spend $3 to $10 million on a property, you kind of want to walk around it.”

The biggest issue for agents has been a lack of inventory. Going into 2020, there was already a shortage of houses on the market, and the number of sellers has not increased to meet the demand seen in April and May.

“I am seeing every agent overloaded with a large number of buyers and not a lot of houses to sell. We haven’t seen anything happen on prices, where I thought for sure we would see some kind of trend downwards because of what was going on, and that was absolutely not happening,” said Mr. Kemp.

Natalie Grubb of Village Properties at one of her listings on the Mesa. Village Properties is preparing to reopen their offices after two months, while continuing to utilize virtual tours.

Natalie Grubb of Village Properties at one of her listings on the Mesa. Village Properties is preparing to reopen their offices after two months, while continuing to utilize virtual tours.

This is especially true with houses on the market for $1 million and under, which agents can’t keep on the shelves. If it’s a good house, priced well and in good condition, agents are fielding multiple offers.

“It’s great for sellers, a little tough for buyers. Ultimately sellers are thinking, ‘Well, should I put my house on the market?’ It’s actually a great time because there’s no competition. If you’re a buyer, buy sooner than later because when this really gets going I think there’s more buyers than sellers, so I think we’re going to have a tough market again,” said Mr. Kemp.

Despite a rocky March, real estate agents are preparing for a surge in interest as more people adjust to home buying during COVID-19 and are anticipating a good year for business.

“I think if we’re down at all it will be single digits. If we’re down by any percentage at all it will definitely be single digits, and it’s very possible that we’ll end up matching or coming very very close to what we did last year, and it was a good year last year. I think these last few months will tell, but if it continues I’m pretty optimistic that we’re going to end up in a good year,” said Ms. Grubb.

Source: by Christina Whittle | Santa Barbara News Press