What Work From Home Could Mean for Orange County & Los Angeles Real Estate

COVID-19 and Work from Home

One result of the pandemic has been a shift to remote work/work from home. While Covid-19 and its long-term effects in the United States are still uncertain, an increased emphasis on work from home seems to be one of the pandemic’s most apparent potential lasting effects. While the degree of that emphasis is still somewhat influenced mainly by future developments with the virus and vaccines, many companies and people have already made decisions for the future that involve an increased amount of remote work. For example, JPMorgan recently announced workers would cycle between working at the office and working from home, and it believes this new workplace regime will be permanent. Many other firms have already declared their employees will be working from home until at least the holidays or well into 2021. Even if the virus is contained and/or a safe vaccine is found, many businesses have learned to work remotely in an efficient way with traditional in-office activities performed at the same level of quality regardless of where the employee is working, signals that a significant number of work environments may shift toward a permanent work-from-home state (which also has the added benefit of reduced employer overhead) for the foreseeable future.

In this blog post, we examine what these means for the future of Orange County real estate.

Work from Home and What it Means for Orange County Real Estate

One potential result from an increased focus on work from home would be an influx of people moving to Orange County (OC) from Los Angeles (LA). The key reasons supporting this idea are less of a need to be close to LA offices, better home price value in OC markets vs. LA, a better quality of life in terms of traffic and time spent in the car for simple things such as shopping or dining out, and much less expensive higher quality schooling available for children in OC. These reasons and the belief that there are many comparable markets in OC and LA suggests that the future may be bright for OC real estate owners and investors due to LA residents moving to OC.  

School Costs

Without the need to live in LA for work, many families may decide that the difference in education costs and free quality educational opportunities are too significant to pass up moving to OC. Due to the well-documented general low quality and lack of opportunities associated with LA public schools, many Angelenos see private schools as the only option for educating their kids in LA. According to Private School Review, the average annual tuition in 2020 for the top 255 private schools in LA was $11,527 for elementary schools and $22,525 for high schools. Contrast that with OC, where public schools do not suffer from the same lack of quality as LA public schools, and OC often has some of the highest-rated K-12 schools in the state of California or even the entire United States. Therefore, families could get high-quality education in OC for their kids at a much lower cost than they do in LA ($0.00 vs. $22,525 per child, per year). Without the need to work in LA offices, this presents a strong economic incentive for families to move from LA to OC.

Better Home Price Value and Home Buying Opportunity in OC Markets

Looking at comparable real estate markets between OC and LA in terms of community, relative market status, and environment, there is a lot to suggest value and opportunity in OC relative to LA. One comparable pair of markets, Manhattan Beach in LA and Newport Beach in OC, clearly demonstrates this when considering the single-family home real estate market.

Manhattan Beach and Newport Beach

For example, from a value perspective, Newport Beach seems like a great play over Manhattan Beach. Currently, Manhattan Beach holds a significantly higher median sales price than Newport Beach. While this can be seen many times in history on the chart, it is also noticeable that the two lines always converge again after Manhattan Beach prices are higher than those in Newport Beach. Sometimes, Newport Beach even begins to have higher prices over Manhattan Beach after these corrections. If history teaches us anything, it is that this price gap won’t last forever, and any additional tailwind to the Newport Beach market due to the COVID environment may be enough to elevate its prices above Manhattan Beach in the future. In conclusion, it’s a better time to buy in Newport Beach (OC) than it is in Manhattan Beach (LA).

Furthermore, the inventory month supply chart also suggests an opportunity. In the past five years, Newport Beach has always had a higher months’ supply than Manhattan Beach. Very recently, that gap has decreased, and now Manhattan Beach has a higher months’ supply. Months’ supply is calculated by dividing active listings by the number of sales in the last six months divided by 6. A decreasing months’ supply suggests houses that are coming onto the market are being absorbed faster by buyers, and the opposite is true for increasing months’ supply. Newport Beach has a very similar and slightly lower months’ supply compared to Manhattan Beach for the first time in 5 years may be an early sign of changes in demands in these markets due to COVID-19 and shows Newport Beach as a value-play based on pricing and recent market trends.

Arguably the most important metric when considering value, the price per square foot, also supports a value argument for Newport Beach over Manhattan Beach. The price per square foot allows you to compare where you can get more bang for your buck when considering home size and space. As of August 2020, the median price per square foot of single-family real estate on a rolling 12-month basis was $876/Sqft for Newport Beach and $1,007/Sqft for Manhattan Beach. As shown in the table below, this is a common theme across comparable markets in LA and OC.

The comparable markets examined were:

• Newport Beach (OC) vs. Manhattan Beach (LA)

• Laguna Beach (OC) vs. Malibu (LA)

• Huntington Beach (OC) vs. Santa Monica (LA)

• Irvine (OC) vs. Sherman Oaks (LA)

• Laguna Niguel (OC) vs. Encino (LA)

• Newport Coast (OC) vs. Beverly Hills (LA)

This demonstrates that size and space cost more in LA relative to comparable OC markets. One’s money gets them further in terms of house size and space in OC relative to LA. With the COVID environment demanding work from home and the need for space within the home, OC markets offer a cheaper and arguably more comfortable solution to those new demands than do comparative LA housing submarkets. That coupled with the significantly lower cost to educate children in OC versus LA, and the higher quality of life in OC in terms of less time spent in your car commuting from point A to point B for simple things such as groceries, and you have a strong case for moving to Orange County from Los Angeles.

Despite the market turmoil and uncertainty, Titan Pacific Group is here to ensure you make the best decisions you can. Whether you are considering a real estate investment or in the process of selling and/or buying a home, we are here to help.

Sources:

https://www.cnbc.com/2020/08/25/jpmorgan-will-have-staff-cycle-between-office-and-remote-work-in-a-move-that-may-remake-wall-street.html

https://www.privateschoolreview.com/california/los-angeles

https://www.usnews.com/education/best-high-schools/articles/how-states-compare#:~:text=Massachusetts%20tops%20all%20other%20states%20with%20the%20highest,19.3%25%2041%20Schools%20%2026%20more%20rows%20

http://crmls.stats.10kresearch.com/

Opportunity Zones and What They Could Mean for You & Your Capital Gains

What is an Opportunity Zone?

In the tax cuts and jobs act, opportunity zones across the United States were established. Opportunity zones are areas designated by governors and confirmed by the US Treasury as low-income areas experiencing economic hardship relative to the rest of the country. The idea behind them was to incentivize private investment as opposed to government funding into these areas by offering tax benefits to investors. Currently, there are more than 8,760 opportunity zones designated across the country.

Tax Benefits

Investing in opportunity zones allows investors to defer and lower any capital gains taxes in most situations. Most capital gains are eligible to be invested in opportunity zones. Both short- and long-term capital gains relating to the sale of stocks, bonds, property, or interest in a partnership are eligible to be invested into opportunity zones. By investing the capital gains, the capital gains taxes owed are deferred until either the sale of the opportunity zone investment or until December 31st, 2026. There are some exceptions and rules. There is a 180 day period in which the capital gains from the sale of an investment must be re-invested into an opportunity zone for the taxes on the capital gains to be deferred. Also, some capital gains relating to derivative contracts and capital gains from a sale or exchange to a related party are not eligible. A related party is one with whom you have a 20% direct or indirect relationship.

In addition to the deferral of the capital gains tax, if the investor holds the opportunity zone investment for at least five years, then only 90% of the capital gains that the investor used in the opportunity zone investment will be eligible for taxes. For example, say an investor puts $1,000,000 of capital gains into an opportunity zone investment. They hold the investment for 5 years, then whenever they sell the fund or when December 31st, 2026 comes around, only $900,000 of the original $1,000,000 will be taxed at the current capital gains tax rates, a 10% reduction to the amount of taxable gains. There is an additional reduction of 5%, to a total of a 15% reduction, to the capital gains that can be taxed if the investment is held for seven years, but now December 31st, 2026, will come before that is possible for any investment made today. The risk here would then be an increased capital gains tax rate in 2026 relative to now, but the lowering of the amount to be taxed after five years by 10% provides some protection to increased rates.

Lastly and arguably, the most significant tax benefit from investing in opportunity zones is that if the investment is held for ten years or more, then any capital gains relating to the investment into the opportunity zone itself are not eligible for taxes. This is what can really boost the real return from these investments relative to other options. Using our previous example, say $1,000,000 in capital gains was invested into an opportunity zone today and that asset was held for ten years and then sold for $2,000,000. On December 31st, 2026, while the investment was still being held, taxes on $900,000 of the original $1,000,000 in capital gains would be due. After the asset was sold, the $1,000,000 in capital gains from the investment into the opportunity zone would be tax-free.

How to Invest in Opportunity Zones and Real Estate Development

To invest in opportunity zones and be eligible for the tax benefits, funds, and capital gains must be invested through an opportunity zone fund. While there are many of these funds around, it is easy for anyone to form one and have control over the opportunity zone investments. An opportunity zone fund must be set up as a corporation or partnership and can be created by filing a form 8896 from the IRS. To remain qualified, an opportunity zone fund must hold 90% of its assets in an opportunity zone area. Qualified investments include real estate/property, equipment, and businesses that get at least 50% of their income from an opportunity zone. When the fund purchases a real estate, substantial improvements must be made to the property in 30 months or less. Improvements are considered significant when they are equal in cost to the original value the fund paid for the asset.  There are several businesses, including golf courses, liquor stores, country clubs, gambling establishments, and some other recreational facilities that cannot be invested into by opportunity funds. Funds are reviewed every six months and at year-end to ensure compliance. Recently it was said that opportunity zone funds with less than 90% of their assets in opportunity zones would not lose their status but would be subject to penalties. 

The rules, regulations, and benefits relating to opportunity zone investment and funds are still adjustable by the government, so it would be wise to consult a professional before acting on any related investment.

Titan Pacific Group is here to help you achieve the best results in real estate. Investing in real estate in opportunity zones is one of the many ways we can help our clients achieve their goals. We rely on our experience and market expertise to drive performance for our clients. 

Call us at 949-464-7639 for more information on Opportunity Zone investing in Orange County, San Diego, and Los Angeles.

Sources:

https://www.fool.com/millionacres/taxes/complete-guide-real-estate-opportunity-zones/

https://www.eda.gov/opportunity-zones/

https://www.realized1031.com/blog/qualified-opportunity-zone-funds-short-and-long-term-capital-gains#:~:text=Qualified%20Opportunity%20Zone%20Funds%3A%20Short%20And%20Long%20Term,taxed%20at%20a%20lower%20rate%20for%20most%20people.

https://www.urbancatalyst.com/opportunity-fund-general-rules#:~:text=Gains%20taxed%20as%20ordinary%20income%20and%20gains%20from,Fund%20within%20180%20days%20of%20realizing%20Capital%20Gains.

https://www.investopedia.com/opportunity-fund-4688682#:~:text=Opportunity%20zones%20were%20created%20as%20part%20of%20the,Secretary%20of%20the%20U.S.%20Treasury%2C%20via%20the%20IRS.

Mello-Roos and Why You Should Know About It

Summary

A Mello-Roos is a tax district created in California by a city, county, or school district for financing specific projects. In many cases, homes in Mello-Roos districts have lower purchase prices than similar homes in other areas. This can be deceiving because what someone may initially save due to a lower purchase price may be lost over time through the additional taxes. For example, an extra $250 to $580 in Mello-Roos tax payments per month can be roughly related to the monthly costs of adding $60,000 to $130,000 to a mortgage loan to buy a more expensive house. In other words, one could buy a home for a significantly higher price than a house with Mello-Roos taxes and end up paying about the same or even less depending on the circumstances. So next time, two similar homes in similar areas of CA have a price difference, remember to check for Mello-Roos taxes.

What is Mello-Roos?

A Mello-Roos is a tax district created in California by a city, county, or school district for financing specific projects. These projects typically invest in police and fire services, infrastructure, parks, and childcare facilities. Mello-Roos is essentially a loophole to Proposition 13, passed in 1978 that put a cap on property taxes in CA at 1% of assessed property value. Mello-Roos is technically a tax on land and not property, allowing it not to violate Proposition 13. However, failure to pay the Mello-Roos taxes often can lead to an accelerated foreclosure of the property on the land. For a Mello-Roos to be created, it must receive approval from 2/3rds of voters. Since the cash flows from the taxes are used by the issuing entity to sell bonds to bring in large amounts of money for projects, the Mello-Roos tax will remain in place for the time needed to service and pay off the bonds. This means someone buying a house in a previously created Mello-Roos district will have to pay the extra taxes regardless of their opinion on it. No matter one’s support for or disagreement with Mello-Roos and the projects they are used to fund, it would be wise to understand their relation to the purchase price of a home.

Mello-Roos and Home Prices

In many cases, homes in Mello-Roos districts have lower purchase prices than similar homes in other areas. This can be deceiving because what someone may initially save due to a lower purchase price may be lost over time through the additional taxes. On a property tax bill in CA, any charge that has CFD in its name relates to Mello-Roos taxes (CFD =Mello-Roos Community Facilities District).

For example, Mello-Roos taxes in Ladera Ranch can range from $3,000 to $7,000 annually, depending on the appraised value of the property. Thus, these Mello-Roos taxes can cost around $250 to $580 per month.

Using an average 30-year fixed mortgage rate of 3.12% (Bankrate, August 28th) and a mortgage calculator from Bankrate, it is easy to see that an additional $100,000 on a loan amount relates to about $428 dollars in extra monthly payments.

Therefore, an extra $250 to $580 in Mello-Roos tax payments per month can be roughly related to the monthly costs of adding $60,000 to $130,000 to a mortgage loan to buy a more expensive house. In other words, one could buy a home for a significantly higher price than a house with Mello-Roos taxes and end up paying about the same or even less depending on the circumstances. So next time, two similar homes in similar areas of CA have a price difference, remember to check for Mello-Roos taxes.

Titan Pacific Group is here to guide its clients in the market and provide value by leveraging its insider knowledge and market experience. No matter what side of the market you find yourself on during these times, we are here to help.

---

Sources

https://www.investopedia.com/terms/m/melloroos.asp

https://www.pointequity.com/blog/what-is-mello-roos-understand-before-you-buy-a-house

http://oct.estreamone.com/Show.aspx?parcel=74139117&year=2019

http://oct.estreamone.com/Show.aspx?parcel=74142103&year=2019

http://oct.estreamone.com/Show.aspx?parcel=74136111&year=2019

Mortgage Data from Bankrate

https://www.bankrate.com/mortgages/rates/mortgage-rates-for-friday-august-28-2020/

Inflation and Opportunities in Real Estate

Summary

When one considers all the options and the inherent uncertainty around inflation and its future, real estate, which offers strong real return opportunities with a strong correlation to inflation relative to other assets, seems like a good bet going forward.

Inflation and Why it is a Hot Topic

In response to the coronavirus pandemic, the government and the Federal Reserve have spent trillions of dollars to try and support the economy through the downturn. According to the 2020 Committee for a Responsible Federal Budget, between legislative and Federal Reserve actions, there has already been $4-5 trillion spent, with the possibility of $6 trillion more on the way.  The $2+ trillion from the Federal Reserve so far is essentially money created out of thin air. To conduct asset purchases, mainly of US treasuries, asset-backed securities, and corporate debt, the Federal Reserve takes in the assets and credits reserves/money to the participating bank/dealer it traded with. This adds money to the economy that was not there before, and is a direct liquidity injection into the markets, thereby lowering interest rates (one could argue, artificially lowering interest rates).

Historically speaking, if the money supply increases faster than the growth in real economic output, inflation will most likely occur (counterbalancing factors are high unemployment, lower wage inflation, and drastically lower consumer spending). However, the link between the Federal Reserve creating money to buy assets and inflation is not as direct as it may seem. An economic downturn can lead to a decrease in borrowing and lending, which lowers the money supply since the amount of money in the economy is directly tied to the amount of money created through loans and borrowing via the fractional reserve banking system. The actions of the Federal Reserve can be seen as a counteracting force to that decrease. Also, it is often the case that these reserves credited to banks remain held as excess reserves instead of being lent out. Since the funds thus can’t add to the money supply by continuously being lent out and deposited, their impact on the money supply is limited.

Despite the commentary above, it would still be prudent to be prepared when it comes to dealing with inflation. If the excess money created from the Federal Reserve finds its way into the system and stays there, strong inflation could occur if borrowing and lending recover, and there are not large gains in economic output. In addition, the WSJ reported that the Federal Reserve is considering letting inflation run above their 2% annual target for periods of time to make up for other times it was below that target rate.

Asset Classes and Inflation

While stocks are often hailed to offer protection from inflation, this sentiment can be misleading. The reason stocks can be seen as a protection against inflation is because the return on equity through stocks is normally above the inflation rate. However, nothing suggests that stocks will respond to a spike in inflation with a spike in prices. The wisdom of an article written by Warren Buffet in 1977 still applies today (http://www.valueinvesting.de/warren-buffett-on-inflation/). The main message was that the return on equity seems to be a constant number, and the effects of inflation imply no direct benefit to improving that return. As mentioned above, if inflation remains below the return from stocks, there is no issue, but if inflation were to rise by a larger than the normal amount, nothing suggests that stock prices would keep up.

Data analysis supports the idea of a weak relation between inflation rates and stock returns. The correlation coefficient between the yearly percent change in the S&P 500 index price and the annual inflation rate between 1929 and 2019 is only about 0.02, suggesting practically no relation between inflation and stock returns. In comparison, the correlation coefficient between the yearly inflation rate and the yearly percent change in the value of the US Case Shiller Home Price Index between 1929 and 2016 is around 0.54. This implies rises in inflation have been a lot more connected to rises in real estate as opposed to stocks.

While some may not be satisfied with 0.54 correlation, a quick review of other asset options paints a bleak picture. It is no secret that bonds and fixed income perform poorly in inflationary environments, and with yields where they are, there is little wiggle room for inflation to creep in without turning real yields negative. Gold is often thought of the best protection against inflation, but recent work by many economists, including Claude B. Erb of the National Bureau of Economics and Campbell Harvey of Duke University School of Business, have shown that gold does not correlate well to inflation. According to Peter Hug, director of global trading at Kitco, price movements in gold are more often related to the health of economies, supply factors, and central bank actions. Considering this and the recent surge in gold’s price, the idea of buying gold and hoping it will rise further in relation to inflation seems questionable at best. The last asset worth mentioning would be treasury inflation-protected securities or TIPS.  These securities offer the only true way to ward off inflation since their principal value is tied to the consumer price index. However, what one gains in safety from inflation, they pay for in return. The current yield to maturity on even the longest maturing TIPS is negative. When one considers all the options and the inherent uncertainty around inflation and its future, real estate, which offers strong real return opportunities with a strong correlation to inflation relative to other assets, seems like a good bet going forward.

Titan Pacific Group is here to help during these challenging times. No matter what side of the market you find yourself on, we can utilize our experience and insider insight to help you achieve the best possible results.

Sources

https://www.multpl.com/case-shiller-home-price-index/table/by-year

https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093

https://finance.yahoo.com/quote/%5EGSPC/history?period1=-1325635200&period2=1597881600&interval=1mo&filter=history&frequency=1mo

https://www.covidmoneytracker.org/

https://www.investopedia.com/articles/active-trading/031915/what-moves-gold-prices.asp

https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093

Outlook For Housing Market Remains Linked To Volatility and Uncertainty Around The Pandemic, But Certain Factors Provide Safety and Backstops Against Downturn

June and July were strong months for the housing market. According to a report by Bank of America Securities’ US Economists Stephen Juneau and Michelle Meyer, sales of existing and new homes increased significantly in June and data points to stable demand for housing. This is further supported by the Pending Home Sales Index (PHSI), a forward-looking indicator of home sales based on contract signings, rising 16.6% to 116.1 in June. “It is quite surprising and remarkable that, in the midst of a global pandemic, contract activity for home purchases is higher compared to one year ago,” said Lawrence Yun, the chief economist for the National Association of Realtors. In June, home prices nationwide, inclusive of distressed sales, increased 4.9% year over year. In July, the national average median home price reached a new high, largely due to pent up demand and low inventory. The CoreLogic HPI Forecast indicates that home prices will increase on a month-over-month basis by 0.1% from June 2020 to July 2020.

While the recent data and sentiment are inspiring, the market is not necessarily out of the woods yet.  That same report from Bank of America Securities that shined positive light on the housing market over the recent months suggests, “further improvement may be difficult to come by as some of the sharp recovery likely partly reflects a pull forward in activity and pent-up demand.” The report goes on to suggest how the economy and the housing market to a certain degree may be caught in a loop where lockdowns and restrictions lead to better progress with the virus that results in increased economic activity, which in turn leads to more infections and then renewed restrictions and a weakening in economic activity. This plays well into the argument recently put out by Neal Kashkari, president of the Federal Reserve Bank of Minneapolis. Kashkari suggests that an intense lockdown for a month to six weeks, followed by a national testing and tracing strategy, is the best way to go. Kashkari sees this as something that may be painful in the short term but will prove to provide more economic benefits in the long term than the current strategy of state and local governments dealing with the virus in a patchwork fashion. The issue of renewal and extension of federal aid is also a concern, implying a significant amount of risk to rental markets especially. The end of the $600 per week benefits and the inability of Congress to find a quick solution presents sizeable headwinds. Missed rent payments in the first two weeks of July were already up to 12.4% vs. 9.9% during the same time in 2019, according to online real estate database Zillow.

Despite the obvious potential headwinds, recent developments and other factors help support optimism surrounding the market. On August 8th, the president circumvented Congress and signed an executive order to provide jobless and student loan aid, suspend some payroll taxes, and impose a partial mortarium on evictions. While the effects of the executive order on the market will most certainly be complex, the jobless aid is most likely a substantial benefit to the rental market. Also, low-interest rates are a condition of this pandemic, and any further deterioration in the economy due to the pandemic will be accompanied by these low, and maybe even lower rates. These low-interest rates are a constant driver for buyers in the housing market. According to CoreLogic, “the recent rebound of home sales suggests the pandemic did not derail home buyers, who continue to be motivated by historically low mortgage rates. This, coupled with the declining supply of homes for sale, could shield home price growth from the impacts of the current economic uncertainty.” Michael T. Fay, principal, managing director and global head of Avison Young’s asset resolution team, summarized the situation when she said, “You cannot rely on putting money in banks or bonds in this low-interest-rate environment. You’re going to look at real estate and maybe some REITs.”

Corona del Mar Market Trends

For both condos and single-family homes in Corona del Mar, inventory has been on the rise recently. However, there has been a decrease in average days on market as well. This suggests that buyer demand is rising to meet the new inventory levels. The reduction in average days on the market to counteract the increase in inventory has been more intense for single-family homes as opposed to condos/townhouses. This may partially be contributing to the market for condos and townhouses significantly cooling in recent weeks. However, a few weeks of decreased demand is really what would need to occur to see any significant price decreases and a buyer’s market. For single-family homes, recent developments are different from those of the townhouses and condos. The past couple of weeks have seen home sales exceed new inventory. If this trend continues, there may start to be some upward pressure on home prices.

Corona del Mar Market Trends (Single-Family Detached Homes)

Corona del Mar Market Trends (Condos)

Regardless of whether you are considering buying or selling, let’s connect today. We are here to help you navigate the market successfully during these unprecedented times. Our insight and experience allow us to provide you with the inside scoop on houses and the market that you won’t see online.

Phone: 949-464-7639

Will the Housing Market Turn Around This Year?

Today, many people are asking themselves if they should buy or sell a home in 2020. Some have shifted their plans or put them on hold over the past couple of months, and understandably so. Everyone seems to be wondering if the market is going to change, and when the economy will turn around. If you’re trying to figure out what’s going to happen and how to play your cards this year, you’re not alone.

This spring, in the 2020 NAR Flash Survey: Economic Pulse, the National Association of Realtors (NAR) has been tracking the behavior changes of homebuyers and sellers. In a reaction to their most recent survey, Lawrence Yun, Chief Economist at NAR, noted the beginnings of a turn in the market:

“After a pause, home sellers are gearing up to list their properties with the reopening of the economy…Plenty of buyers also appear ready to take advantage of record-low mortgage rates and the stability that comes with these locked-in monthly payments into future years.”

What does the survey indicate about sellers? 

Sellers are positioning themselves to make moves this year. More than 3 in 4 potential sellers are preparing to sell their homes once stay-at-home orders are lifted, and they feel more confident, which means more homes will start to be available for interested buyers. Just last week, Zillow also reported an uptick in listings, which is excellent news for the health of the market:

“The number of new for-sale listings overall has shown improvement, up 5.9% last week from the previous week. New listings of the most-expensive homes…are now seeing the biggest resurgence, up 8%. The uptick is likely a sign that sellers are feeling more confident because of improving buyer demand, as newly pending sales have also jumped up during the same period.”

What does the survey note about buyers?

The recent pandemic has impacted buyer preferences, showing:

• 5% of the respondents said buyers are shifting their focus from urban to suburban areas.

• 1 in 8 Realtors report changes in desired home features, with home offices, bigger yards, and more space for their families becoming increasingly important.

• Only 17% said buyers stopped looking due to concerns about their employment or loss of a job.

As we’ve mentioned before, buyer demand is strong right now, and many are simply waiting for more inventory to become available so they can make a move, especially as the country begins to reopen.

Bottom Line

If you’re thinking about putting your house on the market, let’s connect today. There’s a good chance an eager buyer is looking for a home just like yours. If you’re thinking about making a home purchase, but haven’t found the one? We’re here to help.  Contact us for a list of Coming Soon and likely to list homes. Today, what you see online isn’t necessarily what you get.  We’ll give you the inside scoop!

---

Housing prices poised for a reduction, but not crash, as COVID-19 halts rise in homeownership

We continue to keep a close eye on the Southern California region's real estate market from our offices in Corona del Mar Newport Beach. While COVID-19’s longer-term impact on Southern California real estate remains dynamic and uncertain, there have been several notable developments since our April 11th article, Pandemic Continues To Wreak Havoc On Real Estate Market And Broader Economy.

We expect the recent notable decline in home sales due to the Coronavirus to bring a halt to the steady rise in the homeownership rate, which we saw happening before the Coronavirus began impacting the housing market. Nationally, we expect new and existing home sales will both drop by around 50% between the first and second quarters and only make up part of that drop over the second half of the year.

The good news is that with widespread forbearance in place, foreclosures will be kept to a minimum, so the homeowner rate is unlikely to fall backward. We expect the overall homeownership rate to hold steady at around 65%. However, even after the virus has been brought under control, it will take time for households' savings and income to recover. Combined with tighter credit conditions, that implies the homeownership rate will rise at a relatively slow pace over 2021 and 2022.

It is important to note that unlike in previous downturns, residential property has not been the root cause this time. Much of the blame for the global downturns in the early-1990s and mid-2000s could be pinned on burst housing bubbles. Years of leveraged over-investment set the stage for house prices to tumble once a shock to interest rates came along, which it did. Overextended households deleveraged to cover debt repayments or defaulted, and mortgage lenders incurred losses. The chickens came home to roost.

As stated above, the housing market isn't the villain this time around, but we believe that drops in household income will ultimately deal a blow to housing demand and, therefore, prices. The incomes of would-be homebuyers will probably fall by less than aggregate household income, and income losses will fall disproportionately on low-paid workers in consumer services. They are more likely to be renters than homeowners. Nevertheless, early evidence shows that housing is already taking a hit. In March, US home sales fell the most in over six years.

With the above in mind, it would be overly optimistic to believe that housing prices will escape this recession unscathed. With that said, assuming that policy support proves useful as lockdowns hamper property sales, and if demand rebounds later this year, widespread residential real estate price crashes are unlikely. The risks to our forecasts for smaller-than-10% declines in house prices in advanced economies lie to the downside.

Recall that strong new home sales in 2019 helped the under-35 homeownership rate jump to a nine-year high in the first quarter. But, with the disruption from COVID set to cut home sales in half in the second quarter, that impressive performance is expected to come to a halt. That said, widespread forbearance will keep foreclosures to a minimum, preventing a collapse in homeownership such as that seen after the financial crisis. As a result, we expect the homeownership rate will hold steady at around 65% over the next year.

First-quarter Housing Vacancies and Homeownership surveys had some encouraging news for the homeownership rate. After seasonal adjustment, the rate rose to 65.3%, the highest since mid-2012. That rise was driven by increased homeownership among younger Americans. The under-35 rate, defined as the number of owner-occupied homes divided by the number of owned and rented homes, wherein each tenure the head of the household is 35 years old or less, saw its most significant year-on-year gain since records began in 1995 to reach 37.9% (See Chart 1).

The boost to homeownership among younger Americans reflects the strength of new home sales over the past year. While some existing home sales reflect movements from the rental to homeowner sector, it is sales of new homes that primarily drives changes in homeownership. After all, even if they are not sold directly to first-time to buyers, new sales will free up homes further down the housing supply chain.

Annual growth in new home sales averaged over 11% in 2019, the best performance for three years. Even so, the surge in under-35 homeownership looks high by past standards (See Chart 2).  It is worth noting that there is a high degree of uncertainty around homeownership rates. The 90% confidence interval around the under-35 rate in the first quarter of 2020 is +/- 0.7. Taking the lower end of that range, the annual growth rate would be more in line with new home sales.

As lockdowns cause housing transactions to fall, house price indices may be unreliable in the near term. It's tricky to retrieve price data for goods that aren't being bought and sold in large quantities. Over the year, though, we should see house price falls in all advanced economies around the world. For now, we expect house price declines of about 5%, on average, rather than deep crashes, for three reasons.

1.      Policy measures, both past, and present should minimize the risk of mass foreclosures. Stricter affordability checks over the last decade mean that households are better able to cope with debt repayments in the face of an income shock than was the case in the past. Today, mortgage holidays, coupled with lower interest rates and government income support, mean that homeowners have more space to weather the storm. All this should limit the scale of forced selling by those unable to meet their obligations to creditors.

2.      Even for those who want to sell, many will struggle to do so. The lockdowns have erected practical barriers to selling real estate, at least in the near term. For instance, social distancing has put a stop to home viewings and has restricted valuations by surveyors. Further upstream, supply chain disruptions and a largely furloughed workforce have hindered the supply of new homes for sales by developers. So, while housing demand will fall, there could be some offsetting effect on prices from restrictions to adequate supply.

3.      Our macroeconomic forecasts imply that much of the hit to housing demand will be short-lived. Admittedly, we are forecasting a deep global recession and expect it to take years for incomes to recover to where they would otherwise have been, if not for the Coronavirus. However, our working assumption is that containment measures will soon be eased, which will allow economies to begin recovering in relatively short order, especially compared to the more drawn-out slump in the aftermath of the global financial crisis. A recovery in demand in the second half of 2020 should put a floor under house prices before self-reinforcing declines in price expectations have the chance to set in.

With that said, the risks to our house price forecasts lie to the downside. While we don't anticipate price crashes like the US, UK and Ireland experienced around the time of the financial crisis (see Chart 3), the risks are more significant in the likes of Canada and Sweden, where residential property is expensive (See Chart 4). More generally, given the genuine threat of a second wave of the virus, containment may well drag on for longer than we envision. Government support is more likely to be less, rather than more, effective at propping up household incomes than we assume.

Similarly, households are more likely to surprise us by being more cautious about buying houses, not less. If the recession bores a bigger hole in lenders' balance sheets than we've accounted for, liquidity support from central banks may not be enough to ensure the supply of mortgage credit that will be needed to facilitate recovery in housing demand.

---

You might also want to read the following articles for more information about how the Coronavirus is impacting the Southern California real estate market, and some helpful tips for homebuyers, homeowners, owners of investment properties, and seller of a home or investment property, can make the most of this new real estate market.

• How The Coronavirus Is Impacting Southern California Real Estate

• Pandemic Continues Wreaking Havoc on Real Estate Market and Broader Economy

• Four Tips On How You Can Make The Most Of This New Real Estate Market

• Navigating The Landlord-Tenant Relationship During The COVID-19 Pandemic

---

How the Coronavirus is Impacting Southern California Real Esta

I've been watching the Orange County real estate market closely as the coronavirus situation continues to escalate throughout the U.S. While the Coronavirus's longer-term impact on the real estate market is unclear at this time, I can tell you based on my observations, research, and interactions with clients/colleagues alike that the market has changed dramatically over this past week. Both near-term and long-term outlooks remain dynamic and uncertain. With that said, given the number of questions I've received from clients inquiring about the state of our local real estate market here in Orange County, I wanted to take a moment to explain my thoughts on this topic. 

For the time being, the American economy is at a Coronavirus-driven stand-still. No one should be surprised that increasingly restrictive measures on people's movement and an imminent surge in unemployment, which is likely to have severe consequences on the broader economy, will also adversely impact the real estate market. However, no one should rush to sell their home in a panic and use the proceeds from the sale to invest in toilet paper.

For now, due to the currently stymied financial situation, the real estate market is dealing with a troubled U.S. economy, and prospective homeowners are putting off purchasing properties. In the backdrop, American homeowners are sitting on a record $18.7 trillion in home equity. Still, homeowners are not rushing the banks to refinance. This could be because rates increased steadily over the past couple of weeks. However, it is most likely because people who either took on too much debt during the financial crisis or saw what happened to others who did are warier about taking on high levels of debt on their homes. The latter is not necessarily a bad thing for the long-term health of the residential real estate market as it demonstrates that homeowners are implementing the lessons they learned from the Great Recession. It also serves as one of many data points to chart the differences between this event-driven downturn caused by the Coronavirus, and the Great Recession that lasted 19 months, from December 2007 until June 2009. Note, according to a recent report published by Goldman Sachs, event-driven downturns recover much faster than a cyclical market downturn.

At this stage in the pandemic, a considerable number of buyers are hitting the pause button. On the listing side of things, the California Association of Realtors just issued a moratorium, effectively stopping all open houses. There is a general decline in buyer/seller confidence related to the direction of the overall economy coupled with unprecedented measures taken to combat the spread of Covid-19, including significant social distancing efforts nationwide. As a result, buyers and sellers of residential real estate are operating with an abundance of caution, with most taking a "wait and see" approach in these uncertain times.

Many American economists are predicting an "absolutely brutal" housing market report next month. Still, the overall outlook does not necessarily mean that we are heading into a doomsday scenario. As Matthew Pointon of Capital Economics wrote, "Increasingly restrictive measures on people's movement, and an imminent surge in unemployment, means we expect total home sales will drop by around 35% in the second quarter compared to the end of 2019. But the dip should prove short-lived. Assuming a strong fiscal and monetary policy response, pent-up demand from the spring buying season will help sales recover by the end of the year."

However, at this moment in time, we don't have broadly disseminated data to look at to analyze the severity of the Coronavirus's impact on the real estate market. February data indicating a rise in single-family housing starts pre-dates the outbreak of the Coronavirus, and the outlook for housing starts will, in my estimation, worsen considerably over the next few months. Any disruption the Coronavirus has on housing market activity won't be evident in the home sales data until late April at the earliest. But other metrics like the number of purchase mortgage applications, and reports of new home buyer traffic from the NAHB due to be released this week will provide the first clue as to where sales are heading.

About 40% of annual sales take place from March through June, according to the National Association of Realtors. Hence, the second quarter is usually a critical period for home sales, as buyers try to move into new homes over the summer before the start of a new school year. According to Capital Economics, U.S. home sales could drop by 35% in the second quarter compared with the fourth quarter of 2019 as the pandemic adds to unemployment and keeps potential home buyers indoors. However, “the pace of sales is likely to recover later in the year,” says Capital Economics' property economist Matthew Pointon. He expects total sales this year of around five million, down from his previous forecast of 6.2 million. He goes on to write that "it will take time for the economy to recover, but assuming the country begins to get back to normal in the second half of the year, pent-up demand and a lack of inventory will encourage builders to restart projects."

Regarding mortgages, the Fed promise to buy at least $200bn of MBS will support liquidity in the market and put some downward pressure on mortgage interest rates. But mortgage rates are also being pushed higher by lender caution and capacity constraints, with enforced home working not helping the latter. We probably won't see the 30-year mortgage rate drop much below 3.3% over the next few weeks, but that is still low by historical standards, and it's certainly low enough to warrant taking on a mortgage to buy a great property when the time is right to strike on the right opportunity.

Over the past week, I've seen a much more significant than the usual number of sellers either taking their properties off the market (changing their listing status from Active to either Hold, Expired, Cancelled, or Withdrawn), or dramatically reducing their asking price. I canvased several key OC submarkets for data including Costa Mesa, Irvine, Newport Beach, Corona del Mar, Newport Coast, Laguna Beach, San Juan Capistrano, San Clemente, Aliso Viejo, Laguna Niguel, Mission Viejo, Ladera Ranch, Huntington Beach, Yorba Linda, Santa Ana, Tustin, and Orange. Based on my research and the data I uncovered, I would categorize approximately 70% of all changes made to listings over this past week as a reactionary result of the uncertainty surrounding the impacts of the Coronavirus. I would classify the remaining 30% of changes as those that occur during normal economic and real estate market conditions.

We all know that precious metals offer industrial use as far as intrinsic value is concerned. Property ownership can also be valuable because homes are scarce and necessary. While the real estate market faltered during the subprime mortgage crisis, and then again briefly in 2017, real estate income properties have always produced revenue and profits. They have offered one of the best risk-adjusted returns of the major asset classes. 

From my vantage point, it seems like sellers who can afford to weather the storm are taking their properties off the market, while those who need to sell for one reason, or another are reducing their asking price. The latter brings me to the crux of my assessment, and how I'm viewing the real estate market at this moment in time. Be patient, and be prepared to jump on the right opportunity, because we are heading into what I believe will be a highly profitable, yet, opportunistic time in real estate for those who can afford to take advantage of the opportunities that arise. 

I certainly don't have a crystal ball, and there are undoubtedly a lot of moving parts with a cloud of uncertainty looming over just about everything these days. Still, if we can agree that the longer it takes to get the coronavirus under control, the longer it will take for the overall economy to recover from it. Then, we should track developments related to containing the novel virus, and we should prepare ourselves to enter a potentially short-lived, target-rich, and highly opportunistic real estate environment. In short, don't panic. Be patient and ready to strike when the right opportunity presents itself. Buy low and sell high when the economy recovers, which it is bound to do.

Investing in Southern California Real Estate Provides Appreciation, Cash-flow, and Peace of Mind

SoCal real estate investors wanting both appreciation and cash-flow don't need to look any further than these top 5 SoCal rental markets (Los Angeles, San Diego, Anaheim, Santa Ana, and Long Beach). Ranked among the top 25 rental markets in the U.S., none of these five local area markets are "Overvalued" according to CoreLogic. Investing in Southern California real estate continues to provide the best option for local area investors looking for both appreciation and cash flow. Plus, as a local area investor, investing in SoCal offers the added security of knowing that your real estate is close to you, and in one of the premier markets nation-wide.

For more information, visit https://www.titanpac.com/realtor

#realestate #californiarealestate #losangelesrealestate #sandiegorealestate #orangecountyrealestate #southerncalifornia #titanpacgroup #socal #investors #investor #cashflow #mortgage #realestatemarket #interestrates #realestateinvestors

New Higher FHA, Fannie Mae, Freddie Mac Loan Limits Give Home Buyers More Power in 2020

With higher home prices come higher loan amounts, and the FHA, Fannie Mae, and Freddie Mac all recently adjusted their loan limit amounts to account for higher home prices. Those higher loan limits took effect on Jan. 1, 2020, meaning the FHA, Fannie Mae, and Freddie Mac are all now backing larger loans.

Link to Original Story: https://www.housingwire.com/articles/fha-fannie-mae-freddie-mac-are-all-now-backing-larger-loans/?utm

The 2020 FHA loan limit for most of the country is now $331,760, an increase of nearly $17,000 over 2019’s loan limit of $314,827.

There are several counties (approximately 70 like Orange County and Los Angeles) where the median home price far exceeds the FHA loan limit floor. Those areas where the loan limit exceeds this floor are considered “high-cost areas,” and HERA requires the FHA to set its maximum loan limit “ceiling” for those high-cost areas at 150% of the national conforming limit.

Therefore, for those approximately 70 “high-cost” counties, the FHA’s 2020 loan limit is $765,600, an increase of nearly $40,000 over 2019’s total of $726,525.

At the end of November, the government-sponsored enterprises announced that the 2020 maximum conforming loan limit was increasing from 2019’s level to $484,350 to $510,400 for 2020. That marks the fourth straight year that the FHFA has increased the conforming loan limits after not increasing them for an entire decade from 2006 to 2016. Fannie Mae and Freddie Mac are now backing loans that exceed $510,000, while the FHA is backing loans of just above $331,000.

For much more on the Fannie and Freddie loan limits, including a breakdown of the loan limits by county, click here, and for much more on the FHA loan limits, including an analysis of loan limits by county, click here.

Click here see a related article with insight into the 2020 housing market and our Southern California real estate market predictions for Orange County, Los Angeles, and San Diego.

California Governor Signs SB 330, creating more certainty for creates certainty for developers constructing new housing units, a step toward alleviating California's housing supply crisis.

Gov. Newsom today signed SB 330 which creates certainty for developers constructing new housing units, by permitting no more than five public hearings to approve a proposed housing development if the development is consistent with local planning, zoning and design requirements. Also, upon granting housing development approval, local governments will be prohibited from increasing local permitting fees throughout the project’s development, which will create more certainty in the entitlement process. It also streamlines the local permitting process for five years in cities whose populations exceed 5,000 residents and where rents exceed 130 percent of the national average. Finally, it labels California’s housing crisis a “housing supply crisis.”

About SB 330:

• It creates certainty for developers constructing new housing units, by permitting no more than five public hearings to approve a proposed housing development if the development is consistent with local planning, zoning and design requirements.

• Upon granting housing development approval, local governments will be prohibited from increasing local permitting fees throughout the project’s development, which will create more certainty in the entitlement process.

• Streamlines the local permitting process for five years in cities whose populations exceed 5,000 residents and where rents exceed 130 percent of the national average.

• It labels California’s housing crisis a “housing supply crisis.”

The Impact of AB 1482, California’s Statewide Rent Control and Just Cause Eviction Bill, on Value-Add Multifamily Real Estate

The California Senate approved Assembly Bill 1482 (“AB-1482”) on September 10, 2019, and when California Governor, Gavin Newsom signs the bill in a matter of days, California will become just the second state in the nation to pass a statewide rent cap (Oregon passed a similar law earlier this year). The legislation will take effect in January 2020 and will affect an estimated 2.4 million apartments until it eventually sunsetts in 2030.  Once signed into law, it will become the most significant California rental housing law in a quarter century, and we want to make sure you understand its key points, summarized below.

WHAT IS THE MAXIMUM ANNUAL RENT CAP UNDER THE BILL?

A cap on annual rent increases set at 5% (plus inflation for the metropolitan area), up to a maximum of 10% per year.

WHAT IS THE BILL’S JUST CAUSE PROVISION?

A prohibition on evictions without "just cause." Landlords can no longer terminate month-to-month tenancies at will and may now only evict tenants for one of 15 specific reasons. The permissible reasons are divided into two categories: "at fault" and "no fault."

• "At fault" termination is generally allowed when tenants have breached their lease and does not require the payment of relocation assistance. "At fault" reasons include non-payment of rent, nuisance, criminal activity, refusal to allow entry, and breach of a material term of the lease.

  • Note, for certain just cause terminations that are curable, AB-1482 requires that the owner gives a notice of violation and an opportunity to cure the violation prior to issuing the notice of termination.

• "No fault" termination is allowed even when the tenant has not breached the lease and will require the landlord to pay one month's rent in relocation assistance. "No fault" reasons include an owner or family member intending to occupy the property, withdrawal from the rental market, substantial remodeling and compliance with a government order to vacate the property.

  • Note, for no-fault just cause terminations, the bill requires the owner to assist certain tenants to relocate (regardless of the tenant's income), by either providing a direct payment of one month's rent to the tenant or by waiving (in writing) the payment of rent for the final month of the tenancy prior to the rent becoming due. If the owner does not provide relocation assistance by one of the two methods above, then the notice of termination is void.

DOES THE BILL APPLY TO ALL PROPERTIES, OR ARE THERE EXEMPTIONS?

The bill's just cause eviction provisions only protect tenants who have been in possession for a year or more. Certain types of housing are exempt including:

• Single family homes and condos if:

  • Tenants have received notice of the exemption; and

  • The owner is not a REIT, corporation, or LLC owned wholly or in part by a corporation.

    • Note, if the ownership entity is an LLC and one of the partners is a corporation, the exemption will be lost

• Homes built within the last 15 years

  • Note, the 15-year exemption rolls over every year, so for example, units built in 2005 are exempt this year but will lose exemption in 2020.

• Owner-occupied duplexes

• Owner-occupied single-family homes where two or fewer rooms are rented out

  • Note, exempt from just cause but not exempt from the rent cap

• Government assisted housing

  • Note, the law authorizes an owner of an affordable housing property to establish the initial rental rate for the unit upon expiration of the restriction but would require the owner to comply with the cap on rent increases for subsequent rent increases.

DOES THE BILL APPLY RETROACTIVELY TO INCREASES ABOVE THE ALLOWED CAP AMOUNT?

This cap applies retroactively to all rent increases since March 15, 2019. Any rent increases initiated on or after that date will count toward the rent cap, and if over the maximum, will have to be rolled back to the maximum permissible increase effective January 1, 2020. However, the owner will not be liable to the tenant for any corresponding rent overpayment.

DOES THE BILL ALLOW FOR AN ADDITIONAL RENT INCREASE IF AN OWNER ALREADY INCREASED THE RENT BY AN AMOUNT THAT IS LESS THAN THE ALLOWED CAP?

Yes, if an owner increased the rent between March 15, 2019 and January 1, 2020, by an amount that is less than the allowable cap, then the owner can increase the rent again, but only up to the cap amount allowed under AB-1482. Keep in mind that owners are restricted to no more than two increases per year, therefore, only two rent increases are permitted within 12 months of March 15, 2019.

ARE THERE ANY DISCLOSURE REQUIREMENTS?

Yes, owners must provide notice to tenants of their rights prescribed under the law’s provisions by January 1, 2020. Notice using the new "Rent Cap and Just Cause Addendum" can be provided as follows:

• For month-to-month tenants, the addendum should be incorporated into the rental agreement by providing a notice in change in terms of tenancy.

• If the tenant is on a lease, the addendum should be provided as a stand-alone notice.

• For all tenants signing a new lease, or a renewed lease agreement after January 1, 2020, then the addendum must be included in their new or renewed lease / rental agreement.

 HOW DOES AB1482 IMPACT VALUE-ADD REMODEL / RENOVATION OR REDEVELOPMENT PROJECTS:

•  Based on the “no fault” provisions of AB 1482, when an owner intends to demolish or to substantially remodel a residential property, where “substantially remodel” means the replacement or substantial modification of any structural, electrical, plumbing, or mechanical system that requires a permit from a governmental agency, or the abatement of hazardous materials, including lead-based paint, mold, or asbestos, in accordance with applicable federal, state, and local laws, that cannot be reasonably accomplished in a safe manner with the tenant in place and that requires the tenant to vacate the residential real property for at least 30 days.

• The owner, while following the notice requirements, can accomplish a value-add remodel / renovation, or redevelopment project by:

1.      Withdrawing units from the rental market due to the intent to demolish or substantially remodel the residential property; and

 2.      Providing the relocation assistance described in the "No fault" termination explanation above (i.e. provide the equivalent of one-month worth of rent to the tenant in the form of either a credit for their last month of occupancy or as money to facilitate moving into and occupying a new residence).

•  Note,cosmetic improvements alone, including painting, decorating, and minor repairs, or other work that can be performed safely without having the residential real property vacated, do not qualify as substantial rehabilitation.

CALL US AT (949) 464-7639 OR CLICK HERE IF YOU WANT TO KNOW IF OR HOW YOUR PROPERTY IS DIRECTLY IMPACTED BY AB 1482

CLICK HERE TO READ THE FULL TEXT OF ASSEMBLY BILL 1482

*The information herein is intended to be a summary-level outline, supplemented through consultation with your realtor and attorney, and therefore should not be relied upon absent such consultation.