Marterra Market Monitor May

Year To Date Activity

Properties Sold (single and multifamily): 23

Sales Volume: $37,289,195

Cumulative Value of Fund Properties Sold: $6,433,500

Homes/Units Managed: 310

Properties Leased: 25

Gross Collected Rent: $4,577,562

Brokerage Listings

Property Management Rental Listings

Is anyone else having a hard time keeping up with news? No, just me?

I wrote this section last week, and then a bunch of things happened that made my original draft completely irrelevant, so here we are.

To me, the three biggest things I am watching from a macro perspective right now are:

1. Strait of Hormuz - I don't think we are going to see interest rates come down until we see some resolution here. I talk about this more in the mortgage section.

2. Billionaire Wealth Tax (State Asset Seizure) - Apparently, this proposition has enough signatures to make the November ballot. I can't think of a more destructive proposal. If this passes, it will be catastrophic to the California economy. I also think this is such an absurd idea that it has the potential to swing enough money flow that you might see competitive elections in parts of California that typically don't see competitive elections (I'm looking at you LA Mayoral race).

In "What's The Good Word" I dig more into local politics and share how I approach solving some of the municipal challenges that face us. It's a little wonky, but this is my favorite section this month.

3. Kevin Warsh Likely to Clear Senate Confirmation - Kevin Warsh is pushing for a smaller Fed footprint, including shrinking the balance sheet and rethinking how inflation is measured (favoring “trimmed-mean” metrics), while signaling openness to coordinated policy that could allow lower rates longer-term if productivity improves.

And before we get into this months abridged edition, here is my shameless reminder that I am running for Costa Mesa City Council.

If you are interested in volunteering, donating or getting a yard sign, you can reach out through my campaign website below.

Campaign Website

Residential Transactional Market: We started the month strong with a handful of closings, mostly carryover from the previous month, and then the market took a very quick, hard turn. We had three buyers cancel escrow in the last week or so, which is as much as we will generally have in a year. Stepping back, looking at each transaction that cancelled, it was about something very specific to the property, and not necessarily the market. With that being said, it's hard to tell if these cancellations are anecdotal or market indicators.

We find it useful to take a look at the number of homes listed in a market and compare that to the number of pending homes/just sold (90 days), to get a sense of the supply and demand dynamics in a given sub market (shout out to my wife Christine for coming up with this methodology). Here are a few markets to give you a sense of how much things can vary City to City.

The below is only for detached homes.

Costa Mesa - 62 active listings, 29 pending or active under contract (47% of active listings), 103 sold (166% of active listings)

Irvine - 361 active listings, 109 pending or active under contract (30% of active listings), 276 sold (76% of active listings)

Newport Beach - 175 active listings, 40 pending or active under contract (23% of active listings), 106 sold (61% of active listings)

*** higher end markets tend to have lower velocity

Seal Beach - 20 active listings, 8 pending or active under contract (33% of active listings), 17 sold (85% of active listings)

Huntington Beach - 120 active listings, 80 pending or active under contract (67% of active listings), 201 sold (167% of active listings)

Mission Viejo - 283 active listings, 69 pending or active under contract (24% of active listings), 188 sold (66% of active listings)

Tustin - 37 active listings, 24 pending or active under contract (65% of active listings), 53 sold (143% of active listings)

I think this is a good methodology of getting a quick temperature on a submarket.

Residential Rental Market: We have seen some weakness in the rental market the last few weeks, especially in the apartment market (I think the single family home rental market is being propped up because 'would be buyers' are still renting).

We have seen some apartment units drop rent ~10% YOY, which is nearly unheard of. What is interesting is we aren't necessarily seeing a huge glut of supply, which is suggesting that the demand side is where we are seeing the weakness.

Mortgage Market/Interest Rates: I generally try to base my interest rate directional projections based on the economy because in a normal world that is the main driving force behind rates. Right now, it's clear geopolitical issues (primarily closure of the Strait of Hormuz) are the main driver of interest rates. But here is my contrarian hot-take. Rates will probably be lower before the primaries, if not, they will definitely be lower before the mid-terms.

Politicians are world class at self preservation, and the administration will do whatever they need to do (whether is a good idea or a bad idea) to bring down oil prices and interest rates before the election.

Please do not act on this prediction, because I am probably wrong.

Macro Observations: If I am being totally honest, I don't think I have anything useful to share this month. The TLDR is GDP rebounded to about 2.0% in Q1 but came in slightly below expectations, with slower consumer spending offset by strong investment and government outlays, while inflation (PCE) remains elevated around 3.5% and running hotter on a quarterly basis. Meanwhile, jobless claims came in lower than expected at 189K, signaling a still-tight labor market, and the Employment Cost Index continues to be closely watched as a key indicator of persistent wage-driven inflation.

I do have a friend who works for a publicly traded domestic oil company. He seems pretty fired up (in a good way) about his 401k, which is nice for him.

The economy is pretty meh right now, seemingly propped up by government spending and AI capex. Overall, it’s not great, not blowing up, it just sort of is.

What's The Good Word: I really try not to focus on local Costa Mesa politics/government issues, because I know a lot of you don't live here/don't own property here. With a few exceptions (most notably Chickengate), most of my local political commentary, should be able to be applied to most local governments.

With all the whiplashing news stories, it's hard to establish a very strong opinion on a lot of directional market info I originally set out to provide. But for those of you who are entirely uninterested in local politics in your market let Los Angeles (and their excruciatingly bad property rights policies) be a warning to you of how bad things can get. And while you might not care about local politics, if you own real estate it absolutely cares about you.

We have seen some pretty shocking budget results out of some local municipalities. Irvine is running about a $6M shortfall today with projections up to ~$47M long term, while Santa Ana, Anaheim, Orange, and Fullerton are dealing with larger or more structural deficits right now. The most obvious solutions to fill budget deficits can often times have terrible unintended consequences.

Generally, the approach to deficits is either a) cut services or b) put off capital improvements. If you want to see property values crumble, a great way to accomplish that is to cut spending on police and to not maintain your streets, the other avenue is through tax increases, which often leads to the opposite of what you are trying to accomplish (see ULA (the "mansion tax") in LA).

I think there is a better way. Economic development driven by SMART GROWTH.

One of the reasons I am so focused on repairing the permit process in Costa Mesa is because it has the opportunity to drive so much value for Costa Mesa. In the past, I have mainly focused on forgone sales tax for businesses delayed business openings, think about all that sales tax the City forwent because it took Harper BBQ 7.5 years to open, Northgate 4 years to open, Salty Horse 3 years to open, Bei Restaurant 2.5 years to open.

The bigger opportunity for the City might actually be the home renovation business. This is true for any California City with an older housing stock.

Let's breakdown a few of the benefits just one of our projects will have for the City.

Let's look at our project at 218 Lillian as an example.

Property Taxes: The previous owner paid approximately $2,000 per year in property taxes. Property taxes are split up between a ton of agencies, and only about 10-15% of the property paid goes to the City specifically. That means this owner was contributing at most about $300 per year to the City via property taxes. When we complete this project, based on our estimated sale price, the new owner will pay $44,000 per year in property taxes, meaning they will be contributing up to $6,600 to the City each year. That is a 22X increase, not 22%, 22X. Additionally, that property tax number will continue to grow at up to 2% per year.

Permits and Fees: $51,200 straight to the City. If there wasn't an existing home there prior, our fees would have been $75,000.

Sales Tax: The estimated construction budget for this project is approximately $1,500,000, assume approximately 1/2 will be materials. We buy most of our materials in town (Costa Mesa has Ganahl, Home Depot, and a few really great appliance stores), so of the $750,000 of total material costs, probably $500,000 will be purchased in Costa Mesa. Not only does that $500,000 support local jobs, it also generates about $40,000 sales tax, of which the City should receive about $5,000.

The remaining $750,000 will go towards paying the people who are actually building the homes. Many of these folks live in Costa Mesa, but all of them will end up buying lunch, coffee and gas in our City, further supporting our tax bases and our local economy.

I know some people might say that permit delays aren't a big deal because the project will eventually get approved and the revenue will eventually come in. The problem is that the delays kill or modify a lot of existing projects.

Our average holding cost on a project is about $10,000 per month. When a project takes 6-months longer to get approved than it should, that is $60,000 of additional costs which changes the math. When the math changes, either the project doesn't get completed or it turns into a cheap flip that does not maximize value for the community.

Multiple this over all the potential projects in Costa Mesa, and we are talking about money for a lot of police officers, fixing a lot of pot holes and renovating a lot of parks.

Project Updates: We have several active projects; here is a quick update on a few of them.

Bucknell, Costa Mesa: Here is a quick video Machine & Co (Michelle and Christine) talking about the design element of the home.

Thanks again for reading, and I would like to thank our agents and property managers who provide valuable insights from their day-to-day in the field. Without them, this email wouldn't be very useful or interesting.

If there is anything you need: vendors, lenders, or others, please let me know. We have an extensive network of the best and brightest in the industry.

I geek off this stuff; if you want to grab a coffee or chat about anything related to real estate, the market, or investing, please do not hesitate to reach out.

If you don't want to receive these updates in the future, please smash the unsubscribe button below. No hard feelings; I do it ruthlessly. Lastly, if you found the above informative, please share it with a friend or drop me a line.