NAR Settlement - Several Changes in the Real Estate Industry

 News that will affect the real estate industry is happening--largely affecting the buyer's side of things. This is all subject to court approval, and could take months to go into effect. 

The main takeaways are:

• Listing agents can no longer offer buyer's broker compensation on any MLS boards
• Buyer's Broker compensation offers can still be made (Meaning offers may be made to seller asking for Buyer's broker compensation)
• Buyers must now sign a Buyer's Rep form with an agent before any real estate activity is done
• Commissions will continue to be negotiable via contracts and Buyers may ask Sellers for their Broker's compensation

The new laws are not yet set in stone but expected to go to into effect in July 2024, but more details to follow as things solidify, get modified, added, deleted, etc.

I have to ask, is this any different from how attorneys operate? Or a CPA? Or if you hire any specialist? 

How will this affect all sides? Some possible scenarios:

• Buyers may be hurt the most because on top of the high real estate prices, they're going to have to pay for a buyer's agent if they want representation (this is basically how it's worked in NY). Of course buyers don't have to use a buyer's agent at all, but then buyers will likely pay more for the house because there won't be negotiating done on their behalf. 
• Sellers and even seller's agents can choose to pay buyer's agents or not. This will become a negotiating point but will likely continue to remain competitive. 
• VA and FHA loan buyers will likely lose out the most because they won't have the extra funds to pay for a buyer's agent.
• Sellers could end up with less buyers because many buyers won't be able to afford to pay a buyer's agent. 
• Sellers may still have to pay a buyer's agent to remain competitive in a slow market.
• Commissions may be allowed to be listed on non-MLS websites.
• Buyer's agents and buyers may only want to buy properties in which a Seller is offering compensation the buyer's agent, so that the buyer doesn't have to pay the buyer's agent.
• Listing agents may be asked to draft offers for buyers, but again, a buyer's representation agreement is now mandatory.
• More buyers may pay for and hire an attorney to draft up an offer. 
• Property values likely won't change much if at all, with extra being charged to the buyer.
• Buyers will scramble to buy before July 2024 to avoid the possibility of paying a buyer's agent
• Who pays the buyer's agent, if any are involved? Seller, Buyer, or BOTH. No longer is it being offered by the listing agent.

Real Estate is Up, If Anything

Interest rates are up, there's a war that could expand, there's been banking failures and likely more to come, yet real estate is holding on. Why is that?!

There is absolutely no doubt the first reason is inventory. There just isn't enough. When you have more homes that have sold than are on the market, that's very telling. Santa Monica has 39 homes for sale under $5M right now and 38 sold in the past month. Culver City has 8 for sale and 12 sold in the past month. West Hollywood has 16 active and 22 sold. Pasadena has 94 active and 171 homes sold. There just aren't enough homes compared to the demand. On the flipside, DTLA has 192 for sale and 83 homes sold, so now you know where there are deals to be had.

The second reason prices are still going up is safe haven aspect of real estate. Unlike the volatile stock and crypto markets and low yield treasuries, real estate is very malleable. You can rent out, update, flip, etc. And those who need to park some of their money are putting some of it in real estate.

Lending is going to get worse. If you think this banking thing is over, it's not. Banks will be under more scrutiny, and will be lending less. 10/90 loans will likely be hard to come by. Most conventional banks will want to see at least 20% down for buyers. So anyone holding onto their nice 2.9% loans is likely gonna just stay put. And why put your house on the market when you can just Airbnb the house, rent it out, or add on to it if you need the size?

DTLA Already Showing Signs of Bouncing Back

While most dense urban centers took a backseat to the suburbs during COVID, there's been signs of people moving back to city centers, particularly in DTLA. Whenever there's a shake up and prices get depressed, those with long term holding plans always come out of the woodwork and buy. 

Investors, city dwellers from NYC, SF, Chicago, Seattle, and other metro areas have been moving into DTLA according to recent sales and leases from other DTLA realtors. There's been a noticeable number of people from out of state moving to DTLA due it's dense city environment and of course the weather. With outdoor dining returning, and indoor dining at minimal capacity, the ability to walk outside in winter to 70-degree sunshine, a slew of activities within 1-2 hours of anywhere (skiing, hiking, lakes, wineries, mountains, beaches), there's a lot going for DTLA.

Sales activity has increased about 8-10% this year from last, and prices have ticked up about 3% from last year. DTLA is still down overall about 7% in prices from pre-COVID times.

Leases are up now too, with more people feeling safer in general and rather than moving out of a walkable area, there are lots of people who are moving within DTLA and trying out new buildings and neighborhoods. 

Entering Spring and Summer, the hope is that with more people vaccinated, the worst is behind us and can move forward to heal, resume business activities, and do our part to help keep the smallest businesses afloat. 

Doing the Opposite of Everyone

Investing mantra #1. Remember the crash of 2008? Anyone who saw opportunity between 2008-2012, while tons of people were jumping ship from their homes, did well

In 2020, what is everyone doing? Everyone is buying in the suburbs. Everyone is paying top dollar to get out of the city. You might think of buying in dense city centers now while prices are more reasonable. 

Something to think about.

Why have LA home prices been so resilient?

The market in urban areas has come down since pre-COVID. On average, in NYC, about -18%, in SF, about -10% and in DTLA, about -4%. (Prices in the more suburban areas of LA are up about +1%)

Why has LA been more resilient? 

1. First, prices in LA were always lower than in NYC and SF. And suddenly, the nice weather, larger spaces and lower prices are looking pretty good when you can transplant yourself anywhere and work from home.

2. Remember, NYC was and still is the hardest hit COVID zone. LA, with it's huge population, has a fraction of the number of cases and deaths. Something is being done right in LA in terms keeping things safer. 

3. People still want a city, and LA, with its proximity to green spaces, mountains, beaches, deserts, etc, is proving to be the ideal place to settle during this uncertain time. 

4. There is a lot more space in LA than in other major cities. The average home size is about 1300sf in greater LA, and that's not including yards and other outdoor spaces. Compare that to 700sf is SF. You do get a lot more space for your money in LA, it's just a fact. 

5. The population. LA has a huge population. Where there is a population, whether employed or not, is going to need basic services, and that means jobs. Why else are companies like Amazon buying up warehouse spaces in LA? Because of demand for goods. 

June 2020 Recap + Changing Times

QUICK HOUSING NEWS, OPINIONS, STATS: 

- Things are sitting on the market longer. (Average is about 45+ days). The beginning of June wasn't great with the aftermath of the looting and riots, this hurt momentum, but the end of June saw some mild recovery in prices and activity.

 

- Signs of change. Never has the knock-on effect of events been so apparent until this pandemic. The lockdowns ended up causing a slew of businesses to stop cold turkey. This caused unprecedented unemployment in the US. As lockdowns eased, unemployment claims eased. This points to companies stabilizing (maybe the CARES Act helped?), and some are even rehiring. June 2020 stats showed the 4.8 millions jobs were added, though unemployment still remains high. See NYTimes article here: 

https://www.nytimes.com/2020/07/02/business/stock-market-today-coronavirus.html#link-5f5a419 

and

https://www.marketwatch.com/story/dow-futures-surge-400-points-after-jobs-report-for-june-shows-48-million-jobs-added-unemployment-falls-2020-07-02  

 

- Possible V-shape recovery in housing. Real estate has been "open" for 3 months now. April was the worst month so far, with COVID lockdowns fresh in people's minds. As lockdowns eased in May, real estate started to bounce back and May was great in terms of activity, and most importantly, prices. June was about the same as May, if not slightly better as pent up demand and low interest rates drove some buyers out there. See some optimistic housing news here from Business Insider:

https://www.businessinsider.com/housing-market-v-shaped-rebound-us-could-start-economic-recovery-2020-6  

- Possible plateau or dip in housing early next year. Three big unknowns that could rock the boat in the coming months. FIRST, if there's no vaccine anytime soon. SECOND, Interest rates rise, shutting out a lot of potential buyers. THIRD, unemployment remains high and stunts consumer activity.

- Less foreign buyers, more domestic buyers. Those who've been priced out are becoming more able to buy due to less competition from foreign money. 

https://www.wsj.com/articles/foreign-home-buying-dries-up-easing-the-way-for-domestic-buyers-11593682201  

- Mortgage applications fell since May. In June, super low interest rates helped the housing market, A LOT. This is seriously the single biggest thing helping buying activity right now. However, the number of mortgage applications fell, and this could because taxes are due on July 15, continued uncertainty in the market,  job insecurity. 

- There will likely be an influx of renters in the next 3-12 months. We know that with job instability and unemployment, there is a percentage of the population who will continue to rent, or sell and decide to rent. Rent prices have dropped as well, but minimally. About 1-2% on average.

 

- Inventory is still low. I mentioned this before, and this, along with low interest rates, is what's keeping prices afloat. People aren't selling because many don't have to. The majority of people who own now are special in that many have equity in their homes, unlike back in 2008, when no one had equity and the tiniest shift in the market caused people to be upside down on their mortgages. That was ugly.  

  - Real estate as a good bet against inflation. It's hard to know where to park cash these days, and with inflation and interest rates so low, keeping it in a savings account isn't ideal. But buying a house is looking like a safer bet against the falling dollar. 

https://www.forbes.com/sites/davidkudla/2020/06/30/inflation-will-come-here-are-five-ways-to-combat-it/#59cc16dd6deb

 

  - Virtual home shopping on the rise. Lockdowns have forced people to pivot, and now more people are touring homes via virtual tours, videos, and photos. According to Zillow, virtual tours for buyers has increased by 600% in the past couple of months. 

 

- Working and playing from home is the new norm.  It's not just a tech industry thing anymore. Every large company is rethinking their work culture and it's predicted that the majority of white collar jobs will become remote in the near future. Same goes with some of the non-work related stuff. Interesting article about virtual activities partnering with online retail.  And it makes sense. 

https://www.marketwatch.com/story/lululemon-acquisition-mirror-could-generate-700-million-and-reach-600000-subscribers-by-2023-bank-of-america-2020-07-01?mod=home-page

- Brace yourselves for the long haul.  The days of 15-30% ROI within a year or two of holding real estate are gone for now. You have to think conservatively, like 2-3% gains per year, with micro fluctuations in between.  Too many factors that affect housing are keeping growth at slower pace, but hey, I'm grateful that there is growth at all in these times.

 

- Malls may become the new housing solution. Interesting article on how malls may become housing, since as we know, the shopping mall is definitely going the way of the dinosaur. This could solve the housing shortag,e maybe?

https://www.bloomberg.com/news/articles/2020-06-30/a-case-for-turning-empty-malls-into-housing?srnd=premium

Going for Distressed Sales and Leases - It's Happening Again

It happens every time there's a shock, a crisis, an upheaval, and now a pandemic. It's important to note that even in these times, some people are benefitting off of distressed real estate. Some businesses who haven't been hit with revenue issues have been leasing and buying commercial spaces at excellent terms.

LA DWP just signed on for a 10 year lease for a property in DTLA. 132,000sf. https://therealdeal.com/la/2020/05/20/power-lease-ladwp-inks-deal-for-132k-sf-at-downtown-office/

Jellyfish just left WeWork and signed on for 2 entire floors of the Valentino building in NYC's midtown. They probably wanted to keep their staff isolated a bit more.
https://commercialobserver.com/2020/04/marketer-jellyfish-leaves-wework-for-10k-sf-in-midtown/

The historic building dubbed the "Pottery Barn Building" in Old Town Pasadena just sold for only $16m. A steal for a corner property that will go up in value once things calm down.  https://labusinessjournal.com/news/2020/may/18/retail-site-pasadena-fetches-16-million/

Facebook is about to sign a lease for a humongous space at the Farley Post Office building in NY. https://www.vno.com/office/property/the-farley-building/3313609/landing

The Centinela, a 48-unit building in Santa Monica just sold. Only $12M. In SANTA MONICA. Upside potential on this place for sure. https://labusinessjournal.com/news/2020/may/04/santa-monica-multifamily-sells-12-million/

Housing + Necessity Spending = The New Normal

One thing's certain, and that is the future is uncertain. For most of us, there's no frame of reference for what is happening. Even the folks who grew up during the Great Depression know this is different, because the economy wasn't global back then. 

For housing, what does this mean? No doubt housing is taking a hit in terms of lowered activity, price plateaus, etc, but the fact remains, housing is a necessity.

What studies are showing is that on average, many Americans who are in a position to save even a little bit, are saving like never before. They are spending less on unnecessary items, and spending conservatively on food and housing. If there's any silver lining in all of this, it's that people have become more conscious of the value of money, and how having even a small amount of savings will be absolutely necessary. This is the new normal. Until there's a vaccine, of course.

Culture is also changing. Working from home is going to be the new norm for sure. Twitter just said that their employees can work from home forever. More companies will follow, I'm sure of it. And why not? The companies won't have to own or lease out expensive office space, and have all the crazy overhead. But of course, employees will be making their own overhead in their homes. They'll need a office corner, or if the space permits, an entire room for a home office. No doubt some people will upgrade their homes for a larger space to accommodate working remotely. 

At least until there's a vaccine, the way we socialize will be changed too. In the short term, people will travel less abroad, and more people will have local outings. Some city dwellers will want a yard--I have clients who've said this experience has made them want to have a little piece of the outside for themselves. I also have a few clients who have said that the isolation of living in a suburb is making them go insane, and they want to move where there's some amount of social interaction where there is more life and walkability. At least for the time being, this is helping move real estate in an unprecedented time.