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Real Estate Radio Show Archives
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Show Overview |
Bio |
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01-03-2009 |
Bruce Norris is joined once again by Craig Hill (hard money loan officer at The Norris Group) and Greg Norris (full-time property buyer for The Norris Group.
Bruce asks Craig about calls from first time investors purchasing homes with structural damage and mold. Craig says he steers newer investors with no construction background away from heavy fixer uppers. Houses don’t have to be a complete disaster. You don’t want their first house to be a bad experience.
Bruce asks Greg what he is doing differently from one year ago to buy and sell properties. Greg says he hasn’t changed that much but has gotten more efficient. At the very beginning he was doing cheaper repairs but now there’s a little more upgrades. Instead of linoleum we use tile in some areas and instead of tile on counters he puts in granite. We need to be the best on the market.
Realtors that deal with buyers are saying great things. One in particular isn’t wasting any more of her time on REOs and has decided to only show our homes because of the quality.
Greg says price and condition are really important in this market. Greg says the higher end listings have disappeared and TNG is typically the highest. Inventory is very low. Even though The Norris Group is the highest, the homes still sell. Consumers don’t want to deal with the fixers and want a nice home.
Appraisals are a bit of a problem. Greg says he’s having to set a top level. Buyers are wanting to see a top payment to be $1200-$1400 per month which is similar to rent if not a little less. Greg talks about the staging of the homes and how it helps with presentation. It helps online showings.
Bruce and Craig talk about the hold ups with selling. Craig says financing and appraisers are the biggest issues. There seems to be willing buyers for fixed homes. Craig says homes are being fixed better than they were in the 90s. More is being spent.
Craig is having to tell people not to chase the market and get very realistic on price. He often calls clients if a loan has been going more than five months. He wants to make sure the investor gets to the finish line. It’s difficult when prices are declining.
Bruce asks Greg about appraisal issues. Greg says the last 30 days has been much more difficult. Banks are so scared they are overcompensating. Appraisals over one month are considered old. Three months is considered too old.
Bruce asks about FHA transactions and the 180 day rule. Greg says he’s never been asked for a second appraisal. Bruce thinks maybe the review appraisal is the second appraisal. Bruce says that some of these appraisers are sitting 500 miles away.
Bruce asks Craig about loans that can’t seem to close. Craig says there is willingness on the side of the buyer but it’s the financing piece that’s causing problems for California real estate transactions. The checks and re-checks of the buyers stall closings.
Bruce asks Craig about the many new trust deed investors The Norris Group has had come on in the last 90 days and what makes them feel secure about doing investments. Craig says perceived safety is key. Craig makes small loans amounts, the investor is a special borrower, and typically the worst case would be the money lender ends up with a property.
Bruce brings up the fact The Norris Group was very conservative over the past few years so some of TNG’s main money investors placed their money elsewhere. Bruce asks about some of the uh-oh stories Craig has heard about. Craig says money investors are attracted to the return and sometimes forget there’s risk, especially if they had been working with TNG who has a very good record.. He told some to be patient and that TNG would be busy again soon. Some of these investors didn’t wait, went elsewhere, and now have a small portfolio of non-paying loans.
Bruce asks Greg what the secrets are to keep good contractors interested in doing our work. Greg says that it’s important to be easy to deal with. We don’t stand in their way and we have work. Consistent work is a big deal.
Bruce asks if there’s red flags when dealing with contractors. Greg says when contractors ask for money before work is done it’s a red flag. Greg typically pays every two weeks. The Norris Group pays for the parts. TNG knows what parts we want installed and we’re really just contracting labor. Greg says contractors resisted his method of buying all the parts at first but later said they liked the system. It allows them to have less money out of pocket and actually take on more jobs. Home Depot was difficult to work with at first but now after dealing with them for a year, it’s really easy and everything happens over email.
Craig says repairs is still a big hurdle but they get used to it. Sometimes Craig forwards them before and after photos and videos of an investor’s work. He’s had money investors turn down a project but then they see before and after videos of an investor’s work and they sign up for several. Once they see what investors do, they feel more comfortable.
Craig talks about holds for repair money. Most houses are needing major repairs so almost all loans have money held for renovation. Red flags for Craig are investors who want money before repairs are finished. Draws are given after things are completed. This protects the money investor and also makes sure the investor stays on track.
Bruce asks Greg how he handles all the showings of the properties since he lists all of the properties for The Norris Group. Greg says he doesn’t show them at all. If interested buyers call, Greg used to tell them to call their local agent after figuring what they were looking for. Greg wants buyers to be pre-qualified and doesn’t have a time deal all of that. He really relies on buyers agents.
Bruce asks Greg how we protect ourselves during escrow. Greg says he does all of his due diligence up front now to make sure he doesn’t go into escrow with someone who can’t close. He wants all buyers to be pre-qualified and not just pre-approved. |
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12-27-2008 |
Bruce Norris is joined this week by the loan officer for the Norris Group, Craig Hill, and the full-time property buyer for the Norris Group, Greg Norris.
Bruce asks Craig about how long he’s been in the hard money loan business and who the typical borrower was when he first started. Craig talks about buyers he used to work with and how it changed 20 years ago because of rule changes. Craig then talks about how he started working with Bruce and how it made much more sense to lend to investors. Craig says the investor has made not only more sense but are better at making payments.
Bruce then chats with Greg about his past year and a half as a property buyer. Greg talks about his early experience watching trustee sale buyers and what they liked to buy. Greg talks about loans available for investors and how conventional loans are currently at a liit of four.
Bruce asks Craig why lenders are hesitant to lend to investors. Craig says lenders have a false perception that investors are bad to lend to. An investor has more money down and has just as many reason to stay in a home as an owner occupant but lenders don’t want to be involved in that transaction.
Greg talks about how long ago he started making offers straight out of the MLS. Greg says making offers straight out of the MLS was not successful in early 2008 as the lenders wouldn’t budge. In the first six months of 2008, zero deals came out of the MLS, most were coming from auction. Now towards the end of the year, almost all came from the MLS that The Norris Group purchased. Now, The Norris Group is buying about 5% of the offers made.
Craig talks about last minute funding calls and why these investors are in a rush. Craig goes into detail why people with money make these investor loans. Craig says our main target market are seeing loans being made of $85,000 to $120,000 where last year those same homes were being bought for $200,000. There’s been a big change in price. Money sources have become a little nervous.
The perception right now is everyone wants a cookie cutter deal. Everyone wants a $100,000 loan and money sources do not want to be aggressive. Those that want larger loans or are buying in areas out of comfort zone areas will need more in money in the transaction. Money sources in Northern California are wanting to invest in smaller loan amounts and also invest in Southern California where they feel TNG performs best.
Most hard money loans have to have investors put more money into the deals right now. Different sources have gone out the window because of the market.
Bruce asks Greg what he is looking for now as he is making offers on things inside the MLS. Greg says he is looking for anything within a $30,000 range where he thinks he can buy it and make a profit. Sometimes these are short sales and sometimes his offers don’t get accepted for months. Sometimes he gets deals because other investors fall out and he’s the only one left.
At this point, Greg is not being able to talk with people directly often. Right now, banks seem to be dictating to REO agents where before there was much more relationship involved. Greg says he sometimes gets no reaction from REO agents when making offers. Every agent reacts different. Some email when we didn’t get a deal and some do.
Bruce says between 2000-2006 most of our hard money loans came from investors purchasing from people directly. Craig says it’s now changed almost completely where 100% are bought out of the MLS, through auctions, and occasionally from trustee sale and probate. The MLS at this point is creating the most real estate opportunities.
Out of the 40 properties Greg has purchased this year, 30% of the deals were auctions, the rest were from the MLS. Greg is not looking forward to attending auctions. It’s a lot of work for sometimes no results. REDC and Hudson and Marshall have been mixed this year.
Craig says the inventory he is making hard money loans on is different form the 90s. In the 90s there were more 30s and 40s built home located in San Bernardino and Moreno Valley. This time, the investors are being savvier. Investors are buying a little bigger homes and newer homes. The inventory is much better.
Craig talks about why some investors get frustrated because they can’t participate in our money program. Credit issues aren’t the biggest issue. Liquidity is just very important right now. Most people don’t mind hearing “no” because we’re trying to set them up for success. Some investors just don’t understand the process.
Bruce talks about deals Craig turns down and investors coming back later thanking him for now allowing them into the deal. Craig finds that very gratifying. More next week. |
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12-20-2008 |
Bruce Norris is joined this week by the Senior Resident Fellow of Finance for the Urban Land Institute, Stephen Blank.
Bruce asked about the ULI Emerging Trends report and how long its been around. Stephen says its been around for 30 years and has always been national in scope. The report has gone through different partnerships but the report is now a joint venture between the Urban Land Institute and Price Waterhouse Cooper. The report interviews 100s of people in the real estate business and compiles their opinions. Interviewees include developers, private and public owners, advisors, institutional investors, service providers and lenders.
Stephen says the people that were interviewed in 2007 actually said they were expecting 2008 to be difficult. Emerging Trends is unique because of the process and the one-on-one interview process. These interviews tend to be very frank in nature. There is one writer and three editors to help put the report together. The real estate industry has been very supportive in being involved in this report.
Bruce asks Stephen where the blame is in his opinion. Stephen says there was a period of unparalleled liquidity. With that liquidity came an increasing need for income-producing assets and increased competition to lend money so interest rates were forced to low levels. Increased liquidity increased leverage pushing down rates of return.
The subprime market was unregulated and obviously became an issue. Mortgage bankers took these loans and then passed them on to Wall Street. Some argue the models that were used were too old and relied to heavily on ratings. There was a failure to do due diligence and its created a big mess. People ended up day trading condos.
Bruce says theres been some confusion between investor and speculator. Now, weve assured ourselves the downturn because the investors are limited to the number of loans. Investors cant 1031 exchange and investors cant buy rentals due to limits put in place by lending institutions. Purchase prices are being driven down even further because of this issue and the government isnt addressing it at this time.
Bruce asks if Stephen thinks the residential problem will move to commercial and if it will be as severe. Stephen says he doesnt think theyre related and that an economic downturn needs to happen. Commercial is a lagging indicator. Residential could cause a downturn in the economy which would then spill over to commercial. Stephen says we didnt build as much so were not going to have over supply meeting under demand like the last down market. Only some areas like Las Vegas and Florida will have issues because of over building.
Bruce asks if he sees commercial lenders taking back a glut of properties in the coming years. Stephen sees sharp increases in foreclosures for loans adjusting in 2009-2010. The loan-to-value ratios are going to be an issue unless their income has increased a great deal. Bruce and Stephen discuss if lenders could leave a loan in place to avoid taking back a building, also known as performing non-performing loans. The debt is still being paid. Lenders, if they can, would rather nurse these along until the market improves. Not all lenders can do that unfortunately.
Bruce asks if commercial lenders did the same kind of stated income programs that we saw in residential. Stephen says that as competition increased, banks started looking at other factors to base loan amounts on. Reserves were lowered. If the markets had continued to go up, the property could afford this new method. In a decline, its an issue.
Stephen sees cap rates going up. 15-20% price decline could occur because the cap rates are changing. Not as much personal guarantees are on commercial. Moving forward from now, more lenders are requiring personal guarantees.
Historically loans had an amortization with ten year term assuming a 25 year amortization period. In ten years you would historically amortize 12-13% of the loan which added protection for the lender, even if prices declined. As the market was more competitive, amortization period was eliminated and the loans were interest only. As these are refinanced, no equity exists.
Bruce asks about unemployment and commercial. Stephen says it will be an issue and vacancies will increase. Declining lease rates will also be an issue. Stephen says REITs are not originators of loans but purchase already existing debt. They may originate mezzanine loans but are not conventional lenders. REITs are owners of income producing properties. Primary lenders are commercial banks (40% of markets), insurance companies (20% of market), and commercial mortgage-backed securities (40% of market). Stephen says that the mortgage backed system is on life support. Insurance agencies are a major source now but its taking more time and they have the pick of the market.
For more information on the Urban Land Institute, visit uli.org. |
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12-13-2008 |
Bruce Norris is joined once again by Paul Earnhart (Founding Principle) and Erik Hernandez (Senior Vice President) of Lee and Associates in Ontario, CA.
Bruce asks Paul how this downturn compares to downturns hes seen before. He says this one is broader compared to the 90s. In the 90s there was an oversupply of four years. Lenders ended up taking back large quantities of properties and the RTC got involved. Values fell rapidly because of quick liquidation. The Inland Empire survived because of the influx of companies from the LA area looking at their bottom-line and moving into cheaper areas. Capital, however, never dried up. Banks were still making loans. Capital now is much tighter. This time its systemic and more problematic.
Bruce asks about oversupply of inventory. Erik says certain categories are overbuilt and in certain areas theres lots of standing inventory. Some inventory is too far along into building to stop. Theres more coming in the coming year. They started building when vacancy and absorption rates looked good and the world has changed.
Bruce thinks there is going to be a vacant building glut. He asks how vacant buildings are going to be appraised. Paul says appraisals will be looking at income values not at sale comps. If someone wants a loan on a vacant building the financing will be of the hard money variety or youll need to prove a tenant is coming in. Owner occupied is still good but the income will still be scrutinized.
Bruce talks about what happened in the past with the City of Perris. Bruce feels the next two years will be ugly but long-term migration outlooks look good. He asks Paul about unemployment and how that changes the commercial real estate industry.
Paul says its a two-edged sword. Warehouses are a very small piece of commercial and over 100 million square feet over the past five years. The assumption was that consumers would keep spending so its been really overbuilt. The question becomes now if theres a structural vacancy. Some companies are already gone: Linen and Things, Bombay Company, Levitz, etc. If people arent working they arent spending. Theres less need for these kinds of spaces.
Bruce asks if the new tenant that takes over for some of these large spaces pay much less. Erik says landlords are very motivated and list lease rates and significant discounts.
Bruce talks about reading through loan docs for his line of credit and how he was surprised at the ways the lenders can get heir money back. He asks if commercial is the same. Paul says that lenders do have some say if things start going bad. If lenders see the balance sheet doesnt look good then they can take action.
Bruce talks about some investors writing themselves a check into savings from their home equity line of credit and the bank then taking the money out of the account and then closing the line of credit altogether. All agree it seems far reaching but more and more, even the most credit worthy individuals are having credit disappear.
Bruce asks Erik if were gaining commercial tenants. Erik says people who dont have to be here are gone. Paul says the taxes and bureaucratic nonsense of California is not very business friendly. Businesses are only here because they have to be due to logistics of distribution and manufacturing. Those that dont have to be here go to states like Texas and Arizona who are more business friendly.
Bruce asks if businesses tend to lease or buy in this market. Landlords are being very aggressive so buying a building would need to pencil. Commercial leases vary by sizes. Fixturizing a commercial building can be expensive so companies who put in the infrastructure for larger buildings will stay in longer leases.
All three talk about the very short time frame that economists and experts give industry constituents as far as market outlook and much of it is wrong. For those in commercial, theres a very long time line and the world can totally change. Those that came out early saying there was a real problem took lots of heat.
Finally, Bruce asks where Paul and Erik see opportunity in the commercial sector. Paul sees land opportunity coming first followed by small to mid-sized office product. Industrial on mid to large size wont be good for 12 to 24 months. Liquidity is the real issue here. |
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12-06-2008 |
Bruce Norris is joined this week by Paul Earnhart (Founding Principle) and Erik Hernandez (Senior Vice President) of Lee and Associates in Ontario, CA.
Lee and Associates specializes in industrial commercial real estate. Bruce asks when the commercial real estate market peaked. Paul said the peak was about the same as residential but that it became more obvious in July of 2007. This is when several partners backed out of deals and much more scrutiny started taking place.
Bruce asks Erik about financing and if commercial had its own version of stated income. Erik says Lehman was doing commercial lending as well but it wasnt as aggressive. Paul says lenders were willing to finance on sales comparables instead of income streams. No income stream analysis was taking place but now that has changed.
The typical buyer from 2004-2006 in the commercial Inland Empire market were Asian entrepreneurs and domestic buyers for consumer services. The market has receded but some areas on the outer edges of the Inland Empire are being hit harder. No new development is taking place. Foreign investors havent disappeared but are slow and cautious when making decisions.
Bruce asks if commercial deals were leveraged or if they were bought cash. Erik says if it was an owner occupant (owner user) the deal would typically have 10% down and 90% would be financed. Lenders would do a first trust deed at 50% and then a second at 40% would be guaranteed by the Small Business Administration (SBA). Erik says this program is currently still around. Wells Fargo, Bank of America, and some regional banks are still active in the commercial arena since they are only 50% into a transactions. Bruce asks if the SBA is in line for the bailout.
Paul says prices are down around 15% from the peak. There are a few spots where its worse. For those that cant refinance, they are letting the building go into foreclosure.
Paul says they are expecting a rough road for the coming year. Rents and values have dropped and financing is impossible for some. The SBA financing is only good up to $3 million dollars. Anything over must use conventional financing. SBA is also more conservatively underwriting their loans. SBA is paying more attention to debt-coverage ratios (DCR) as opposed to pure sale comps. DCR measures your ability to pay the property's monthly mortgage payments from the cash generated from renting the property. SBA has not dried up so financing is still there.
Conventional financing is now limited to 65% of value. Lenders are much more cautious here. Bruce asks about mezzanine financing. Paul says its changed. Mezzanine financing used to be anything above 75% loan to value. Now its 60% loan to value. If the underlying lender will allow it, its much more expensive. 14-15% rates will apply and the financing will be for 3-5 years typically. The first can be around 10 years. They will want to get as much risk out of the way as possible.
If the property is very good construction and has good tenants, Cap rates are held low. Investors feel better protected here. The all cash buyers are looking for these nicer buildings. Leveraged buyers see higher cap rates. Caps rates are up 25% and Paul expects it to go up another 10%.
Bruce asks about what happens when a cap rate goes up from six to eight and what happens to the value. Paul says about a 25% in value takes place. Any new development is nearly impossible because land and construction cant keep up with price adjustments. Bruce says similar things are happening for the residential market as properties are being bought for land value.
Bruce brings up that there is $100 billion of commercial financing that comes due in 2009. Bruce asks if Paul and Erik think its a problem for those hoping to refinance. Paul thinks that number is low because that number is premised on individual loans and some business have leveraged their building for lines of credit and those are coming due as well. Paul says that lenders can also make margin calls on these lines of credit. It could be a huge problem.
Bruce asks if pension funds buy real estate free and clear. Paul says that is true and pension funds dont act as quickly and have a longer range outlook for investments. REITs are structured differently and some are fairing better than others. Bruce and Paul talk about REIT values going through the floor and if that will change how they are able to fund future projects.
There were many non recourse loans being made in commercial. Non recourse loans are now much more difficult to get.
Bruce asks about how insurance companies are involved and if they are big players in the financing of commercial real estate. Paul says they are much more risk averse and have pulled back in availability of funds.
Paul says vacancies are not out of control yet but they are starting to increase. Erik talks about vacancy (buildings with no tenants) versus availability rates. Many companies are subleasing space since down sizing is taking place. Vacancy numbers may be around 6% for the West End but availability rates are around 12%.
More coming next week and you can find Paul and Erik at lee-assoc.com. |
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11-29-2008 |
Bruce Norris is joined this week by chief economist of First American Corelogic, Mark Fleming. First American CoreLogic, Inc. is the nations largest provider of advanced property and ownership information, analytics, and solutions.
Mark starts by explaining what Corelogics Core Risk Monitor is and what it evaluates. This evaluation tool is used to forecast mortgage default risk areas. The report makes use of house price dynamic trends, economic trends, foreclosure delinquency trends and collateral risk trends. Bruce asks of those trends which is the one that causes the others to follow. Mark says the economic and house price trends are the most important. Issues with price decreases and the ability for people to pay their mortgages continue to create problems.
Bruce asks if the downturn from 1991-1997 in California is following the same model we are seeing today. Mark says its slightly different. Mark says in the 90s it was more a function of unemployment. This time around, the house price downward trend is causing more of a problem. The economic downturn is following.
Bruce asks if the core factors are different for different states. Mark says yes but these two primary conditions are key. Mark talks about the Midwest and how their market has changed and reacted.
Bruce asks Mark about his take on affordability and if increasing affordability means less risk. Mark says that increasing affordability means more individuals will be able to enter the market on the demand side and means that inventory will be able to stop the price slides. There are a few steps along the way to get the market really going but affordability is important.
Bruce asks about Corelogic and how much emotions play part in the economy. Mark talks about the emotions to prices and houses and how individuals dont like to lose. Bruce talks about people and the fear of people not wanting to buy for fear of losses. Mark says that some homes become such a good deal they get back in anyway.
In Corelogics report in the 3rd quarter of 2007, Bruce asks how Ohio and Michigan topped the highest risk market but arent in this years report. Mark says it wasnt that they improved, other markets got worse. In Corelogics 3rd report of 2008, California has 8 of the top 10 riskiest markets and did not appear in their 2007 report. Mark says the price declines got these areas on the list.
Bruce talks about the historic nature of price declines in California and how its the worst hes ever seen. Mark says even nationally its bad. What once were the top markets are doing so poorly its bringing down the national numbers. California and Florida are seeing large price declines and they are two of the largest markets. Historically, housing recessions are more localized.
Bruce asks about the percentage of houses that are upside down in California. Mark says 28% of loans in California are in the negative equity position. Corelogic only recently started these evaluations so has no idea what happened in the 90s. Corelogic uses market trends and valuation models to figure out home prices and ran data for September for their most recent report they released.
Bruce asks if there are states that are in worse shape compared to California. Mark says Nevada is in the lead with 48% of homeowners owing more on their property then it is worth. The 48% includes investors and anyone with a mortgage is counted. The mortgage stock in Nevada is much younger than California. They didnt have the time to pay down the mortgage hence the reason they are so upside down. California has many more mature loans.
Bruce asks about unemployment and how it might cause further price declines. Mark says rising unemployment will lead to more foreclosures as more people cant afford their payments. However, when individuals are in the negative equity position, studies shows mobility decreases and will tend to look locally instead of moving out of state for jobs. Bruce brings up that California is a nonrecourse state and people will find it easier to walk. Mark says it will be interesting to watch the behavior of people in this cycle.
Bruce asks if the bailout will help stem the foreclosure situation. Mark says the more loans that are modified the better well do. Bruce and Mark discuss the moral hazard of re-writing some loans but not others. Mark says this is part of the challenge for those creating these mortgage modification programs.
Bruce says the actually foreclosure data says were actually down in foreclosures because of SB1137. Lenders have to go through more steps in the foreclosure process now and data is very misleading at this time. Corelogic says they are ignoring the seeming improvement in foreclosure numbers because of this bottleneck.
Bruce asks if in the model if the percentage of those over encumbered include those that refinanced to get money out of the house. Mark says the report includes all mortgages. For more information, see corelogic.com. |
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11-22-2008 |
Bruce Norris is joined once again by Inland Empire Economist and Specialist John Husing.
Bruce Norris mentions that The Norris Group is now ready to start purchasing properties with the intent to hold them as rentals. Bruce says were buying at 28% of what the lender was owed.
John takes Moreno Valley as an example of what happened in the last cycle with rentals. The injection of rentals in areas that were traditionally owner occupied caused problems. Rentals are generally not as well cared for as owner occupied properties in the area. Home values go down because of this. In areas dominated by rentals, calls for police soar. Soon turnover increases as renters look for the best deals and theres soon a rent war. Side effects of too many rentals can cause many issues. John says Moreno Valley was destroyed by HUD in the last cycle because they didnt even think about the effects to the communities.
In the stabilization act, money has been given to cities to help stop this issue. Cities can negotiate prices in bulk and then double escrow the homes at certain prices over to construction firms to bring them back to nice homes. They then sell these homes to qualified first time home buyers. San Bernardino did this in the last cycle. 90% of the people who purchased those homes were still in 10 years later.
Bruce mentions that homeownership levels got too high and that more rentals will be a natural conclusion. John thinks its more of a pricing question. If prices got down to a level thats affordable, people will buy. He says California has never built enough homes for its population.
John says that demand for homes is accelerating greatly. Unfortunately, the supply of foreclosures is still coming in great quantity which continues to bring down prices. John feels the only real solution is to get the principal down.
Bruce says Riverside is one of the possible hot spots once this all turns around. John says the Inland region has more construction dirt available then other counties. Over the next 25 years, Southern California will add 6 million people. Orange County and San Diego are built out or zoned out of being able to build. LA is in a similar situation. Once we get through this downturn, the Inland region has tremendous growth opportunity.
Bruce says that people would rather be in California then many other states. For the next couple of years, people from other states will start to recognize the opportunity to move to California and be making the same payment or less and be able to live in a better climate. Bruce thinks well see massive in migration. John says he too thinks people will be looking at California as a place to retire.
Bruce talks about how he got to Riverside and the massive growth thats taken place. John explains the three stage growth process. By the late 70s, Riverside developers started developing in the area. People were putting up houses where people didnt want to live. But affordability is important. Later, the entrepreneurial developers come out here because there was a market. Retail centers soon follow because of demand. Housing boom tends lead to population serving businesses coming into the area. Industrial developers follow after which creates blue collar jobs. The Inland area was in Stage 3 where we saw increasing upscale houses being built. The Inland Empire saw much younger people move into the area. This influx of young talent with higher education opens up the area for much different jobs and services. The Inland Empire economy will be back on Johns three stage development once we get through this cycle.
John says San Fernando and Orange County went through this same three stage growth cycle. Orange County went through stage three in the 70s. John tells the story of South Coast Plaza. Orange County is actually worried because its losing its young and educated workers to the Inland Empire.
In Riverside, all industries are having a difficult time. Residential construction brought in a large about of jobs. Warehousing and distribution have also been main drivers for jobs. Now that these have both slowed, unemployment has boomed.
Bruce asks John if the Feds will crank up infrastructure projects. John says that would be the way to help the economy. The influx of cash to consumers by the government in May didnt work because they paid off debt or went to Walmart.
Bruce asks John about the difference in median incomes from the Orange County and Riverside. John says they are very different. However, if you take the median income and then subtract the cost of housing, its about dead even. As the economy approves, well continue to pull more and more people from Orange County for this reason.
More on John Husing and his research at johnhusing.com |
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11-15-2008 |
Bruce Norris is joined this week by Inland Empire Economist Dr. John Husing. Bruce asks John if were facing the biggest mess hes ever seen since hes been an economist. John says its the worst mess hes seen in his life.
John talks about how we got here. In 2004 the real estate market detached from reality. The housing shortage created unbelievable demand creating massive price increases. Investors came into the picture. Prices started increasing even more since they tied up supply. It had nothing to do with real supply and demand issues. The creative financing made it even worse.
Bruce brings up that the same financing was available to consumers just as well as it was for investors. The consumer too became the speculator.
Bruce asks if the Feds are taking the correct steps to fix the problem. John thinks they havent fixed the fundamental problems. John says all homes bought in 2004-2007 are upside down. John says its one third of the market. That does not include those that used their home as a piggy bank and refinanced.
Bruce asks if foreclosure moratoriums have worked in the past. John thinks its just a delay. There are three parts to a loan: the principal, interest rates and the terms. Ultimately its about the principal. The mortgage backed securities market is where its getting held up.
Bruce talks about some for these solutions and how they only apply for those that have the adjustable loans and how that doesnt fair well for those that didnt participate in those programs.
John thinks were only about one third through the houses that are upside down and that doesnt include people who refinanced. If the price gets down far enough, they could just walk away anyway.
Bruce asks if commercial areas are affected by residential. John says the office market was the third tightest office market in the US because many firms were moving here because the size and growth of our economy. There was a subsequent boom in commercial building. Weve gone from 7% vacancy to 19%. Theres more being finished so it will bring it over 20%.
Retail sales have plunged due to unemployment in residential building in the Inland Empire (Riverside, Moreno Valley, San Bernardino, Corona, Perris). We have a 10% decline in sales so now the shopping malls are being affected. General Growth, who owns several shopping malls, might go under. Their stock price has been hit hard.
John thinks well see a few more large retail stores go under. Numerous furniture stores are already out of business. The auto industry is getting hit hard but thats part of an industry issue thats ongoing.
Bruce asks John about the cities in California and if they will be dealing with difficult issues in their budget as real estate taxes take a big hit. John says cities will be affected. The biggest item in the discretionary budget is retail sales. When sales go down, that makes things difficult.
Bruce asks about the ramifications of when cities go bankrupt and who ends up holding the bag. John talks about damaged credit and investors not getting paid. The typical investor in bonds includes pension funds. Bonds are typically considered a secure and safe investment. Triple A has really been misleading as many of these investments have not turned out to be safe at all.
As real estate supply increases, the supply of homes has dropped significantly. Demand has gone up but the supply is still too strong. The supply is what has to be addressed. As long as the supply still is too high, we wont see new homes being built as it wont pencil. Locally, if builders get the land for free, builders still cant build because the fees and materials are still too expensive. Homes are going for less than replacement values. So many industries are connected to the building industry. 95% of all job losses in the Inland Empire can be traced back to the residential construction industry. The unemployment rate in the inland empire has reached 9.1%.
John doesnt think high unemployment is causing too much out migration. John thinks nationally we are having a difficult time so there are no real safe havens.
Bruce asks if California has ever seen 12% unemployment. John says no and the worst for the Inland Empire area was 1993. That was localized because of the space/defense industry job losses.
Commercial construction is now not penciling. The projects currently underway will be finished. John doesnt think another office space will be build until 2013-2014. We have to absorb around 20% vacancy rate.
With the US going into recession, world trade has slowed down substantially and directly affects the Inland Empire because of lack of warehousing and distribution space needed. Construction will now stop in the industrial market which is typically very strong.
Bruce asks who the typical lender is in the commercial market. Local banks and pension plans are behind some of these projects. Bruce feels they will own a lot of real estate in the coming years. This is happening in Orange County as well because the Financial Industry was hit so hard.
Technically many of these buildings are still leased but are now vacant. They dont show up as vacancy. Therefore the availability rate is a better indicator John says.
Bruce asks about apartments. John says the coastal markets have the best chance of doing well. In the Inland Empire it hasnt shown up as a bright spot. John thinks many people are moving closer to their jobs. Vacancies have actually increased. Its a market we dont have good data on.
Bruce and John discuss about the oil market. John says lower gas prices are like a tax decrease which helps in the short term. In the long term, projects we were hoping was going to happen are now on hold (alternative energy projects). Bruce talks about the how this is a repeat of the 80s.
John talks about an oil set price solution and how it might help.
Bruce talks about the new regulations and how REO agents are going to adjust. Theyve laid off staff knowing they will have to hire them back to handle the huge volume coming shortly. John really thinks we need to find out how can we get restructuring on the underlying loan on the mortgage backed securities. See Dr. John Husing on his website at johnhusing.com. |
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11-08-2008 |
Bruce Norris is joined this week by radio host of the Construction Zone Radio Show on KTIE 590am, general building contractor, and industry expert for the State License Board, Matt Le Vesque.
Bruce starts by asking Matt about the term general contractor and what type of license is implied. Matt talks about the different A, B, C, and D licenses. A license is a general engineering license which means streets and bridges. B is for general building contractors which means they perform two or more unrelated trades on a particular project. C license allows the contractor to subcontract out parts of a job.
Bruce asks if that having a general contractors license describes capability and expertise. Matt says there are many that have a license that shouldn’t try to do other areas of specialty and how that comes into play. Matt says four years of experience in general construction working for someone else or specific education is necessary to become a general contractor. There are three parts to the test to pass: legal, trade and within the trade is a large section on math. General contractors can’t do specialty projects out of their industry not does it always work out well when they try.
Matt talks about people who pose as general contractors who are not. Matt describes what happens to those who pose as generals and get caught.
Bruce asks what licenses a handyman is required to have. Matt tells him none and expands to talk about the limitations of what a handman can and cannot do and the dollar amount allowed. Overhead does change quite a bit when you get the general contractors license. Matt talks about the bond costs for different specialties.
Bruce asks Matt what people should have to be protected. Matt says general contractors should have workers compensation and why it’s necessary. Bruce talks about a certain issue that the Norris Group has recently found about. Matt talks about how people get around the rules or work the loopholes.
Bruce asks what happens if people are caught not paying workers comp. Matt talks about Workers Comp fraud laws and what could happen. People can search sclb.ca.gov to find out info on contractors. He says not to be fooled by the except status and explains what to look for.
Matt and Bruce discusses general liability and when that kicks in. Matt talks about a third party that gets injured on a job and not an employee or home owner.
Bruce asks about the rights of the consumer if the general contractor who do not deliver. Matt talks about how many consumers get shamed, especially with early payments. Some people pay before the work is complete which is a mistake. Don’t let the payment get ahead of the work he warns.
Bruce talks about the scenario about contractors who do work and get paid but who fail to pay supply stores like Home Depot and Lowes for the materials. Matt says this is actually a problem for the consumer and how to protect yourself. Matt reminds people to get the lien release and talks about preliminary lien notices. Consumers want to make sure they have the opportunity to write a joint check. Bruce and Matt talk about how this works with subcontractors.
Bruce asks Matt the best way to get connected with reputable contractors. Matt likes when people talk to their friends and neighbors and to make sure you do your homework.
Bruce asks about a warranty of work from a contractor. Matt says there’s a four year minimum for all work. Most contractors don’t know that or believe it and sometimes write something different in their contracts. They can extend it but can’t make it shorter than four years.
Bruce asks about how to be a good customer. Matt says payment is key followed by interesting and/or challenging work.
Bruce asks about Matt’s radio show and what they do. The Construction Zone Radio Show has live experts and also has live callers call with their questions. See czronline.org or visit ktie590am.com. |
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11-01-2008 |
Bruce Norris is joined once again by President of REventures, Michael Pines. Michael and Bruce are discussing foreclosure law changes in California bill 1137.
Bruce wonders why there are so many loopholes left open for interpretation. Michael says when bills are written so hastily there is not enough time to do the most thorough job. Michael believes 1137 wasn’t done very well. Courts will have to be involved to interpret this law. The courts will be used to set precedence. Some of this could be unconstitutional. These issues will take years to fix. In the short term, we will deal with ramifications. Lenders would have to do some major work to get changes quickly. Lenders might be able to get a preliminary injunction.
The new law effects loans originated January 2003 and December 2007. Bruce asks if former owners can get served. If you were a bonafied purchaser you will have protection under the law and protection on title. If you purchased at trustee sale, that could be another issue. The consumer could collect damages but not get the property back. The lender who did not follow the correct process will be more at risk. However, lawyers and clients could be liable if not done correctly.
1137 was really created to make lenders really sit down with the people to try and work things out. It’s a little vague. Bruce asks if there is any training for those people making these phone calls. Bruce says meetings and phone calls by trained people would be very different. Michael says there is currently no precedence and the lenders are scrambling. Some lenders don’t even know 1137 has passed. Lawyers might be telling some lenders this is unconstitutional and should fight it. There will probably be class action lawsuits.
Title companies are now requiring a letter from the lender making them liable for not following procedure. The title company will make it clear that they are not liable. They do not want to be responsible for this law.
1137 is talking about owner occupied properties. Bruce is wondering what type of products qualify. There could be conflicts with other laws currently on the books including California foreclosure laws.
Under 1137, lenders can get fined up to $1000 a day for a brown lawn. Bruce brings up that the lenders will be out of business very shortly where he buys in Moreno Valley. Bruce brings up a meeting with another city The Norris Group had about this very issue. The City’s perception was that they could only charge at city cost, not at the full $1000. People are already reading this differently. This law will be applied differently in different cities. Michael says this will be a dream bill for lawyers. Some judicial process will be in place so the lenders will be able to fight this. It depends on how much the fines amount to.
Under 1137, neighbors could have brown law and this law doesn’t apply. If an investor buys an REO, the law doesn’t apply. However, if investors purchase at trustee sale, 1137 will apply and the investor will be fined if a brown lawn exists. Michael says this is why many are calling this law unconstitutional. Bruce thinks most trustee sale buyers don’t know they have the same liability as the lenders.
Bruce talks about having bought a property and how there was a fine and how it caused it to stall the closing since the bank didn’t even know. Some lawyers will use SB 1137 to stall the foreclosure process. Bruce tells Michael about that happening with a property where it got retracted because they had done the foreclosure incorrectly. Judges are requiring lenders bring original paper work.
Bruce sees the change in the number of files in the NOD phase since many banks are trying to catch up. It’s a bottleneck since the process has changed.
It’s very common for people in foreclosure to get very active late in the process. If they contact a foreclosure consultant, the people may not be eligible for parts of the bill. Michael says there is an exception but the qualifications are unclear. Lenders probably won’t count on that.
Michael and Bruce discuss whether lenders are getting motivated to sell notes as they would be taking on the responsibility. Buyers should consider the responsibility coming if they are purchasing debt. SB 1137 has not yet solved much of anything. It could create opportunity for investors as the lenders will get much more motivated. |
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