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Investing Archives ✔️ News For Finance

China-based Fuyao Glass Industry Group, whose U.S. plant was the subject of the Oscar-winning documentary “American Factory” in 2020, plans to raise to HK$4.3 billion, or $550 million, in a stock sale amid improvement in its business this year, according to a Hong Kong Stock Exchange filing on Sunday.

The glass supplier, whose auto industry customers include Toyota, Volkswagen, General Motors, Ford and Hyundai, plans to sell 101.1 million shares at HK$42.64, representing a fully diluted 3.9% stake.  Fuyao’s shares trade in Hong Kong and Shanghai.

Fuyao expects that China’s automobile industry “will recover and rebound in 2021” compared with pandemic-hit 2020, the company said in the statement. “By using the funds raised from the placing in its working capital, debt repayment, research and development projects, photovoltaic glass market expansion and general corporate uses, the company may further expand its business and optimize its capital structure,” the statement said.  Fuyao, which generates nearly half of its sales from outside of China, also aims to “attract more international reputable investors with strategic value and improve (the) equity structure of the company.”  

Revenue last year fell by 5.7% to 19.9 billion yuan, or $3 billion; net profit declined by 10.3% to 2.6 billion yuan.  Operations recovered in the first quarter, however: operating revenue rose by 37% to 5.7 billion yuan and net profit increased by 86% to 855 million yuan.

China is the world’s No. 1 automobile market; auto sales in the country rose by 75% in the first quarter of 2021 to 6.5 million units. China also makes approximately 80% of the world’s solar panels; the country’s Xinyi Glass and First Glass Group are two of the world’s largest suppliers of photovoltaic glass. Fuyao, founded in 1987, said about 10% of  funds raised from its new stock sale would be used “to expand the photovoltaic glass market and general corporate uses.”

Fuyao’s U.S. factory is located in Moraine, Ohio. Besides China and the U.S., Fuyao has manufacturing sites in 10 other countries including Russia, Germany, Japan and South Korea; it employs more than 27,000 worldwide, according to the company’s website.

Fuyao’s chairman Cho Tak Wong has a fortune worth $4.3 billion today on the Forbes Real-Time Billionaires List.  His son Tso Fai is vice chairman.  Xinyi Solar’s main shareholder Lee Yin Yee has a fortune worth $4.9 billion and Flat Glass Chairman Ruan Lianghong’s is worth $4.9 billion.  

See related posts:

China’s Richest Man in Solar Talks About Falling Costs, Global Growth

China Holds Promise For Global Businesses Despite Uneven Recovery: Authors

Finding Wealth In China’s ‘Time Machines’: 2021 Forbes Midas List’s Jing Hong

@rflannerychina

Topline

Despite international aid efforts ramping up, the second wave of Covid-19 infections in India continues to intensify, yielding a new record high for daily deaths on Sunday and prompting an outcry—from businessmen and public officials alike—for government intervention to help ease the rate of infection.

Key Facts

In a Sunday statement for the Confederation of Indian Industry, Indian billionaire Uday Kotak called on increased lockdown measures in India and urged “the strongest national steps, including curtailing economic activity, to reduce suffering.”

India’s Ministry of Health and Family Welfare reported 3,689 new Covid-19 deaths Sunday, marking the nation’s largest daily death toll yet and bringing the total number of Covid-19 deaths in the country to more than 215,000.

The country also reported 392,488 new cases Sunday, down from a record high of 401,993 reported Saturday but still the second-highest daily tally on record for any country around the world.

Meanwhile, India’s death and infection rates continue to outpace its rate of vaccination: Roughly 157 million vaccines have been administered in the country, up just 1.2% Sunday, and despite India being the world’s leading producer of vaccines, only 2% of its population has been fully inoculated due largely to high vaccine prices and a large impoverished population.

“Enough is enough,” the High Court of Delhi said Saturday as it directed the nation’s central government—which has been criticized for its lackluster pandemic response—to supply oxygen to India’s capital territory of Delhi, warning officials that it may initiate contempt of court proceedings if the order is not implemented.

“The hospitals are full,” Germany’s Ambassador to India, Walter J Lindner, said late Saturday while delivering ventilators to New Delhi, adding that people are sometimes dying in front of hospitals and in their cars because they have no oxygen.

Crucial Quote 

“At this critical juncture when [the] toll of lives is rising… safeguarding lives is of utmost priority and nationwide maximal response measures at the highest level [must be] called for to cut the transmission links,” Kotak said Sunday. “We must heed expert advice on this subject—from India and abroad.”

Key Background

For roughly two weeks, a second wave of the pandemic has intensified in India—overwhelming hospitals, exhausting the nation’s vaccine supply and making the country the biggest Covid-19 hotspot in the world. Many are blaming India’s ruling party for the outbreak, saying Prime Minister Narendra Modi campaigned aggressively for crucial state elections while failing to impose measures to help prevent a pandemic outbreak. Now starting to trickle in, election results are pointing to an overwhelming defeat for Modi’s party. “Evidently something went wrong, evidently we were hit by a tsunami,” Narendra Taneja, a spokesperson for India’s ruling party, told CNN last week. “We know we’re in power, we are responsible… our focus is now on how we can save lives.” So far, only six of India’s 29 states have imposed some form of Covid-19 lockdown during the new wave of infections.

Surprising Fact

According to an early Sunday report by Reuters, Indian officials ignored a forum of scientific advisors in early March who warned of a more contagious Covid-19 variant rapidly spreading around the country. Despite the calls for increased lockdown measures, officials instead held large political rallies attended by millions of maskless people ahead of the elections, Reuters reported.

Big Number

19.6 million. That’s how many Covid-19 cases have been reported in India through Sunday—the second-most among countries and behind only the United States’ count of 32.4 million.

Tangent

Speaking to CBS’ Face the Nation Sunday morning, White House Chief of Staff Ron Klain said the U.S. is “rushing aid” to India, including therapeutics, ventilators, personal protective equipment and rapid diagnostic tests. The U.S. is also looking to send over a portion of already purchased AstraZeneca vaccines.

Further Reading

India hits new grim record with 3,689 COVID-19 deaths in one day (Al Jazeera)

Photos Show The Distressing Severity Of India’s Covid-19 Crisis (Forbes)

India’s Daily Covid Cases Soar Past 400,000 As Crisis Deepens (Forbes) 

Enough is enough, ensure oxygen supply, Delhi High Court directs Centre (Tribune India)

California legislators have proposed big tax hikes—again, reprising two tax bills introduced in 2020 that failed to pass. With the economy improving and the state hungry for money, perhaps this year will be different. One tax bill would raise the state’s already stratospheric top income tax rate by up to 3.5% for very high incomes. The other is a controversial wealth tax. Currently, the income tax rate on individuals tops out at 13.3%, but Assembly Bill 1253 would raise the top tax rate to 14.3% for those making more than $1 million. Over $2 million, you would hit 16.3%, and over $5 million, a top rate of 16.8%. Even before any proposed changes, California’s top 1% of income earners pay most of the state’s personal income tax revenue (46% in 2016). Last year’s bill to raise the tax rate to 16.8% failed, but the new bill comes as the economy is beginning to improve.

Perhaps California wants to be back on top with rates too. Combined New York City and State tax rates top out at 13.53%, eclipsing California’s 13.3%, but 16.8% could humble the world. The bills come when it seems clear that federal taxes are going up too, at least for some. And since 2018, the cap on deducting state taxes against federal taxes is only $10,000. If you pay the proposed 39.6% federal rate and can deduct only $10,000 of state taxes, paying much bigger state taxes is even more painful.

For some time, California has been losing citizens for no-tax states like Texas, Nevada, Washington, Wyoming and Florida, and not just the likes of Elon Musk. Indeed, you don’t have to move to a no-tax state to pay less. Every other state has lower income tax rates than California, either no tax or lower tax. And many states tax capital gains more favorably, like the IRS. California taxes ordinary income and capital gain the same, up to 13.3%—unless the rate goes up. That prompts sellers of stock, Bitcoin, and other assets facing California’s 13.3% tax on capital gains to move then sell. The same for litigants settling big suits who move before they settle. Although moving sounds easy, you need to be thorough and careful so you are not asked to keep paying California taxes. Timing matters too. California audit exposure can be frightening, and in some cases California can assess taxes no matter where you live.

The IRS can generally audit 3 or 6 years depending on the issue, but California can sometimes audit forever.  Like the IRS, California has an unlimited number of years to audit if you never file an income tax return. That can make continuing to file in California—as a nonresident—a smart play. That way you are just reporting your California source income, but not everything else. California source income would include rental income from California property, Schedule K-1s that you might receive from California partnerships or LLCs could reflect some California source income too. Whether you start filing as a nonresident or not, of course, many people worry that saying goodbye to California taxes can mean hello residency audit. Yet the fact that the top tax rate could go up again may put some people on the move. It’s not just income taxes driving the reverse immigration either. The repeated talks of a wealth tax are worrisome, even for those who only aspire to be wealthy.

The wealth tax bill in 2020 failed, but it’s back. California Assembly Bill 310 would levy a 1% tax annually on net worth over $50 million, and a 1.5% tax on net worth over $1 billion. It would also require a constitutional amendment to increase the state’s current wealth tax cap. The wealth tax bill in 2020 was different, starting the tax at $30 million in assets. There’s no question that California is a tax pioneer—remember the property tax revolution of Proposition 13? But pioneer or not, the administrative nightmare that the nation’s first wealth tax would bring seems large indeed. Remember, this is not about income, but about accumulated wealth. And it’s not about a discreet event such as death, where estate tax kicks in. This would be an annual tax, which is and that’s where valuation comes into play. Taxing assets rather than income means major valuation and line-drawing exercises.

Percentage interests in legal entities such as partnerships, LLCs, and hedge funds would evidently have to be valued, and so would interests in businesses. If you are a Californian who owns a 25% of a company in Ohio, the company in Ohio may have to cooperate too. In short, valuation would be complex and involve judgement calls, and it could burden non-California businesses too. Among the more controversial parts of the proposed tax—a tax that itself is highly controversial—are the exit provisions. Suppose that you leave California? It looks like the tax could evidently still get you for four years. Even stepping into California temporarily could be costly, carrying a tax taint. The bill suggest that you could be taxed even as a “temporary resident.” Say you have spent at least 120 days in California over the last two years. Alternatively, suppose that you spent at least 150 days in California over the last four years. In either event, you can evidently get slapped with some tax. My cloudy crystal ball suggests that passing this bill would be tough, but who knows.

Yesterday morning, two major real estate investment trusts – Realty Income

O
and Vereit Inc. – announced that they’ll be merging this year. The deal includes Realty Income acquiring Vereit in an all-stock transaction, with the latter’s shareholders receiving 0.705 shares of the takeover stock for each of their own they currently hold.

When completed, the new and improved company will have an enterprise value of just under $50 billion. $33 billion of that comes from Realty Income. So the remaining $16 billion will significantly extending its scale advantages.

In addition, “the monthly dividend company” will become the sixth-largest U.S. REIT, therefore moving into the RMZ Index. So this is a big deal, to say the least.

Making it even bigger is this: Immediately following the closing, the companies will effectuate a taxable spin-off of their combined office properties into a new, self-managed, publicly traded REIT called SpinCo.

Key point here: The new company will be internally managed and likely led by an experienced management team. This leads me to wonder if W.P. Carey (WPC) might make a run at this portfolio.

The assets would fit its portfolio like a glove, involving around 76% investment-grade properties with annual rents of $183 million. At a 6% cap rate, that would equate to $3 billion.

Synergies = Accretion

The Realty Income/Vereit merger is expected to:

1.     Be over 10% accretive to Realty Income’s adjusted funds from operations (AFFO) per share – in year one

2.     Add meaningful diversification that further enables new growth avenues

3.     Strengthen cash flow durability

4.     Provide significant financial synergies, particularly through accretive debt refinancing opportunities.

Its growth strategy, meanwhile, will remain focused on obtaining high-quality, single-tenant, net-lease retail and industrial properties in the U.S. and U.K. that are leased to leading clients in their respective businesses. Sumit Roy, president and CEO explained:

“We believe the merger with Vereit will generate immediate earnings accretion and value creation for Realty Income’s shareholders while enhancing our ability to execute on our ambitious growth initiatives.

“Together, our company will enjoy increased size, scale, and diversification, continuing to distance Realty Income as the leader in the net-lease industry. Vereit’s real estate portfolio is highly complementary which is expected to further enhance the consistency and durability of our cash flows.”

Certainly, Realty Income’s exposure to movie theaters like AMC Entertainment

AMC
(AMC) and Regal will fall significantly. That will be a big burden off its back.

Admittedly, the monthly dividend company already has a fortress balance sheet. Proof of that is how it’s the only net-lease REIT with an A3 credit rating from Moody’s

MCO
and an A- from S&P. But according to its calculations, this merger should only end up enhancing its credit-positive attributes.

As such, Realty Income should still be able to consistently grow AFFO per share from here. And shareholders should continue to be very happy.

Dividends-A-Plenty

As Realty Income said in its press release, it’s “one of only three REITs in the S&P 500 Dividend Aristocrats Index” known “for having increased its dividend every year for the last 25 consecutive years.” That’s a title it holds dear, and I can’t imagine it would do anything to jeopardize that position.

So it’s no surprise to hear that “Dividend payments for both companies are expected to remain uninterrupted through the close of this transaction.”

Last August, I explained how, “Realty Income is now positioned to execute on” merger and acquisition activity. And clearly, that day has come.

While really big news, this Vereit deal is no surprise to me. If anything, it’s gotten me pondering other possible outcomes, such as…

  1. Will Store Capital pursue Spirit Capital next?
  2. Will Spirit Capital pursue National Retail Properties?
  3. Will W.P. Carey pursue Broadstone Net Lease?
  4. Will Essential Properties Realty Trust pursue National Retail Properties?
  5. Will Four Corners Properties Trust pursue Getty Realty?

Regardless, Realty Income has outperformed benchmark indices by a “country mile” since its 1994 listing on the NYSE. Driving that success is 24 of 25 years of positive earnings growth, with 5.1% median AFFO per-share growth since 1996.

Even in last year’s pandemic-era situation, Realty Income was just one of three net-lease REITs with positive earnings growth.

The only sad part of the news today, as far as I’m concerned, is that I don’t own more shares in it than I do today.

Long O (and STOR, NNN, BNL, EPRT, FCPT, and GTY)

Singapore-listed Olam International said its food ingredients subsidiary is buying Olde Thompson, a U.S.-based maker of private label spices and seasonings, at an enterprise value of $950 million.

The agricultural commodities trader said in February that it has appointed financial and legal advisers to prepare for the initial public offering of Olam Food Ingredients (OFI), which supplies cocoa, coffee, nuts, spices and dairy. OFI said the acquisition of Olde Thomson will transform its spice business and be earnings accretive from the first year onwards.

“Growing our offerings of private label solutions is right at the heart of OFI’s strategy–and within that spices is one of the most attractive and growing categories, especially in the U.S.,” OFI’s CEO Shekhar Anantharaman said. “This will enable us to offer consumers a comprehensive range of bold, authentic, natural taste and flavors with end-to-end traceability.”

The transaction, which is expected to be completed in the second quarter of 2021, is expected to generate potential EBITDA synergies of as much as $30 million, OFI said.

Olam was founded in 1989 by Sunny Verghese, who had regularly featured in the list Singapore’s 50 Richest until 2011. He lost his place in the rankings after Olam’s shares tumbled in 2012 as U.S. short seller questioned the company’s accounting practices and viability.

In 2014, Singapore state-owned investment firm Temasek boosted its shareholding in Olam and now holds 53%. A year later, Japan’s Mitsubishi invested $1.1 billion in the company and currently holds 17%.

Verghese, who has a 4.3% stake and currently is the group’s CEO, has been driving Olam’s expansion in recent years through acquisitions such as the purchase of Archer Daniels Midland for $1.2 billion in 2015, which, according to DBS Group Research, has made Olam one of the top three global cocoa processors.

Eight years ago this month, the Bank of Japan embarked on one of economic history’s most audacious journeys to end deflation. How far has Governor Haruhiko Kuroda’s team gotten?

Not very. In fact, by some measures, the BOJ is now shifting into reverse. That’s the sad implication of Kuroda admitting on Tuesday that rather than 2% inflation, his team will be lucky to hit 1% by 2023.

Where things went so wrong has myriad lessons for policymakers from Seoul to Washington.

When Kuroda announced the 2% goal in April 2013, the plan was for a two-year timeline. The BOJ began with a series of monetary “bazooka” blasts and pledged to fire a minimum of 80 trillion yen, or $740 billion, annually into the government bond market. This overwhelming-force strategy drove the yen down by about 30%, boosting exports and corporate profits.

After that, Kuroda & Co. kept adding tools to its arsenal. The BOJ increased and broadened debt purchases, cornering fixed-income trading. It loaded up on stocks via exchange-traded funds. So much so that by 2018, five years into the journey, the BOJ’s balance sheet surpassed the size of Japan’s $5 trillion economy, a first for a Group of Seven nation.

Yet the intended effects never materialized.

Inflation, for example, barely made an appearance. At the high point, consumer prices barely got halfway to 2%. And when it did, it was the bad kind: imported through higher energy prices with an undervalued currency amplifying the effects.

The bigger problem is that wages never quite perked up as the government hoped. At first, Japan Inc. got into the swing of things with annual pay bumps here are there. Yet a nation racked by deflation dating back to the 1990s needs steady, sizable and sustained salary increases to enliven consumer behavior. Not a 2% boost here, and a bonus here and there.

In 2013, when then-Prime Minister Shinzo Abe hired Kuroda, his government tried to make the 1980s great again. Abe rose to power in December 2012 with a bold plan to restructure an aging, unproductive economy watching China zoom by in gross domestic product terms. The specter of shock therapy added some spring to Japan’s step, globally.

Mostly though, Abe outsourced the job to the BOJ. Abe laid out a seemingly audacious Big Bang plan to loosen labor markets, cut bureaucracy, catalyze a startup boom, empower women and import waves of foreign talent. It turned out to be a series of tiny pops.

Abe’s most obvious win was improving corporate governance. Steps to increase the number of outside directors and return on equity helped drive Nikkei 225 Average stocks to 30-year highs. Yet it didn’t translate into CEOs sharing profits with workers. Nor has Japan been swamped with takeover attempts from abroad.

Ultimately, Abe was endeavoring to bring back old-school “trickle-down” economics. He bet that filling corporate coffers would be enough to kick off a virtuous cycle of huge wage increases, boosting consumption and then fueling even greater profits. That, and staging a wildly successful Tokyo Olympics, was deemed boost enough to end 20 years of falling prices.

The gamble failed, as evidenced by how quickly GDP collapsed 15 months ago when Covid-19 arrived. Within a few months, Tokyo was scrambling to toss more than $2.2 trillion, 40% of GDP, at collapsing demand. A few months after that, Abe—his poll numbers in the 30s—stepped down.

Few economists seem to appreciate how the Tokyo Games set to begin in July—depending on Covid-19 cases—set back the economy. Abe wagered that the sugar high from the event would pay off spectacularly. Worse, he put virtually all of Tokyo’s reform chips in the run-up to the Olympics.

Odd as it sounds now, Team Abe believed that planning for the Games would work its magic to internationalize business practices, increase innovation and have corporate chieftains moving headquarters from Hong Kong and Singapore to Tokyo. It worked in 1964. Abe figured it could happen again.

To be fair, Japan couldn’t have seen the pandemic coming—or a one-year delay for Tokyo 2020. But even bigger than the loss of overseas tourism is the “opportunity cost” of not raising Japan’s economic game these last eight-plus years.

Abe’s replacement, Yoshihide Suga, now faces the return of deflationary pressures investors assumed were history. Suga, though, faces an economic ammunition problem. Overwhelming fiscal and monetary bazookas have already been deployed.

Thankfully, China is leading the global recovery, providing a market for Japan’s export giants. Shipments to the mainland jumped 37.2% in March from a year earlier, particularly for chip-related gear and automobile makers.

Yet export surges from 2013 to 2019 didn’t have corporate CEOs fattening paychecks or investing big in new industries or greater innovation. That sort of virtuous cycle is even less likely as a fourth wave of Covid-19 infections hits Japan.

Japan’s dismal failure with getting a vaccination program going also speaks to a bureaucracy that needed some serious shaking up back in 2013. Instead, we got the Olympics.

Today, the handwringing is over the roughly $25 billion Tokyo lavished on an Olympics that might not happen. Yet history will probably add a zero or two to how a couple of weeks of sports distracted Japan from building economic muscle for the decade ahead.

Topline

Facebook, the world’s largest social media company, posted results for its best first quarter ever Wednesday afternoon, shattering Wall Street expectations thanks to surging advertising revenues despite heightened competition from the likes of Google and threats on the regulatory front.

Key Facts

Menlo Park, Calif.-based Facebook reported revenue of $26.1 billion in the first quarter, 47% more than the $17.7 billion it pulled in the first quarter of last year and marking the company’s best first-quarter showing ever.

Net income, meanwhile, nearly doubled from last year, hitting $9.5 billion, or $3.30 per share—well above average analyst expectations of $2.33 per share.

Facebook’s monthly active users jumped about 50 million, meaning a record-breaking 2.85 billion people used the social network in the last month of the quarter. 

A slew of analysts upped their Facebook price targets this week in anticipation of the better-than-expected earnings report, with Credit Suisse’s Stephen Ju on Monday saying improving ad trends should bode well for Facebook and Instagram’s bottom lines.

Facebook stock futures jumped 7% within minutes of the announcement; shares closed up 1.2% on Wednesday and have climbed about 14% for the year—better than the tech-heavy Nasdaq’s 11% increase.

Big Number

$341.50. That’s how high analysts think Facebook shares can go over the next year, according to Bloomberg data, giving the stock about 11% upside to current prices of about $306.

What To Watch For

Facebook’s third-quarter earnings call is at 5 p.m. EDT Wednesday.

Crucial Quote 

“Expectations for earnings growth are the highest they’ve been in years, allowing more room for disappointment,” Brian Overby, a senior options analyst for Ally Invest,” said in a Tuesday email. “On top of that, investors will be watching big tech extra closely because the sector has benefitted so much from strong consumer spending and the moves toward a more tech-oriented society.”

Key Background

Founded in 2004 by a group of Harvard College classmates including billionaires Mark Zuckerberg and Dustin Moskovitz, Facebook is now the fifth-largest company in the country by market cap, worth a staggering $862 billion. More than 95% of the company’s revenue comes from advertising, with about 50% of sales saturated in the U.S. and Canada. Though Bank of America expects the stock could soar another 20% in the next three years, the biggest risks to watch for include declines in user activity, privacy issues, big-tech regulation and any adverse impact on advertising prices.

Further Reading

Facebook’s Stock To Grow As Earnings Expected To Beat Market Estimates? (Forbes)

Why Mark Zuckerberg Wants Influencers To Get Rich (Forbes)

Indonesian e-commerce unicorn Bukalapak is said to have attracted more investors in its latest funding round that raised more than $400 million, according to a report from DealStreetAsia. 

Bukalapak’s recent corporate filing indicates the London branch of Swiss investment bank UBS Group AG and Malaysian conglomerate Genting Berhad subsidiary Resorts World are among the latest backers, the report said. 

UBS AG London is apparently serving as a nominee for an unidentified client. The bank, which received the largest amount of shares during the funding round, is now holding a 2.5% stake in Bukalapak.

The fundraising came as Bukalapak is said to be preparing for an initial public offering as early as the third quarter of 2021. The Jakarta-based startup could be valued at between $4 and $5 billion in a potential merger with a U.S.-based special purpose acquisition company (SPAC), according to a recent Bloomberg report.

Market research firm CB Insights puts the value of Bukalapak at $3.5 billion. The company achieved its unicorn status in 2017.

The startup was founded in 2010 by Achmad Zaky and two of his friends from the Bandung Institute of Technology. Zaky stepped down from the role of chief executive in January 2020. He was replaced by Rachmat Kaimuddin, a former finance and planning director at PT Bank Bukopin. The other two cofounders, Nugroho Herucahyono and Fajrin Rasyid, also left their posts in 2019 and 2020, respectively. 

Bukalapak, which means “open a stall” in Bahasa Indonesia, helps the country’s millions of small mom-and-pop stores to sell their goods online. The company launched Mitra Bukalapak in 2017, which aims to provide services ranging from connecting kiosks to consumer goods distributors, bill payments and phone top-ups. 

The e-commerce platform now serves more than 6 million sellers and 90 million active users. In April, Bukalapak raised $234 million in a funding round led by Microsoft, Singaporean sovereign wealth fund GIC, Indonesian media conglomerate Emtek and South Korean web portal Naver Corp., according to a report from Reuters.

Wow! What a difference a year makes. Just over a year ago, as we entered the Coronavirus lockdown, it seemed you might not be able to give away some houses, and in-person showings were completely shut down in Los Angeles. Now, we appear to be in the midst of one of the hottest national housing markets since before the financial crisis. This parallel may lead many people to wonder when will the Los Angeles housing market crash? With so few homes on the market, I’m sure there are a few home shoppers praying for the Los Angeles housing market to crash.

As a Los Angeles financial planner, who has grown up in Southern California, I have seen the real estate market boom and bust over the years. I am also fortunate enough to see the long-term trend of real estate prices going up, up, and up over time. Most of the homebuying discussed here could apply to any housing market that may or may not be coming up on a crash.

  • Last year, overall, the increase in home prices nationally was 17.2%. In Austin, Texas, the median listing price for a house rose 40% in one year. -Axios Markets, April 11, 2021, In Los Angeles County, the median sales price rose (just) 14.3% to $708,500 in February, while sales climbed 19.1%.

What Would Cause the Los Angeles Housing Market to Crash?

There is always a risk of losing money on a home in Southern California, including high-cost areas like most of Los Angeles, West Hollywood, and Beverly Hills. There is obviously more risk when prices are as high as they appear to be now, paired with a housing shortage, record-low interest rates, and what appears to be a buying frenzy. But unless someone discovers some hidden land that tens of thousands of homes can, magically, be built (quickly), there is little reason to expect a crash in the Los Angeles housing market. As a financial planner, I must point out that the Los Angeles housing market crashing and you getting misguided into an unwise home purchase are not necessarily the same thing. Prices may soften, or you may get sucked into (way) overpaying for a home. Or perhaps, you buy your dream home only to find your dream job is in another town, and you are forced to move.

The only other thing that could really cause a crash in the Los Angeles housing market would be a wave of Coronavirus-related foreclosures. If for some reason, everyone had to sell at the same time, prices could drop. Even this would likely only put a dent in the frenzy around home buying, and I don’t see this as a likely possibility with all the government support to keep us out of another great recession. Unlike the financial crisis, most homeowners had to qualify for their mortgages based on their incomes at some point, and most have a larger equity cushion than average homeowners had before the real estate market crash during the great recession.

Timing the Los Angeles Housing Market

The best home-purchasing advice I can give you is to buy the right house for you at the right time. If you own a home that you like and live in for the long-term, then most short-term market pressure on real estate shouldn’t matter because you likely won’t be forced to sell during what would likely be a temporary downturn.

I will use my grandmother as an example. When she sold her home in the Greater Los Angeles Area and moved into a new retirement home, it was during the 90s housing recession in SoCal. She received less than half of what she expected from selling her home. While that seemed like a bad decision, she ended up coming out ahead, thanks to her decision to purchase her retirement home on Balboa Island in Newport Beach. Her new home’s value quadrupled over the decade that she lived there. Beyond money, her house on Balboa Island was a better fit for her lifestyle and much more fun for our large extended family to visit regularly. 

I should also point out that she lived in her Los Angeles home for more than 40 years, raised her six children there, and it still sold for nearly 600% more than what she paid. Time in the housing market is key to making a healthy profit and not having to worry much about short-term volatility in Los Angeles housing prices. If nothing else, if you get a 30-year fixed mortgage – and make 360 payments – you will own your home outright. 

Should You Bid Up A House in Los Angeles?

You may be wondering How much over the asking price should I offer on a home in Los Angeles in 2021? It has been reported that more than 42% of homes in Los Angeles have been selling for over the asking price. Certain areas, and price points, are going to see an even higher percentage of homes selling for more than asking. There are a lot more people who are desperately trying to buy one-million-dollar homes than 100-million-dollar homes.

Under normal circumstances, I would try and talk you out of bidding up a house price in Los Angeles. However, in the current Los Angeles real estate market, those buying houses on the lower end of price points in their zip codes (a vacant lot in West Hollywood would likely set you back 3-4x the median house cost of a home in Los Angeles) may want to consider being a bit more aggressive with their offers. I love a good bargain, and saving a few thousand dollars off the purchase price is excellent if it works but terrible if you lose out on the perfect home. Ok, so you are shopping in Los Angeles; I’m not sure the dream home exists unless you have several million dollars to spend. The more money you have to spend on a Los Angeles home, the more options you may have to purchase, with less competition.

Set a maximum housing budget that you can afford, which should be less than the maximum mortgage you qualify for. (The only exception here is the self-employed who may have to be a bit more creative to get a large mortgage). Try to avoid getting sucked into a bidding war where you end up spending way more than the house is worth, or worse, spending more than you can really afford. Being house poor is the worst.

How to Lose Money on Los Angeles Real Estate

As a Los Angeles financial planner, many of my clients have owned homes, some since before my parents were even born. Value has gone up and down, but if you own your home long enough, historically, it has been hard to lose money on California real estate. In the short term, it is quite easy to lose money. 

I will admit that I had bad timing on my first Los Angeles home purchase. My home was purchased a bit after the real estate peak before the financial crisis, but before all hell broke loose. The single-family home in the Beverly Grove area likely lost about a third of its value during the financial crisis and likely about 50% off its peak value. I was lucky enough to purchase it for around $300,000 less than the original listing price. Some neighbors purchased homes on my block for $400,000 less than what I paid. Sounds terrible, right? Well, I had no plans of selling or need to move, and I still own the home. Luckily, it is now worth more than double what I paid for it.

When purchasing a home, make sure you will be comfortable living there for at least five years. Purchasing a home often entails financial sacrifice, so make sure you can afford the home (and associated expenses) without having to reduce your standard of living too much. Try to avoid taking on a house remodel project that you can’t handle or afford. 

Mortgage Rates and Buying an LA Home

With interest rates still near record lows, we have to expect that they will increase at some point in the future. This will put pressure on housing prices by making mortgage payments more expensive. Higher interest rates will likely cool the frenzy of home buyers, but this is not expected to be a strong enough effect to crash a housing market.  

Should You Sell During This Hot Los Angeles Real Estate Market?

It may be tempting to sell now during the sizzling housing market. If you are looking to leave LA or downsize from a single-family home to a condo, now may be a great time to sell. If you are looking to sell and just buy another place in the LA area, you will be selling in a hot market while also buying in a hot market, which after paying real estate fees and any capital gains taxes, your money may not go that far when shopping for your new home.

While I don’t see a crash coming, I would tread lightly when shopping for a new home in Los Angeles. Don’t let irrational exuberance force you into an unwise home purchase. Owning a home is still part of the American Dream, but losing money on a home can put a big dent in your overall financial security.

Topline

With Johnson & Johnson’s Covid-19 vaccine once again cleared for administration in the United States, one of the nation’s top health officials is trying to dispel concerns over the single-dose vaccine’s “very rare” blood-clotting problems, warning instead that vaccine hesitancy and Covid-19 pose greater risks.

Key Facts

Speaking to NBC News’ Meet the Press Sunday morning, Dr. Francis Collins, who’s in his twelfth year as director of the National Institutes of Health, said the blood-clotting risks associated with Johnson & Johnson’s vaccine are “truly a rare event” and that “the benefits greatly outweigh the risks.”

“You are less likely as a woman taking J&J to have this blood-clotting problem than to get struck by lightning next year,” Collins added, referencing the fact that a majority of the 15 people in the U.S. who have reported a blood clot associated with Johnson & Johnson’s vaccine have been women under the age of 50.

“The risk of aspirin inducing a significant intestinal bleed is much higher than what we’re talking about,” Collins further noted; studies have pinned the risk of developing “major gastrointestinal bleeding” due to aspirin use at about 1.8%, or roughly 2 out of every 100 people.

To compare, the Centers for Disease Control and Prevention has assessed the approximate risk of developing the rare blood clots associated with the Johnson & Johnson vaccine at about seven in one million—which Collins notes is at least “a thousand times less likely to happen” than an adverse stomach-bleeding reaction to aspirin.

Instead, Collins said vaccine hesitancy and Covid-19 variants pose “serious risks” to reaching herd immunity in the U.S., which Collins forecasts will happen once around 70% to 85% of Americans are vaccinated or immune.

Crucial Quote 

“We Americans, we’re not that good at this kind of risk calculation… Back when seat belts were first being introduced, people were like, ‘Well, you know, suppose my car goes into a lake and I can’t get unbuckled quickly enough when I drown,’” Collins postured Sunday. “Well okay, I guess that’s in there too, but balancing the benefits and the risks, which is what we’re trying to do here, you come out pretty clearly on the side of rolling up your sleeve.” 

Key Background

Ten days after recommending states pause the vaccine’s administration, the CDC and Food and Drug Administration on Friday once again cleared the use of Johnson & Johnson Covid-19 vaccines after a CDC risk assessment found that if all U.S. adults were able to get the vaccine again, there would be 26 cases of blood clots and 1,435 lives saved. “Both agencies have full confidence that this vaccines’ known and potential benefits outweigh its known and potential risks,” acting CDC Commissioner Janet Woodcock said Friday. Over the past several weeks, 15 people in the U.S. who were given the Johnson & Johnson Covid-19 vaccine were diagnosed with a rare type of blood clot, three of whom died.

TANGENT 

According to a Fox News poll released Sunday, 55% of Americans who have yet to be vaccinated against coronavirus said they do not plan to get a shot, with 28% of such respondents either saying that “vaccine development was rushed” or still wanting more data on vaccines. About 16% said they don’t trust the vaccine will work.

Big Number

53.1%. That’s the percentage of the U.S. adult population that has been at least partially vaccinated, according to CDC data.

Further Reading

Fauci Denies Johnson & Johnson Pause Will Contribute To Vaccine Hesitancy (Forbes)

FDA And CDC Recommend Resuming Johnson & Johnson Vaccine For All US Adults After Committee Vote (Forbes)