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May 2020 Newsletter

Market Analysis


COVID-19 has absolutely changed the way we will be investing in real estate moving forward. I won't be going into exactly how that is in this newsletter, but if you want more information on how, then you are welcome to check out our blog over on our website. In this newsletter I wanted to go over the numbers on, what exactly is happening to our economy? What markets will see the greatest impact? How can I prepare myself for what's to come? What has already happened, and how are my investments affected? Let's jump right in. Overview In a new report forecasting April 2020 numbers, home sales will report down. It predicts a 22.3% drop in new home construction along with a variety of negative business and consumer spending statistics.


A new report from Autodata shows sales of cars at the lowest level since 1980, and we’re only heading into the deepest phase of underemployment and high unemployment. Auto sales are expected to drop by 4 million vehicles sold this year. The ISM index fell too, which is a barometer of demand from businesses and consumers.


Not currently discussed right now, is the growing cold war between the US and China. Higher China tariffs and forced repatriation of business back to the US will likely cause business reorganization, a new competitive environment, and economic and employment turbulence. However, that repatriation would be very positive for the US economy going forward for the next 5 years.


It also reported that Wells Fargo is not offering HELOCS. (Home Equity Lines of Credit) JPMorgan Chase is said to be limiting new home loans to borrowers only to those who have down payments of at least 20% and FICO credit scores of at least 700. (As opposed to the 620 Pre-COVID-19)


Zillow reports that close to 4 million mortgages are in forbearance. 7.3% of all mortgagees can’t pay their mortgage. This has already tightened up lending rules. Yahoo reports that mortgage refinancing has hit a 7 year high, as homeowners look to lower payments or get a grace period of some kind. There are reports that mortgage rates might fall to a record low 3.1%. MBA says refinance loans rose 225% — which is three times the rate of one year ago.


Now that businesses are reopening slowly, the market will have a little jump from latent demand and continue an upward trend. The big worry is that we’ll see a second wave of COVID-19 infections. Let’s hope the government gets tough on hygiene, social distancing offenders, otherwise, given some people’s behavior, a second wave is highly likely.

Although the stock markets have been trending up, unemployment and GDP drops are severe. The uncertainty of the Coronavirus period will suppress home sales. Higher unemployment, layoffs of high paid workers, and shut down of the travel industry are 3 key factors that will result in lower home and condo sales, and perhaps for the first time in the last decade, lower home prices.


Many Americans will soon be on their own without Federal assistance and facing back rent and overdue mortgages. Cities such as Denver, Dallas, Houston, Las Vegas, Tulsa, Seattle, will have to face their new reality of low oil prices and minimal tourism for 2020. Boston, New York, New Jersey, Chicago and Los Angeles have their own unique hurdles to face.


Single-family stats fell 17.5%, while multifamily stats dropped 31.7% in March. Building permits were weak, too, falling 6.8%. April was when full nationwide shutdown was in effect, so the numbers will be much lower for April. New-home sales declined strongly, by 15.4% in March to a seasonally adjusted rate of 627,000 units.


NARs (National Association of Realtors) next report for April won’t be out for another 3 weeks, however the March report revealed home prices continued to rise. While forecasts are justifiably downgraded for the nation, we can’t say that home prices will drop. With new construction down, renters wanting to get out of the city, and out of their high density apartments, means there is demand.


Home Sales Down in March

Sales of homes fell 8.5% from February to a seasonally-adjusted annual rate of 5.27 million. Despite that, overall home sales increased year-over-year for the ninth straight month, up 0.8% from a year ago (5.23 million units in March 2019).

Total housing inventory was 1.50 million homes which was up 2.7% from February, although 10.2% less than last years inventory of 1.67 million. Unsold housing inventory rose to 3.4 month supply which is up from last months rate of 3% current sales pace, yet still down from last years 3.8 month totals.


NAR reported that median existing-home prices for all housing types in March rose an astonishing 8% to $280,600, from March 2019 price of ($259,700). This makes March’s national price an incredible 97th straight month of year-over-year gains.


The experts were predicting a weaker housing market for the full year of 2020. The March performance is shockingly against home sales predictions as most inventory was trapped. Will we see home sales decrease now as we head into June?


The demand for homes is falling and in some cities such as Dallas, Houston, Fort Worth, New Orleans, Anchorage, and Denver, prices could plummet due the compounding effect of downward oil prices, and the shutdown. The outlook for the oil cities is not looking good.


It’s likely home prices are plummeting in some cities. Dallas, Houston, and some cities in Florida and California are already seeing much fewer viewings to the point they’re closing down their offices due to the Coronavirus. The shutdown itself is forcing home buyers online, and without jobs, few will be seriously forwarded offers.


It remains to be seen whether buyers will still have a job, willingness and interest, good debt to income ratio, and a big enough down payment to buy this year. Some companies will go under and builders will be reluctant to commit billions to building housing. There's still a huge need for affordable housing and it will be interesting to see how America handles this situation in the comings months.


Pre-Coronavirus Home Sales and Prices

Let’s have a quick look at some major markets across the country. Most markets performed well and Realtors were giving rosy Q1 projections. Then COVID-19 hit. Now buyers and sellers are inquiring about the market for the next 3 months, 6 months, and 5 year and 10 year forecasts.


BOSTON HOUSING MARKET

In February, Boston saw a 7.4% increase in detached homes sold, 547 units. Home prices rose 7.9% to an average of $627,900. Condo sales grew to 585% for a 7.9% increase YoY. (Year over Year) While the average condo price rose 8.5% to $575,000. That was an increase of $45,000.


Active single home listings within Greater Boston fell by about 300 units while the number of new listings grew about 300 units. For condos, there were 50 less units for sale, while new listings grew by about 130 units.


NEW YORK HOUSING MARKET

The New York housing market was very hot in January and February. NYSAR reports all home sales together. February was a very strong month. New home listings fell by about 800 units, while active listings rose about 3,700 units. Median home prices rose $25,000 to $301,000 which was a strong 9.1% increase from last February.


New York’s affordability was near record lows, while prices were near record highs. Available homes were dried up which means NY was entering bubble territory before the March shutdown and recession. With COVID-19 taking hold of the city for two months, the housing market will drop considerably.


LOS ANGELES HOUSING MARKET

In Metro LA, detached home prices rose $11,500 to $550,000 for a 2.1% growth over January and a 8.9% increase YoY. Home sales grew 1% over January but 13.7% over last February. February was a solid month for real estate sales throughout the LA county region.


In Los Angeles proper, home prices actually fell $38,000 to $580,690, a 6% drop from January and 7.3% YoY. Sales were also down 8.6% from January, but were up 9.3% from last February.


SAN FRANCISCO HOUSING MARKET

In San Francisco County, home prices rose an astonishing $150,000 from January to February for 10.3% rise month to month. That was a 7% increase over last February. Sales grew 19% from January, to the same level as last February.


Condo sales in San Francisco rose 27% over January’s numbers which was up 11% from last year. Average condo sales prices were a hefty $1,300,000, a rise of $110,00 over February. That price was 9.2% higher than January and 9.2% and 8.3% higher than last year.


SAN DIEGO HOUSING MARKET

Condo sales grew well in February in San Diego County. It was a growth of 12% from January and 16% from last February. Sales prices grew more modestly at 3.5% from one month ago and 8.4% from last February. Home prices rose $10,000 or 1.2% over January to a new average of $670,000. Sales rose 3.5 % from January and were up YoY by 7.2%.


FLORIDA HOUSING MARKET

Florida’s markets fared well in February with $7.5 billion in real estate sales. Florida Realtors Association reported a 9.1% rise in single family home sales together with 10.9% more condo sales. The median price for single-family homes across Florida grew 8% to $270,000 while the median price of a Florida condo grew by 6.7% to $200,000.


Active inventory of homes dropped by 19% to about 81,000 units. Active inventory is critically low and is dropping by about 3% each month. New home listings fell by 6.2% YoY.


DALLAS HOUSING MARKET

Like most cities, Dallas February home sales did not reflect the effect of this new market contraction. The median price of a home in metro Dallas rose 4.2% to $245,000. Sales grew a strong 11.1%. Active listings fell 6.2% and there are 2.6 months of inventory which is down .3% from last February. Strangely, DOM (Days on Market) is up to 50 days. Zillow forecasts a 5.3% lesser selling price in the next 12 months.


ATLANTA HOUSING MARKET

Atlanta was yet one more major city with a rise in sales and home prices. Total homes and condos sold reached 6,348 units which is up from January’s 5,491 sold, a 13.5% rise. Active listings dropped 4.2% to 18, 163 units and residential inventory shrank 4.8% to 2.3 months. YoY, sold units grew by 9.2% while prices grew 5.3%.


CHICAGO HOUSING MARKET

In Metro Chicago, in February, all home sales grew 6.6% to 6,057 units, YoY from February 2019 sales of 5,680 homes. The median home price in February was $240,000 in the Chicago Metro Area. That’s up 4.3% from February 2019 when it was $230,000.

In the city of Chicago, the median home price grew 6.4% to $290,000 up 6.4% from last year. There are 7,507 homes for sale which is down almost 10% from last year.


DENVER HOUSING MARKET

Denver saw its median home price rise 2.4% and sales rose 3.2% in February 2020. Avg days on market fell by 15%, and active inventory dropped by 2.2% and are down 19.6% YoY. Back in 2006, listings totalled 25,500 when Denver’s population was smaller. With only 4,800 homes for sale currently, prices would have shot up considerably in March.

In February 2020 in the luxury segment, 141 million dollar homes were sold. That was a big jump of 18.5% from from January and 8.5% YoY. The total dollar volume in the luxury segment in February rose 17.6% to $215.45 billion and that’s up 8.2% YoY.


Next 3 Months Not Good, But 6 Month and 5 Year Forecast is More Promising

Mortgage rates will fall as the Fed lowers the key rate which opens up big mortgages for Millennial buyers. NAR, as part of its February housing market report said: According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage decreased to 3.47% in February. This dropped from a 3.62% rate in January. The average commitment rate across all of 2019 was 3.94%.


The 5 to 10 year price forecast is upward, reflecting a downward availability of homes and intense competition. The 2021 housing forecast looks solid. Unemployment claims in the U.S. are scary, but the COVID-19 pandemic will pass.


After the 2008 housing crash, many homes were turned into rentals. That spawned a property management boom, but has resulted in even fewer homes up for sale. Homeowners are staying in their homes 8 years longer today. The story of the market, is a lack of housing, insufficient construction, and low affordability.


February’s National Housing Stats

Existing home sales grew strongly 6.5% in February to seasonally adjusted rate of 5.77 million. That was up 7.2% from last year.


The median US home price rose 8% YoY to $270,100. Total housing inventory coming into March was 1.47 million units, down 9.8% from last February. Unsold inventory sits at a 3.1 month supply same as January.


Properties were on the market for an average of 36 days in February down from 44 days last February. Half of homes sold in less than a month, so sales activity was quick.

First time buyers made up 32% of buyers which is slightly less than usual. Individual investors comprised 17% of sales, and all cash transactions fell to 20% from 21% in January.


SINGLE FAMILY HOME SALES REPORT

NAR reports the single detached home sales rose 350,000 from January, and was up 7.3% from last year. The median price of single detached homes was $272,400 in February, up 8.1% from last year. The median price of a condo increased 7% from last years price to $249,900.


REGIONAL HOME PRICES

Existing home sales in the Northeast fell 4.1% yet price rose to $295,400, which is up 8.2% from last year. In the midwest, home prices rose 7.9% to $203,700 on an increase of .8% sales. In the south, sales grew 7.2% and the median price was up 8.2%. And in the West, sales surged 18.9% while home prices rose 8.1% from last year to a median of $410,000.


New Construction Permits

According to census.gov, nationwide building permits in January were at a seasonally adjusted annual rate of 1,551,000. This is down 9.2% below Decembers numbers. Single‐family housing stats went to 987,000 which is significantly down from Decembers but slightly above Novembers totals.


Housing stats fell 3.6% from December but this number is still 21% higher than last January. Multifamily stats, with 5 or more units, rose to 547,000. Single family housing stats fell 3.5% from December.


Housing completions fell 3.3% from December’s totals, but were up 1.1% on seasonal average.


Summary

As we can see, there's been some major adjustments to the market, and things are changing rapidly everyday. Constant attention to detail & analysis of the market will allow us to make the best calculated decisions moving forward through this crisis.


Investment Opportunities

Deals have been coming through the pipeline, and getting completed, but they are at a significant decline in quantity.


We've received a handful of investment opportunities, here in Mobile, AL, but have yet to find one lucrative enough to constitute the risk of going after it in the current state of the economy.


My recommendation is to stay as liquid as possible. I received an opportunity today with an IRR North of 19%. I'm still in the preliminary stages of due diligence, but these types of deals will be more profound in the coming months. So, if you stay as liquid as possible, and don't spend any unnecessary capital or invest in anything non-coherent with your goals, then you'll be able to make a calculated decision of whether or not to join in such a high yielding investment opportunity with us on the ground floor.


If anyone has any questions about investing in syndications or anything related to real estate, do not hesitate to reach out, and I will walk you through everything you need to know. Mobile, AL Market Analysis -Miami-based Out of the Box Ventures LLC, a subsidiary of Lionheart Capital, recently paid $1.5 million for a 1.4-acre outparcel of commercial property located adjacent to Lowe’s and sandwiched between a Firehouse Subs and CEFCO gas station on Highway 181 in Daphne. The development firm is also currently working on buildouts for two new Popeyes franchises, one in Prichard and another in Bay Minette. For the Daphne site, it is working on a different concept. - Santa Paula, California-based manufacturer BendPak, a global producer of automotive lifts, pipe benders, air compressors and shop equipment, recently announced the opening of a massive 100,000-square-foot warehouse to be set up in Theodore. COVID-19 notwithstanding, the administrative and shipping complex is expected to be fully operational within 60 days. The site was selected, in part, due to its strategic proximity to the Port of Mobile. Upon opening, BendPak’s new distribution center will feature a 3,600-square-foot administrative office space, 15 dock doors, two oversized ramp doors, a wet pipe sprinkler system and LED lighting. The site’s 24-foot ceiling height will also allow for a variety of racked and floor storage options for inventory placement. Staffing needs at the new site were unknown as of press time. Possible Economic Boom in Alabama Post COVID-19 The economic transition to globalism in the 1990s was particularly hard on Alabama.

For a mere fraction of what textiles once cost to produce in the United States, plants in Honduras, China and, later, Vietnam manufactured socks and underwear that were once made in Alabama by W.Y. Shugart & Sons and Vanity Fair.


Then came coronavirus.


Most reasonable people in this era of pandemic will acknowledge we cannot rely on Mainland China to manufacture goods vital to national security and public safety.

Right now, the focus is on medical equipment and pharmaceuticals. Politicians of all stripes now say as a matter of public policy we must bring back manufacturing of those items, at least in part, to the United States.


That could mean incentivizing or subsidizing these products to make that possible. It also likely means creating barriers for Chinese imports, as well. We’re all protectionists now.

Last week during an interview, U.S. Sen. Doug Jones suggested such a scenario could provide economic opportunities for Alabama.


“I think that that’s going to be really important going forward, and there are

opportunities,” Jones says. “We’ve got textile mills in Alabama that have been closed that could be reopened to make masks and to make gowns. We’ve got other manufacturing facilities that might could be used for ventilators. There’s a lot of things I think we can do and should do to give those incentives, particularly in the healthcare industry, to try to make sure when we get out of this, we start planning for the future and the next one.”

What if Washington, D.C., takes that approach? The government on the state level should be thinking about what that means for Alabama.


Closer to home, Vanity Fair’s collapse in South Alabama has been well chronicled. The textile giant was once the driving force that led the rural parts of the area out of poverty. No longer did the region have to rely on small farms producing cash crops for the lion’s share of its economic activity.


Globalization at the end of the last century changed that. Could manufacturing come back to this shuttered mill to make Jones’ vision a reality?


Former area pulp and paper executive Pete Black, a longtime Monroeville resident who has spearheaded numerous efforts to revive his hometown’s manufacturing core, weighed in on the possibility of opening portions of that facility up again.


“Most of the VF infrastructure has been torn down,” Black said in an email. “There are two buildings remaining. One is still active, with about 300 employees in a distribution center. The other is a huge, 225,000-square-foot building, which was once a central cutting facility (cutting the garment into patterns) supporting about 10 sewing plants across South Alabama. It is now empty, except for occasional distribution overflow, and has been for sale for years.”


Black was less optimistic about the return of textiles to Monroeville, but voiced his support for Jones’ suggestion.


“I am all for Senator Jones’ idea to bring manufacturing back to the U.S.,” he said. “I hope we make pharmaceuticals a high priority. In 2012-13, I went to China four times as we tried to recruit Chinese manufacturers to come to Monroeville, including textiles. We were unsuccessful. I think textiles will be very challenging to bring back.

“As a guy who worked his career in manufacturing, I strongly support bringing focus to U.S. manufacturing returning from Asia,” Black added.


Another component that might give Monroeville and some of these other former mill towns in Alabama an advantage is having the remnants of a workforce that has the skill sets or the ability to adjust to a skill set required to manufacture medical equipment.

Black says some of those individuals with that experience have remained in the area.

“That was a key concern for a Chinese glove manufacturer we tried to recruit,” he said. “Especially, as we have not done textile manufacturing in 20 years. We held a job fair and about 200 people with textile experience showed up. So, could you staff a 100-person textile facility? Probably. Of course, you can always train employees without any sewing or cutting experience.”


If America starts to roll back its embrace of globalist economic theory because of the pandemic, Alabama is the logical fit. Low wages, limited presences of labor unions, and it was the place to be before that trend, so why not?

Alabama is poised for success in the coming years following COVID-19. Conclusion That concludes our newsletter for the month! I know it was unusually long, but we're trying to overcommit to our promise in educating you and building you wealth! If you are interested in investing with us, or want to learn more about us, go to our partnership page and fill out the form. We'd love to hear from you. To your success!

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