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By Bruce Norris Bruce Norris.

Aaron and Bruce Norris of The Norris Group on the Real Estate Radio Show #334

Friday, June 14th, 2013

Aaron Norris,
Marketing Director of The Norris Group

(Full Bio)

Bruce Norris,
Realtor, Investor, Hard Money Lender, Educator

(Full Bio)

In a reversal this week, Bruce Norris is the special guest again this week. He is interviewed by Aaron Norris, his son and Vice President of the Norris Group. Bruce is the president and founder of the Norris Group and has been a real estate investor since 1980. During this time he has been involved in over 2,000 transactions. As an investor, builder, and/or hard money partner he is best known for his long-term market timing reports including The California Comeback 1997 and The California Crash 2006.

In the last session Bruce and Aaron talked a lot about California Comeback 2 as well as what they are currently working on. Aaron said they are still two weeks away from it even going to print, so Aaron wondered if Bruce was still doing research. Bruce said he is since he saw the stock market was down 200 points on the backs of poor employment and the Fed decisions. During the week there was some unhappiness about the Fed possibly stepping in and doing less buying of the mortgages. At the same time we do not have any new employment, and that is the conundrum for them. They are going to make a national decision to not have a double-dip recession by continuing the low interest trends. California will say this is fantastic.

Aaron wondered who some of the naysayers are who are still expecting a poor comeback for real estate. Bruce said Shiller from the Case-Shiller Index expects a flat market for ten years, which is not uncommon. He owns two houses, but he does not own them with any expectation of them going up. Bruce never feels arrogant about the conclusions and feels like there are much more intelligent people than him who have disagreed with him and been incorrect. You do not celebrate this, but rather you ask what you are seeing that they are not. He thinks the only thing it really comes down to and is important when you start talking about transactions. Bruce looks at a chart, and it is alive to him. He remembers 1995, 1989, what he did, and paying for what he did. This is part of the moodometer. He can look at this and feel the mood of getting it wrong.

Bruce remembers when he first talked with Michael Carney about prices doubling. He mentioned how if they look at a foreclosure chart, Bruce will see something in it that he does not. It is okay because he is collecting the data but is not in the industry. If we have refinement and better conclusions, it is probably because we also have a history of what we have said coming out true. If it is not true and you are a researcher, then you go back and not pretend it was wrong but instead see if yours and another’s thought process was incorrect and change it. This is what you have to be honest and do. When prices did not end when people thought they would, they got some heat for this. There was a whole year of $500-$600 they did not think would happen, but then they did not even know what a collateralized debt obligation was. They had no idea people were financing things, and it turned out they did not even know what a debt obligation was either. You can then go back and at least see why something occurred.

There are some things you can point to and say you are not going to change your thesis because something was nonsense. This is one of the things they have had to do in the conclusion chapter. He is forced to not go to the peak price we have reached. To extrapolate the future, he has to go backwards. We cannot go to the peak price since that was nonsense. The question asked was if they could go down to 11% affordability, to which the response was they could if they play with it. They are probably not going to play with it, so we have to go back to a historical number and play with where our price goes from there. Literally, the ending chapter of his new book will have what they have done before but only in California, and now they are breaking it down per area where the stopping payment will be. This is something they have never done.

They have come up with the affordability number, but he thinks this time it will end on a payment ratio. You could say in Riverside County it will be one particular payment; so if it was one price in ’89 and produced a certain payment at the end, then this time we will extrapolate it all in payments to where you can feel comfortable making a decision. Bruce has not even looked at this yet, so it may be that the payment ends earlier in coastal areas. We did see a progression of money going from the coast, so maybe this is what we will do as investors. We may get the gains out of high-dollar areas and keep moving it. Rosamond did not even pencil until 2004, so it makes sense to him. He has not seen this statistically, but he thinks this is where it may go. When you are maxed out in one area, your historical payment looks like it is over. However, it may not be over somewhere else. Lancaster and Palmdale still has a price per month that is around 1990’s price per month.

Aaron said they have not gotten any debate invitations yet, but if there was a debate it would be a lot more fun than the debates in 2005 and 2006. He remembers being in the audience and being so upset about how Bruce was treated on stage. People were flat out snarky. Bruce said the fun part about it was there was somebody in the audience who is now an investor of the Norris Group. When he came in, he said something to the effect of being worth $75 million when he heard Bruce and is now worth $25 million. This felt good for Bruce because that audience of builders was not in the mood to hear this. When you make decisions based on how you feel, you are always going to be late. When you are booming in 2005 and 2006 and are a builder, the problem with being a builder is you really have lead time for your product.

If you think 2005 and 2006 are happy, you have to think that 2009 is going to be the same. Whatever you are buying today is not going to produce a house until then. This is a flaw and the same flaw they have now. They are not creating sub-divisions because they do not feel happy right now, so they are not going to start something that is going to come out of the ground until 2016. Bruce said he would not take this risk. Maybe they are smarter than he thinks and are not going to take the risk. He cannot imagine them not creating building lots, but when he saw the first quarter of 2013 he really thought it would be different. He thought it would be a year’s worth of 2012 and that the numbers would be 25, not 4. He thought we would get a pace of at least 100 this year, not 350. He thought the people are really skeptical. This is really the only way you can describe it since they have not signed up and do not have a backlog of new homes or available lots.

The way homes are handled is different than it was during the boom. They take your order first and a down payment before they even start building. You order first and then they build. They are not building a whole lot of models hoping to sell. Bruce said one of his family members just went shopping for a home, and someone in sales said four months ago there was still no excitement. Now, things are crazy and they are raising house prices every four houses. Just one company is raising the price every four sales. Somewhere down the road, one of the people who attended the Saturday seminar was a sales person and a material buyer for the company. He said what is happening now is the land cost is escalating. When they start figuring out their lot costs, they are now going back to their suppliers and trying to buy everything cheaper in order to make up for the difference. This will be an interesting problem since usually when building gets busier, the price of everything goes up instead of down.

Aaron has seen articles saying they are having a hard time finding labor too. We have not had to build anything for a while, and the labor migrates out or does not come at all. What is interesting about the California comeback is you are going to end up with migration from here. One of the chapters revisits everything we ever did with UHaul. They compare it with the years when there was a downturn and at the end of the boom, and they price out the UHaul going both directions to see where we are at now. When California does have a construction boom, we get migration from foreign people and other states.

Aaron said one of the chapters he liked in the presentation All in or Fold was the chapter about people migrating. It said if they do not come back soon enough, they might plan enough routes to where they never come back. What if this boom is not long enough to cement people in California where they have a good experience to where they want to plant routes and are gone again? The new report is covering 24 months about which he feels very positive. He does not see how it would end negatively inside of the 24 months, but he wants to set the guidelines for the numbers that tell you where it ends. He really hopes it does not come to this because he is tired of this happening in real estate. When he speaks in front of clubs and he has positive projections, Aaron gets so many comments from people about how Bruce seems so happy. He tells them it is because he likes what he is talking about to them. When you are talking about two days of the California Crash, it is hard to keep talking about it.

Aaron and Bruce discuss the hard money loan program, the 8-year program they came out with in 2009. At this time people thought they were crazy, and some of the research reports Bruce does plays into that. Aaron asked Bruce why he chose 8 years, to which Bruce said he thought it would be more than enough for them to have an exit. He did not expect someone to have to refi, he just wanted to give them plenty of time to sell at the peak. Aaron said he has not seen any hard money lenders who have been able to recreate the 8-year term. Craig Hill trusts the performance of the borrowers, and they pay on time. Bruce went back to present to Fannie Mae, and he had the green ball of all currents and they were blown away. His portfolio is at 9.9%, and everyone is current.

They were loaning to investors, not speculators, which is a big difference. The people who bought it in 2009 and 2010 and locked in the earliest bottom prices are going to be so happy. You also have to think about the trust deed investor who has a 9% yield going for 8 years. They probably started at 60% of value, and now they are probably at 40%. It has gotten even more boring, and your chance of taking a loss on this is ridiculously non-existent. Now we are starting to do building programs, which has just started ramping up and they have gotten a lot of interest in the last three months. These are people who have bought lots below what it cost to put into it.

You also have the lending world who is not in the mood to do that loan. The private money world can react, and more appropriately and quickly to what the market is telling us. This is a side benefit of figuring things out in the future in that we can look at the loan business and say we need to adjust to a different product type. Bruce said the reason they do not have competitors is that you normally do not get to ask private party money people to take on an 8-year loan. This is completely the trust that has been in place. As a trust deed investor, Bruce has a lot of the 8-year loans. He does not have to get paid off every 6 months. It is the most boring part of his portfolio of things that he has that creates cash flow. No one calls him; there is no fix-it. He got a $500 bill a couple days ago on a rental, but he never gets one on a trust deed.

Aaron said Bruce does not really have to deal with tenants and toilets. Even though he grew up with Bruce in real estate, he really did not pay attention until he started working for the Norris Group. It has been interesting to see the progression of the customer life cycles. Sometimes you have been helping people start way back in the late 1990s, and as they progress they move into the trust deeds. It has been really interesting to watch this the last couple years.

Aaron talked to Craig Hill of the Norris Group, and Craig said that about 40% of the loans come from private sellers, 40% from short sales, and the remaining is a mix of probate REO and new build. It will be really interesting to see how this progresses in just the next twelve months. One of the chapters they are going to have in the new report includes data given by Sean O’Toole. The chapter will look at the equity position and how it has changed from a year ago. Short sales will continue as long as there are people upside-down. When you have price aggression like we are going to have, it is not going to be long. Some of the rules we have such as tax law changes and not taxing debt forgiveness are national policies that will probably not be necessary in California after 2013. Even if they pulled the plug in California, it would not be a big deal.

One of the main questions Aaron and Diana Barlet take a lot is if you had to start completely over with no money, where would you start in this market? Bruce said he would start with Subject 2, go to Craigslist, run an ad, and talk to people who wanted to walk away. He would then take over their position, get an option to buy some dirt, find someone he can flip to, and aggressively pursue responses from signs and mailers. This was literally how he started. He did not have any money to buy properties, he found. This is one of the important messages that people do not always understand. This is why Bruce uses the phrase “the simplest cotta.” Sometimes we spend an entire class doing the simplest cotta that you learned four years ago. You wonder why they are doing this, and then you see your sensei do it and see that it is a lot different than what you learned earlier.

The whole idea is that you are going to have expertise after a certain amount of years, but Bruce bought a lot of properties with no expertise and did not really want it bad enough to embarrass himself. There are two sides to this. You cannot wait until you are an expert, but you can bust your fannie (no pun intended) and get a lot of results. During the first three months of his buying career when he accumulated three years of money so fast, it really taught him that you really do not have to know very much. You have to bring what you have and be willing to try really hard. This is one of these markets where you are rewarded for trying something. You really get bailed out of mistakes you might make on appraisals and repairs. This year is 2004 and 2005 revisited in that there is a very strong upside.

At the beginning of June Bruce taught his seminar How to Make a Million Dollars in 24 Month, and Aaron said he really likes it when Bruce talks about bringing currently know and have into the business. In this market especially, Aaron likes watching Mike Cantu, Tony Alvarez, Bill Tan, and Bruce give advice on all their different areas of expertise while all showing their own unique personalities. One of the great things about the business of real estate is you can really come from anywhere and make it happen. We all can get out hustle by somebody who wants it bad enough. Bruce has had those conversations where you would have an agent you have dealt with before and have not heard from in a while. You call them and say you have not done anything for a while, and they tell you they got a call from someone else. It was like some hustler stepped in, and it makes you suspicious. You thought it was on automatic pilot, but it was not.

For this year’s I Survived Real Estate, Aaron has already heard back from Fannie Mae who told him that Doug Duncan cannot come as of now. However, he is on the radar and wants to be part of the panel if something changes. For people who do not know about the event, it is October 18th. At this event, they bring in thought leaders from all over the real estate industry to talk about regulation, legislation, solutions, and trends. It has been really fun over the years, and it is such a different conversation since you are getting things from different sectors. This year so far, we have gotten a few panelists returning for the first time in a couple years. This includes Debra Still, who was there in 2011 and is currently the chair of the Mortgage Bankers Association.

From their experience, having people coming out and testifying in front of Congress and really being in it that year makes it fun to have them come out again since they are a lot more candid. Leslie Appleton-Young, the Chief Economist for the California Association of Realtors, is also returning. Also on the panel is Christopher Thornberg, who is always a favorite. Round out the panel are Sean O’Toole, with Property Radar (formerly ForeclosureRadar) and John Burns from John Burns Real Estate Consulting. John Burns now has experience with both builders and hedge funds and does consulting. Bruce knows that John has been very positive about the market, and it would be very interesting to see what his take is on how far behind builders are. He just cannot look at the subdivisions and know what all they need. He is probably having trouble with people listening to him.

Aaron asked Bruce what he will most likely talk about at I Survived Real Estate. Bruce said that because it is near the end of the year, you still have Dodd-Frank that needs to get finalized. This is why he thinks what Debra Still has to say will be very interesting. Sean, with his knowledge of foreclosures, can really see if there are any trends and if there is shadow inventory. Christopher Thornberg will be there, and he is very knowledgeable on the economy and disagrees with some of the policies we have in place, including Prop 13. This year the money will go towards Make a Wish and St. Jude again. Last year $70 grand was raised, so we will see if we can up that a little this year. Aaron said this is one of his favorite events of the year, and usually about 450 people attend. They broadcast it live, and the Norris Group is currently working on the event as we speak.

Their plate is full this summer, although Bruce said he did not know we would be starting the year writing California Comeback 2. It became obvious to him when he saw what was happening in the market that he should be writing it. Next year they may have to change the title of I Survived Real Estate, but it has been such a treat for them to do over the years.

Sometimes Aaron gets asked about family. Bruce has never pushed any of his children into real estate, and he has been very hands off unless it was something about which they were passionate. However, he never pushed it onto them. Bruce said oddly enough, both his sons Aaron and Greg brought expertise to the company that he did not have. An opportunity opened up for Aaron, although it did not seem like it was very enjoyable at times. At first Bruce thought maybe it wasn’t for Aaron, but he had no idea that he knew what he knew and was learning a lot on the job. All of a sudden, their documents went from ho-hum to “Oh my goodness!” This was a lot of fun, and Greg is like Aaron in the sense where they both work hard all the time and learn on their own. Bruce has enjoyed every moment, but he did not push it on them because he did not see any reason to and wanted them to do their own thing. People are shocked when they hear Aaron moved from being an artist in New York to real estate in California. It is far from the truth to say Bruce has done a lot for his children, but rather they have done a lot for the company and have gotten them to levels they would not be at otherwise.

The industry is also getting to see a document in a way that no one else produces, not even Academia. Aaron actually used The California Crash to get into the MBA program. This was the document he presented at the school. Bruce remembered the first person who opened this document in the seminar was shocked by it. Even Aaron said it was a fun document to present.

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

Tags: Aaron Norris, All in or Fold, bruce norris, California Comeback, California Crash, Case-Shiller index, hard money, i survived real estate, investor, lender, private money, the norris group, The Norris Group Real Estate Radio Show
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Aaron and Bruce Norris of The Norris Group on the Real Estate Radio Show #333

Friday, June 7th, 2013

Aaron Norris,
Marketing Director of The Norris Group

(Full Bio)

Bruce Norris,
Realtor, Investor, Hard Money Lender, Educator

(Full Bio)

In a reversal this week, Bruce Norris is the special guest this week. He is interviewed by Aaron Norris, his son and Vice President of the Norris Group. Bruce is the president and founder of the Norris Group and has been a real estate investor since 1980. During this time he has been involved in over 2,000 transactions. As an investor, builder, and/or hard money partner he is best known for his long-term market timing reports including The California Comeback 1997, The California Crash 2006, and he is the moderator for I Survived Real Estate. This is their award-winning show that has produced almost $350,000 since its inception in 2008.

Aaron said Bruce saved him a lot of money in the last decade. Aaron moved back from New York City in 2004, and Bruce told him to not buy anything. After he got out of debt and saved up his money for several years, he bought in 2011 at the bottom of the market in his neighborhood. He refinanced in late 2012, and it has gone up almost $100,000. Even when he was in New York Bruce snagged a property for him and held it for a while. He sold close to the peak, so Aaron came back with a chunk. He bought the house in 2011 for about half of what it was going for, and it was a new house they finished building in 2005. Bruce has done the same for a few people in the office. The scary part is imagining people having to make decisions based only on what you say.

Aaron asked if the current market feels like any of the other markets Bruce has experienced since he became a real estate investor. Bruce said it has not gotten here the same way, but it does feel like a full-blown comeback in the sense of the aggression of the price moves. This market has started this way rather than being ramped up to that point. Normally they ramp up, and there is a ramp-up period of statistics, job improvement, migration improvement, attitude adjustment. Everything goes in unison and dances along, then you have an explosion where we are all happy and all the news articles are positive. We have gone from 0 to 100 miles an hour, and it took six months. Aaron’s house went up $100 grand, which is a big percentage jump. A press release went out in December where Bruce predicted the 20% increase in the California median price. They got a little bit of flak for that online since people thought he was crazy, but it is also coming true much more quickly than people thought. Bruce was being conservative at the time, but it is interesting how quickly it has been happening.

The nice thing about looking at the charts they have is seeing how it stems from their own experience in the market. Bruce’s son Greg will sit down with him and show him what is happening in the market, and then they will buy a property and think they will have to buy it close to too high of a price. They think they will sell it in 4-6 months, and they end up selling it as is in 22 days and it ending up all cash. Bruce asked why this was happening, so they almost had to re-engineer and go backwards to see why it was happening. This was what was different. They normally had a sequence to a comeback that they breeched because of policies. This did not make it any less profitable; it only made it a surprise.

Aaron did some research before the show and looked at the timing reports Bruce had done since 1997. Right now he is currently working on his latest report California Comeback 2: Fast, Furious, and Dangerous. In 1997, Bruce wrote his first report at a time when everybody hated real estate. Aaron asked Bruce to share his story about how he got a platform to give this presentation. Bruce said one important person to him making this happen was Michael Carney at Cal Poly Pomona. He had his own real estate construction report, which had been around for literally decades. Bruce was doing all his research in college libraries, and he went to a company where you could have a hand-held printed copy of an appraisal. In an area were several reports from Michael’s company. At this time he had never met Dr. Carney yet, but he was able to access all his reports; and they were not only statistics but stories as well. He began reading them, and it was fantastic because it was like a history of California. He would read about what occurred in the ‘70s, and he realized the Japanese, for example, were just given permission to buy California real estate at this time. In essence, this was like inviting the hedge funds. This was extra demand and an impetus to price.

All these things played a role, but the original idea really came from the week that Aaron graduated. He bought him a car that cost $15.7 and a house two days later for $13.3. This was in 1995, and they had come up a market in 1989 that felt just like ’05. You could not do anything wrong, prices would always increase, and people were talking about a shortage of land. It is always the same story until it is not anymore. You go through that emotional high of 1989, and you get to the emotional basement at the end of 1996. The trick is if you are going to write a report that is of value, you must ignore the emotion, look at the statistics, and say we are now inevitably going the other direction.

The valuable part is calling it in advance. Bruce was glad they were saying things, although they did not get to produce a California Comeback document until they July. However, they have said things such as “real estate all in.” However, he was not saying it was going to move rapidly in price, but he did think it was a valid investment vehicle. Now that they have had price aggression, what is interesting is that when you a ’96, you have an emotional bottom and it does not feel like a good decision. It was just like how getting off in ’06 felt like an emotionally bad decision. You were having so much fun and almost did not want it to end, and you want to get just one more $100 grand out of it.

The danger is to let it all go back, and this is what happened to so many people. It took six months too long, and all of a sudden you were not going to sell when prices were declining rapidly. The replay of that is possible this time, and this is why the Comeback document really contains an exit strategy. Bruce does not think we will have time to write the exit strategy, but we are going to go up so fast to get mathematically done. The second interest rates change, this will be a big game shift. Bruce thinks we should really withhold that final chapter until the last hour of the day. Aaron warns people as they are marketing the report that it is for chart nerds only since there are some people who only want the end chapter and don’t care about the rest of his research. However, Bruce strategically gives them all the charts and sources, how he came to the conclusions, and then tells them to try to challenge what he has come up with in his research.

In the document being produced, the only chapter he does not have is the conclusion chapter because he has not seen all of the charts in one place. He cannot draw the conclusions until he looks at all the data. He has a good idea because he has done all the studies of the chapters. He thinks what makes the report special is that, first, there is no agenda. He is not trying to get somebody to do something because he tells them to do it and it is what he is doing. He likes sharing the methodology to where people can see how he does things step by step. Things have changed over time; and the things he thought were absolutely true can be trumped by policy. Aaron said it has been amazing how much has occurred and is still happening. This is why it is going to be interesting to see how much policy in place, Dodd-Frank that still has not been fully implemented, and the California Homeowner Bill of Rights. It is just layers.

The question then is how you know what will come next. Bruce said the uncertainty plays a role in people’s hesitation. Everybody’s opinion is that everything is coming back, and then you look at the number of subdivisions created in the first quarter. In Riverside in 2013, it was only 5. Normally what would be created would be 60, sometimes even 75-90. You are talking about making 5% of the subdivisions in a market where everyone is euphoric except for the people who have to take long-term risks. This is because of uncertainty. Is there going to be a Fannie, Freddie, an interest rate hike, will the Fed still participate, or will we have 20% down payments. There are still so many unknowns, but the bottom line is that when you buy a house right now you are locking in an interest rate that is at a ridiculous number, even going up a certain percentage.

You are seeing the public saying that it makes sense if they can only get something. Aaron said he is surprised the rhetoric has not changed yet since you have a lot of buyers who are completely pushed out because they cannot afford to compete with hedge funds and investors who can do all-cash or investors who have cash on hand. This is why some of the subprime programs existed in the beginning. Aaron is just surprised that the California Association of Realtors and the Center for Responsible Lending that they have pushed so hard onto the other side that you wonder what is going to be available for people in the lower income categories to even get into the market. Bruce, being a free market Republican, still says this is one case that feels like an IPO where the insiders get something for one price while the people on the outside get it for another. Bruce feels sorry for the person who is 21 years old, has to get an FHA loan, fights to get a property, and is paying $50 grand more now than he would have 5 months ago since he did not get an offer accepted.

There are many people making decisions. We have made decisions not to sell to the hedge funds. This takes private people saying they want some owner-occupant to buy the house. An article came out last week about the Carrington hedge funds exiting the market. They are managing 5,000 properties for Fannie, Freddie, Citi Bank, and all these properties are being turned into rentals. He wonders what the government is going to do with these, whether they will start releasing them or not. Aaron wondered if there was a deadline put on them, to which Bruce replied he does not think so.

However, in talking to Rick Sharga he thinks it is some years down the road and they really wanted to have that government pile of properties not be competition for the private sector. What then happened was we just have no inventory. In a way, it has been a very smart move since they are not going to lose a lot of money on those properties. As prices increase, they are going to have a lot less problem loans since the people who are upside down will have equity. Whoever thought of this and if it is really how they planned it, then it has been pretty genius. It has happened in unison with the buyers coming off the sidelines who were foreclosed on in 2008 and 2009. He doubts that they calculated the historic number of people they foreclosed on back then coming back and wanting back in. It was not genius foreclosing on so many people since that really set up the downturn. Now, you have the boomerang of those people being excess buyers on top of really strong demand anyway.

It will be really interesting to see if they decide to pull out and use the other hedge funds to follow suit. Bruce thinks if we put it in perspective, what is really important is that you have other groups who have shown up before who make up a certain percentage of the market. Sean O’Toole wrote a report that concentrates on hedge funds. They talked about where they bought, what price range they bought, how many they bought. All of a sudden you can put this in perspective and say you will move 420,000 properties in California of which they might buy 5%. You look and see that the number is not so humongous and think they may not have the same game plan or exit at the same time. Even if they did, Bruce is not impressed with their timing model.

Bruce was buying back in 2008 and 2009, and they bought in 2011 and 2012. He paid a lot less than they did since he was intending to hold. Bruce was not sure their exit plan was any better than their entrance plan. The company like Carrington decided to leave because the cap rate probably does not work to rent it and they just missed one of the greatest comebacks as far as upside price, and it is going to happen fairly quickly. At the end of the day, if they wanted a deal it would have been on the upside in price. However, they probably could not look at the model and say it cash flows. This is why he has never had them as a participant.

Aaron said it will be interesting to see the people coming out from underwater and how they feel about what they own. Will they stay put and be happy, or will they be eager to get out. Bruce thinks they have been through a lot of grief, and he does not know if you will be able to sell your property and replace it right away. He does not know if you will be able to net it enough to have enough of a down payment. He also does not know if they will want to go from owning to renting. If you stuck it out all the way through the downturn, then why would you become a renter if you have been current all this time? Logically it does not make sense and looks like things are going to be fun again. You can see them maybe wanting to sell and getting to another location, but they want to own again and have to wait until they have the down payment. This would make more sense.

Aaron said the timing report is around 250 pages and over 400 charts. In the back end they allow people to access all the reports. However, what does not make it into the report is even more interesting. The question is what the process is and how you decide what goes in and how much gets left out. You do have to make the cut, and what Bruce literally does is takes the table of contents for all past reports. He could cover up to 45 t0 50 topics. In a day alone he probably has 20, and other days he has covered two days. The California Crash was a very important document because he had to figure out the ending. The research papers show he does not have an agenda and use something that has a really cool title. Instead, he looks at the document and all the data and sees what is appropriate. Now that they have twenty chapters in a day and have a very educated audience, they know a lot of the process and has the other documents.

On top of each chapter is the question of why a particular chapter would be making the cut. This is important since this time there are now some chapters that are new and discuss the Fed. When you look at the Fed, they are going to be very instrumental in how this ends and whether it will end nicely or ugly. The odd thing is they have an agenda that is very different from California real estate. They have a national agenda, and the jobs reports have been disappointing. Our unemployment rate has gone down, and the only reason for this is people have become non-looking participants and have given up. They do not have a job, and they are still on unemployment food stamps.

Bruce had to look all the way back to 1970 where the Fed was very involved and look at the volatility of their changes from 1970 all the way to the present. He then divided this up into how many times a year they could change interest rates. When he taught, Bruce asked how many people had been in the business before 2007. It was not a large percentage and was around half and half. If you look up how many times the Fed could change interest rates a year and go back from recent experience, you see that they never change. You then find out they can change it 21 times. This is when you get shocked.

When Bruce and Sean O’Toole went to Washington D.C. to do research on interest rates and found out we were at the lowest interest rates in our life, to Bruce this meant a progression back to normal would be faster than any pace we have seen in our life. When the Fed decides to move, it is not going to be by an 1/8th of a point. Your mortgage rate could go from three to five in lightning speed. What is amazing in some markets is that you are still going to be paying less than rent. With the last chapter, we will literally play with the math and say that if we get to a median price where it is a little over $400, and we get to $500 grand and start handing it a 5% mortgage rate instead of 3 ½, you will bring about the end of the price rise more quickly and it will be safer.

His fear is you not doing it since nationally it does not look like you can raise interest rates yet and you still have to buy the paper you are buying to keep interest rates artificially down. Things do not get better nationally until California has a ridiculous median price on the backs of the interest rate. The problem is then really bad since we are isolated and have probably blown up in price. National policy will then do whatever it has to do while we sit here. Bruce agrees that it is a lot of fun, and we will ride it up until the point where we see that everything beyond this is mathematically all baloney. If it goes up anymore, he really does not want to participate and it feels like we are rolling the dice instead of investing. With all the proof sets we have, he feels like we can look at a number of different categories. Even these we have refined more and added new ones. This thing has always evolved, and he has always been surprised at the ending himself where he looks and says he would not have seen that happening. This adds another proof to it where you feel real comfortable.

The biggest thing about it is that it has such a long history and has availed so much information. Michael Carney has allowed Bruce to go into his archives that go all the way back to the 60s, and he has one copy of something he lets Bruce see. Bruce has been very privileged to look at everything Michael has and be able to put the history together. Now, there is 43 years of data; and what it boils down to is you taking a price chart. Whatever your assumption is, you can lay it next to the chart. If you think interest rates dictate price, then put the median price attached to that interest rate and see how much of a shock it is. The problem is that it is not a standalone answer.

You cannot say that interest rates went up and prices went up, so when interest rates go up prices increase. This is not always true, and neither is it the case with interest rates always decreasing. You then have to realize that interest rates are important in the way they affect another chart. You then see that affordability is really an important chart unless lending policies trumpet and let people go in buying who should not. The number that should have ended the run in price did not, and we went up 25% more from $500 to $600 on the backs of lending policies that have never existed. You then see that the way to make a comeback is employment, unless you pretend there is nothing for sale. Now your policies are saying to sell Fannie and Freddie, make partnership deals with loan approvals; and all of a sudden what should have been for sale is not. This is the hardest thing about predicting now in that it is intertwined in the next government policy.

Aaron asked if they were doing the moodometer again this year. Bruce said absolutely since the moodometer is not just statistics, but rather we count on people doing the same thing over and over again. Everybody does it, including the news media. One of the chapters is titled The Media Gets an Assist. This is based off the basketball term where players feed the ball. In this case, the ball is fed to the public, and you go from ominous pictures of homes floating underwater to 2005 where the house is being hugged. These are all emotional things and all play to your head as being a very comfortable thing. This is what the media does. They join the price aggression with more aggressive happy pictures. When this happens, people get off the dime and buy something. The volume of sales right now is down as far as it is. It is okay, but there is nothing for sale. We are getting price increases, but we could go up in volume a lot more. He is not worried about the hedge funds leaving since they will when it is mathematically not good for them. They will then be replaced with other people.

The only place it could really come out would be with the equity seller, and this person will be an equity buyer 85% of the time. You would have a temporary rise, and then they would buy another one.

Tune in next week as Aaron continues his discussion with Bruce Norris.

Tags: Aaron Norris, bruce norris, California Comeback, California Crash, equity seller, Federal Reserve, interest rates, investor, lender, SEAN OTOOLE, the norris group, The Norris Group Real Estate Radio Show
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Mike Novak-Smith Joins Bruce Norris on the Real Estate Radio Show #332

Friday, May 31st, 2013

Appraiser and Investor

(Full Bio)

Bruce Norris is joined again this week by Mike Novak-Smith. Mike is with REMAX Results and is in the top 1% of agents nationwide. He is an expert in the disposition of REO, short sales, bankruptcies, asset management, and negotiation.

Dealing with REOs almost forced a learning curve in all the areas that Bruce and Mike discussed. You have to become an expert in dealing with bankruptcies and asset management negotiation. Bruce asked if this time around the owners’ expectations is different than it was in the 90s. Bruce wondered if the occupants foreclosed on were more difficult to get out and if their expectations were higher than they should have been. Mike thinks it was back in the 90s that people took it much harder than they do now. Most everybody in the 90s actually had to qualify to receive the loans. There was no easy loan or pay option ARMs. There was nothing that happened in the last go-around that had a lot of people who just were not qualified to own homes. Everybody qualified at one point; and he does think that emotionally people had much more difficulty than they have now. Today there is more of a mentality that people are owed something and entitled to something.

Bruce said it almost seems like there is a class being taught at night because it seems that everybody knows what is going on and everyone’s mentality. Bruce said at one of his events five years ago is that when you have a society where people feel that they do not have to pay what they owe, you have a problem. Mike never forgot this statement because that is the way it is. We do have a problem, and they get by with it. In the old days Fannie Mae used to get accused of dragging their feet on foreclosure since it took them nine-ten months. By 1998 they had bragging rights since they were down to five months. Today, they brag that they do not foreclose, so the game has changed.

Bruce said when people are being offered cash for keys. Bruce wondered if this has accelerated over time and what the amount is somebody usually receives for exiting a property. Mike said it was common in the 90s. If you look at Countrywide, they paid nothing to an owner-occupant. If it was a tenant, it was a big deal if you got up to $1,000. The average amount was $300-$400. World Savings also went high on the cash for keys and paid around $1,000. Mike did one recently around $10,000, and they usually get a lot of these. It is very common to receive around $3-$4,000.

Bruce asked about short sales and if people are getting money to cooperate for them. Mike said they are. His office does quite a few short sales; and it is quite common to get around $5-$10,000 for doing them. Mike heard some of the major banks pay up to $30,000. A lot of the short sales have become much easier. If the numbers are anywhere close, they get approved and they pay people to do them. One problem real estate agents have is that when you go into a listing appointment and they tell you they have not made a payment 3 years. It is kind of hard to get them to want to sell the house, whether they receive the money or not, because now they are going to have to start making payments. This is a sales challenge that they have, but offers nowadays for doing short sales are fairly generous.

Of the MLS inventory, Bruce wondered what percentage are short sales. Mike said today it is at about 35-40%. At some point this turns to 0, and Bruce wondered if we are a long way from this happening. Mike thinks we are because loan mods, refis, and principal reductions are happening at a great rate. However, he thinks many of these people are going to be back in the trouble category within a short time period. If you took everybody’s home loan today with everybody paid in full and not owed anything, if the real estate industry started doing refis and loaning money within three years you would have REOs again.

Mike thinks there are a certain number of people who will go into foreclosure. What he thinks is interesting is that banks are getting to where they are fulfilling some of their obligations under the settlement with the government where they have to help the borrowers with short sales, loan mods, and principal reductions. Once they have passed that point where they have done what they legally had to do, it will be interesting to see what happens. The problem nowadays is people have expectations. Somebody who has waited for three years has seen everything get more generous over time. If they are still waiting and the generosity suddenly goes to 0, people are definitely going to be screaming about that. Mike thinks there are going to be some surprises coming up. He thinks a lot of the loan mods will fail, and in the end people will end up losing the house.

Bruce asked what percentage of the short sellers are actually current on their mortgages. Mike said most of them are not. His opinion on this has always been that once people decide they are not going to live in the house anymore, have given up on the idea, and quit making their payments has been the general attitude among owners. The first short sale he ever did was 23 years ago, and it has been this way ever since. Once they have the mindset that they are done with the house, then they do not want to pay for it.

There are times in people’s career in California that you go ten years and would not even know the definition of a short sale. We probably will not forget it now, but that was really true. Mike thinks a lot of the agents who got into the business from 1999-2007 got a really big shock. They learned a whole new definition real estate, REOs, and short sales. It was quite a shock for all of them. It is hard to make a living if all you have known is that everything you touched sold quickly and went up for people who bought it from them. Mike said after the first go-around when he used to do a lot of evictions with real estate agents and people in the business, it really taught him to be much more conservative in his finances.

The best financial lesson Mike ever learned was being on the front lines of the foreclosure business. This makes you very conservative with your money and how you invest. It helped him, and he hoped everyone in his position learned their lesson and paid attention. There is nothing like a downturn to teach you things, and it is important to remember. You do not want to make the mistakes 2006 that you did in 1989.

Prices have increased quite a bit. Mike mentioned how he thought the hedge funds were overpaying for some things and wondered if he saw any signs of a bubble. Mike said he has heard from some investors he recently did a deal with that their eviction attorney had an uptick in business because he was having to do a lot of evictions on these hedge fund homes. What they discusses earlier was they were trying to get over market rent, but the ones who will pay this are the ones with bad credit and do not qualify. Time will tell how the hedge fund business will turn out. When he sees people paying $300,000 for a house with roofs and HOA fees on it that rents for $1500 a month, he does not really see how this makes sense. Bruce asked Mike what he thought the house sold for at the peak of the market we were in back in 2006. Mike said it was around $500,000, so maybe it will pencil out for them after they sell it. The hardest thing about this time is that there are so many different twists to this that it is hard to be in the prediction business.

Bruce asked Mike if he is seeing any signs of life in the new home construction business. Mike said they do get a lot of flyers, and he does see brochures and receives a lot of emails about new homes. One thing he finds interesting is that when he drives by lumber companies, he sees rail cars full of lumber in them. He saw one the other day on Highway 74 at the 215, and he saw rail cars being unloaded here. He has paid attention to this for about the last five years, and the most you would see is about two at a time. When you have nine rail cars of lumber, that is a lot of lumber and you can build a lot of houses with this. He has seen this elsewhere, and he does believe the homebuilding is picking up. How much of an impact it has he does not know, but the issue with new homes is there are two different markets. There are many people who will only buy a new car and only buy a new home. There are others who will never buy a new car or buy a new home.

Bruce said they had a surprise recently in Riverside on a new house. It seemed like the price that they paid for the new house was pretty excessive. It was built on a scattered lot, so it was in an area where you could not really comp out the house that was next door and say it was similar. They were in escrow for a price that exceeded what they were asking for and was $150,000 more than the neighborhood. Bruce asked Mike if new homes are getting into the mix usually at a much higher price per square foot. Mike said new homes in a decent market have tended to go for more than the existing homes. However, he has not noticed this trend recently.

Bruce wondered if they are going to build a different size product this time or continue on with the 3-4,000 square footers. Mike said he thinks they are going to build big houses. It is like the car companies who make the most money on the big trucks. This is why they want to sell trucks. In the same way, there is a lot more money in the big houses. It is also expensive creating all the infrastructure and building lots, so you cannot really pile all that cost onto a $200 grand house. When you drive around Rancho Cucamonga, go up as far north as you can, and look at some of the new homes you see how big they are. The new homes will be big just because of the profitability in larger homes.

Bruce asked Mike if he sees lots being created. He said he does not, although he has seen a higher demand for lots. He recently sold one in Victorville; and if you had looked at lots three years ago you would have seen numbers up available. Most of the lots available now out in the desert were pending or recently sold. The market has picked up in vacant land for people who want to build. Bruce wondered what the size of the Victorville lot was and for how much it sold. Mike said it was half-acre and went for $33,000. At the peak of the market last time that was over $100,000. One person Mike knew bought lots for $90,000 and put houses on them. He sold them in the $250 range, so when the market was at its worst the houses on the lot were selling for less than what he paid on the land.

Bruce is amazed that anybody who owns building lots or is creating building lots will build on them the second it pencils. Two years from then they could have gotten $100 to $200,000 more per house. However, they build on them the second it pencils. Mike said this is something that is difficult to time correctly. You wait too long and get over the curve, and you will be sitting on them. Mike was not really sure since this is a hard one to predict.

Bruce asked about the process for qualifying for loans today. He has seen articles that talked about easing going on. Cary Pearce talked on the radio show recently about some of the files he had that were approved that surprised him. He wondered what Mike’s take was on the trend of getting people approved for loans. Mike answered that three years ago, getting a jumbo loan was almost impossible. He thinks the jumbo loans have gotten easier, but the people still must qualify. He thinks it has maybe gotten a little easier, but it is still very difficult. When it is difficult to enforce your contract as it is for the banks, they are going to be very careful with whom they go into contract. Mike thinks this is still the problem, and you can’t blame them. He does believe there are equity lines getting done again, and there are people out doing seconds. However, you have to have a job, you have to have credit, and you have to have money for a down payment. This is not unreasonable, but it is something that businesses were not used to for quite some time.

Bruce wondered if the jumbo loans funded are staying with the lender as portfolio loans. Mike was not sure about this, although he would bet that most of them are portfolio. How much of it they were doing he was not sure, but you can get one now where three years ago you could just forget it. In California, 6-month inventory is considered almost the standard. If you are over this you probably have a problem, and if you are under this you have a healthy market. We probably have about a month and a half of inventory.

Bruce asked Mike if he sees inventory levels returning to anything close to normal in 2013. Mike said he does not see any change and that this year is what it is. He thinks the big problem is that many people in homes today who would try to sell would not qualify to buy their own house back under today’s guidelines. They have made the payments and kept them current, but they would not qualify. If you have someone who lives in Mission Grove or Orange Crest in a $300,000 house who wants to move to Canyon Crest or Orange County to a $5-$600,000 house, he would not be able to do it since he could not get a loan. This is a huge problem since the mid-level buyers are really stuck between a rock and a hard place.

It is almost really important that the investors are participating right now for price support. Mike said you would wonder what would happen if they would flee the market. This is an unknown since it has never happened. The investors are important and have been important, but it really depends on how you define investors. It could mean the traditional people we are used to and who Bruce and Mike are, or the hedge fund type of investors. Bruce thinks if the hedge funds disappeared, their volume would be absorbed by the people who are not being served right now. If you are an FHA buyer, it is really tough to get a house. However, it does not mean the demand for the product or the loan is not there. He thinks it is there in large quantity due to all the foreclosures that occurred three years ago.

Mike agreed and said the demand is there. Last year he had an REO in Moreno Valley that was sold for $90,000 that would be worth around $140,000 today. What he found interesting that he has seen a lot of over the years was a husband and wife who both worked at Jack in the Box and both saved their money to buy a house. It was an American success story in that they were able to pool their money and received the loan and house. Today, they would have 0 chance of doing the same thing. The whole goal is to help the little guy and help the down trodden, but there has been more that has cut out the little guy and they are down trodden out. They have almost no chance to buy anything currently. If somebody called Mike and they were an FHA buyer, he would refer it to one of the buyer agents with whom he deals. He would not even bother with it because he knows that he is going to spend three months trying to find them a house. If you are an agent and are busy, it becomes a time issue and a business decision. The question is how many offers he can write for somebody he knows will be rejected. It has to be tough to be on both sides, both the first-time buyer and the agent who deals with it all.

For a lot of agents, their pool of referral business may be entry-level buyers. The question is where they all are now. The answer is they are in trouble. Bruce wondered if there is any substantial HUD list or VA list like there was in the 90s. Mike said there is not. Those lists used to get pretty long and ugly. However, in the 90s they also did not market very effectively as much as they do now. VA got their act together in the late 90s, and then HUD went online and cleaned things up too. Their backlog back in those days was just poor management of the property. Now they are selling note pools, and a lot of the properties that would have been foreclosed on are probably going that route also.

A lot of them are not foreclosing, or they are giving them a loan mod or principal reduction. This will keep them going for a couple years until they go out and use up what available credit they have to buy new toys and spend more money. They will then be right back to where they were, and this is the thing that needs to be watched. The question now is if the mortgage companies will have the same attitude now and if the government will be on their back to make them give everybody a break. If that were to change, you are going to have a huge foreclosure problem. It is really hard to predict any of what is going to happen.

Bruce said one of the questions we will see will be in regards to unintended consequences. Bruce is a lender, and whenever he talks to people about how easy it will be for them to write off the principal of someone owed money, having dealt with private people he will tell them to put a certain person in a trust deed. He will then ask what the likelihood will be once you cram them down from being owed $100 to getting $60 of her putting money up again for the trust deed. There could be some consequences for the lenders looking at this thinking they had certain rights and finding out they really didn’t. If you watch the mortgage settlement money, Mike saw this past week where several of the large lenders fulfilled their obligations and did what they had to do that was honorable and kept their commitment. A year from now they may think they do not have to do any of this and they better get paid or else. The likelihood of this happening is very high.

Bruce said as far as future decisions go, we have Dodd-Frank that is still to be fully implemented. Bruce wondered if he sees any danger of this coming in 2014. Mike said he was not sure since he had not really kept up with this. When you look at the restrictions on borrowing, they probably have almost implemented the entirety of it. Bruce wondered if they would be playing with the mortgage deduction. Mike does not think they will since he does not believe the mortgage deduction will go anywhere. He could see them possibly cutting the high limit down, but it is so strongly supported by NAR and CAR that he does not see it going away. There is too much downside for any politician to go along with removing it. Bruce also asked if the feelings are the same for Prop 13 in California. Mike said a lot of the politicians would love to get rid of Proposition 13. He could see it possibly going away for the commercial property owners. However, for the residential he just does not see it happening. You have a lot of people in Sacramento, the majority of whom would love to get rid of it and have not yet. He has not seen any bill pursuing this, so he thinks it may be a third rail for politics in California.

The governor is a pretty worldly person. He was in the 70s, and he first fought against Prop 13, and then when it happened he jumped on the band wagon to make sure it was implemented. He knows which battles to fight. Bruce thinks we could end up with more revenue in both the Federal and State in the next few years.

Tags: bruce norris, Dodd-Frank, home construction, loan mods, Mike Novak-Smith, MLS inventory, portfolio loan, Proposition 13, RE/Max Results, reo, short sale, The Norris Group Real Estate Radio Show
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Mike Novak-Smith Joins Bruce Norris on the Real Estate Radio Show #331

Friday, May 24th, 2013

Appraiser and Investor

(Full Bio)

Bruce Norris is joined this week by Mike Novak-Smith. Mike is with REMAX Results and is in the top 1% of agents nationwide. He is an expert in the disposition of REO, short sales, bankruptcies, asset management, and negotiation.

Bruce asked Mike how long he has been in the business. Mike answered that he just made it to 24 years full-time. This puts him about right before the last downturn back in the 90s. In 1989 he had already been in it a couple years before it went south in early 1991. Bruce said it is very unusual that he basically become the largest REO agent, but he did not go through a period of time where REOs dominated before then. Mike could probably see REOs coming this time because he was involved in them in the 90s. To get big in the 90s, you would think you would have to have a prototype before that.

Bruce asked Mike what gave him the idea that this would be the place to look for business. Mike explained that he was working at a Century 21 office, and in those days a 6% commission was very important. It still is, but a lot of times there is a lot more negotiation on commission. In those days there was nothing ever cut, it was just 6%. The Resolution Trust Corporation called to say they paid 5%. Mike, having read a lot, was paying attention to the news and could see real estate starting to slide. He did some quick math and saw if he could take certain deals at 5%, then he could still make his house and car payments. He knew what was going on and was okay doing it, but you really could not give REO away at the time. This was how he got into it. The more you do it, the more you become known for it and can work with it more. You get the referrals you need, although most all the clients he had then are long gone. Since REOs were something you could not give away, then he went with them.

The cycle we just went through started out like gang busters. Bruce wondered when the peak was with Mike’s business as far as REOs. Mike said their peak was about September of 2008. By the time you got to the foreclosures a few months later, we were starting to slow down a little because the governor put a moratorium on them. In 2009 they were still really busy, but it has slowed down a little. Mike went about an 18-month period where every day of the week he received a new REO every day. He would have about 10-12 of them, while other days he would have one. By the end of 2009 it was fairly noticeable that it was slowing down, although they still accomplished a lot.

During the time it slowed down, Bruce wondered if he was more inclined to hear conversation that he needed to stay geared up because they are coming, or if he might as well realize it is going to be a gradual slide to where they just go down to a very small amount. Mike said it is hard to tell everybody that the party is over. He would have clients who were employees of a bank not tell them they were going to be out of a job. Everybody thought the REOs would continue to go on. The data did not take into account the government intervention. It was probably a reasonable assumption to say it, but Mike did maintain overhead longer than he should have. You do not want to end up with a lot of properties and nobody to help you work on them. Mike finally realized with some of them that they do not have the work and have to cut back. The whole business did not want to accept the fact that there is less property.

Regarding the concept of shadow inventory at this point, Bruce asked Mike if he thinks it is a dead issue. Mike said he has never really seen shadow inventory. If you understand the way banks work, once they repossess the property they have to pay the overhead on it, the code liens, and property taxes. Mike thinks there may be shadow inventory where they have not foreclosed on it, but between the loan mods and principal reductions he does not think it really applies. Mike would hear people say that the major banks have 100,000 houses just sitting around that they repossessed. Mike has never seen that, and you really cannot do this. He does think that the ebb and flow to the REO side is controlled. A lot of times some houses sit at six months, and they delay the foreclosure sale on a weekly basis where they can simply foreclose. There is no reason to do this, so there is some kind of control on how many REOs we will have and keep the prices increased. However, Mike does know that they do not sit on inventory they own.

Bruce asked what his chances would be if he was looking to buy an REO tomorrow in Moreno Valley. Mike said his chances would not be very good since there are not very many of them. The minute you put REO on it, you get a lot of offers. Mike’s theory is always to find the best property in the market you are in, no matter who the owner may be. Right now just going out and saying you need to buy an REO is not going to happen. Bruce asked about if you had an FHA buyer as a client how long it would take them to buy a property at full listing price. Mike almost thinks if an FHA buyer is a client, making a business decision is not worth your trouble. He does not even know if you will be paid back for the number of hours you put into your work unless you want to be paid $2 an hour.

Mike has gotten offers where they rehabbed the house for FHA type buyers, and they end up selling it to a cash-buyer anyway. There are a lot of cash buyers out there who are afraid of home repair and contractors, and they are looking for a turn-key product. You do not hear much about this, but it is huge. With few exceptions, Mike thinks the FHA buyer is in a real hurt lock. The VA, FHA, and anybody who is going minimal down right now has a real problem since there are not a lot of products and their chances of getting it is not very good.

Bruce asked how many houses are for sale in Moreno Valley, and how does this correlate with what a normal inventory would be. Mike said the last time he looked there was 93 single-family detached homes available. We have very little inventory, and it is way low. Bruce said he remembers at the peak of ’09 when he pulled up listings in Moreno Valley, and there were 500 that were under $90,000. The highest amount of active listings that Mike ever had was 570. There were other REO agents who had quite a bit also, so this tells you what the inventory ones were. The worst he remembers was one day the inventory being at 1200 properties. Today there is just not much active.

Bruce wondered what he is seeing as far as price movement goes in that market. He said prices are going up because there is not much inventory. Many people are paying far more than they’re worth, and the prices keep increasing. Mike told about a couple in Riverside who looked at the data, and one in particular showed that the house was worth $460. However, since he did not want to look bad with his REO client, he decided to bump it up $30,000. Not only did we get that $30,000 after they were done, but they also received $20 over that. It is even harder trying to arrive at values today and they be accurate. A market will take your tried and true methods of appraisal and evaluation and pump them drastically. A lot of it does not make any sense, and there are a lot of investors out there who get into the auction vitality and pay too much.

It was interesting what Mike said about the appraiser coming in and appraising it at the amount he did. He would have had a hard time finding any comps. One thing Mike did with the appraiser that he does a lot of is he hands them the offers. There is nothing that will support your price more than showing them the market. If you are an appraiser, have twenty offers, and eleven of them are over list price, then it tells you that the house is worth this amount. It is usually because they have a hard time getting the lender to buy it, although this may be starting to change.

One house he looked at was a nice 4,000 square foot house with a pool and a lot of upgrades. One appraiser would feel comfortable pushing the envelope since there were a lot of adjustments that had to be made. Bruce wondered if this was a property that was bought by an owner-occupant, to which Mike replied it was. They bought it, obtained a new loan, and closed it within fourteen days. It was pretty spectacular, but there were no cash offers since the house was over half a million. Your cash offers thin out at about $350,000. You get over $400,000, and you do not see a lot of cash. He has done cash way over this, but it really does thin out.

There are several buyers in the marketplace who are successfully buying properties in Moreno Valley, and Bruce wondered if they are cash buyers. Of these, he wondered how many are investors like himself or hedge fund buyers. Mike answered most are hedge fund buyers, not your local investors. They are people who seem to want to pay anything for the property and are happy to get it regardless of cost. Bruce also asked about the people who are going to live in the property and if they are first-time buyers or people coming off of credit damage who are now able to receive FHA loans. Mike said he has not really dealt with any first-time buyers lately and is not entirely sure. Everyone he has seen has been investor types. He does not think he has even done an FHA deal this year. They have all been cash, investors, and hard money.

The FHA deals just get blown out of the water. He had a house in Fontana earlier in the year where they had 156 offers with $20 grand over list price, and it went cash. A lot of people he did deals with over the years called him to see if he could help. He said if money talks, he does not really know what to tell them and they have to step up to the plate. A lot of times the asset management companies, managers, banks, and anyone who is handling the REO will take less money just to take cash and close it in the month they are in currently. They are more worried about making their goals. If they have to take a cash deal for $5,000 less than a financed offer, they take it. It is really difficult for a first-time buyer. Bruce said he would not want to be starting looking for his first FHA purchase with 3% down or hoping somebody would pay closing cost.

Bruce asked how agents are surviving who do not have a clientele or a base. Mike’s opinion is the majority of the active agents do not make a living at real estate anymore. He would say there is about 200 agents in Riverside and Moreno Valley who make a living at it. A lot of them now are part-time or have dropped out. You can run numbers and see that you cannot live on one deal for six months, which a lot of people are trying to do. For those who have not brought rental property, saved their money, or kept it at an overhead low, they are in trouble.

Bruce asked Mike what his opinion is of the hedge funds being in the marketplace. He said is a little concerned when he sees 93 houses for sale one day, then after he ran the numbers he saw 195 houses for rent. He has never seen this before since it always used to be far more houses for sale than rent. Mike said it seems to him that the hedge fund buyers who are paying anything for property are diminishing the value of having rentals. He is afraid that one day they are just going to bail out of the market. Bruce said one of the things they have to deal with in the upcoming report is that these people are collectively potential market-makers and are raising the prices, lowering the rents, increasing vacancies, and potentially damaging the price by exiting.

With one property in particular, he had a regular seller who sold his property for cash and had multiple offers. He had to go to the property because it was not vacant and clients were still living there. He meets with the contractors for the hedge fund, and he had even offered to fix a roof for about $800. The hedge-fund contractor said he would replace the roof, put in granite countertops, and replace everything. They took a rehab Mike said he could do using high-end legitimate contractors from about $8500, and these guys made it into a $20,000 job. They then paid too much for the house when the end result is people go to rent the houses and rent them for too much money. You will see this in the MLS listings that are for rent. Houses that are worth $1300 are trying to get $2,000.

When you start marketing the house, the tenants are going to come look at it and say it is fabulous. They sign up to rent the house, and within two months they are in default on the rental payments. You can look at it and see that you are trying to collect too much rent on some of these places, and it is not going to pay it. Somebody who has good credit and money is not going to pay 35-40% more than what the house is worth. Somebody is going to look at this and start thinking they may have paid too much for the houses. This is something Mike sees coming.

Another thing he sees is there are many entities who are counting on owning rental properties as being as easy as having a brokerage house fund. In other words, you could take having mutual funds as being pretty passive. You take your quarterly statement, made some money, and are happy without having made any effort. Mike said he sees rental properties being portrayed as this. He knows that owning rental properties is a great business and a good way to make money, but there are hassle factors being discounted. When some of these groups are not looking at their vacancy factor and asking why we paid a lot of money for costs and repairs, they are going to get a little sour on it.

When properties go into escrow with an all-cash buyer, whether a hedge fund or other means, Bruce wondered if Mike had any sense of what percent of the time they fall out. Mike said what happens is there are certain investors who play this game where they are going to pay a price, then come along a week later and try to get a price reduction. Mike warns agents that their deal will fail if they do this, so make sure they like it right now since that is what they are going to get. This does happen, but he sees less of this than he used to since the strategy does not work as well today. If you do not want to buy it, they will just put in the next person. Bruce has a friend in Sacramento who is dealing with hedge funds, and half of his properties fall out at this point since the negotiations after the fact do not work.

Mike said a lot of it depends on what is going on. Mike had a house last year in Redlands where they went to check it, and they saw that the foundation had some problems. The house was built in 1890, so you looked at it and saw that it was something nobody knew about. They had legitimate bids, and the seller said the other party was reasonable and he would split it with them. Nowadays we just come along and don’t like something. You get all the REO paperwork from the seller, and you send it to the buyer’s agent. Before they send it back with the check, they start trying to negotiate it. It is very easy for Mike to send an email to have them cancel on the guys and move on to the next one. When you have 100 offers on each house, it is not too hard to pick the right one eventually. This was more of a problem a year ago for Mike, and he does not see it nowadays much. A lot of people are just happy to get the property.

Bruce wondered if people who are investors hanging onto properties much more than they are selling them right away. Mike said the majority of the strategy today is buy and hold since there is not enough room in them to flip them. Bruce said he is seeing this in the loan business. They have more buy and holds, although they are not doing too bad on flips. They are busy to the point that he never would have believed, and they have people who are finding properties without necessarily dealing with the MLS. They have about 50 loans in play right now, and this is a lot of properties for a market with no inventory. Half of those will be buy and hold since it makes sense to let these things keep going up.

Mike said the companies fixing these rentals in good shape and going for high rent. However, they are probably not going to end up having that work out. Bruce asked Mike if he sees pressure on rents currently with the rents having to go down in order to find people. Mike has rental property, and it is fairly soft. He has properties in Vegas, the region, and in the High Desert. Right now he has not raised anybody’s rent in 2 ½ years. When he runs the data, he really does not see anything to support it. He thinks rents are really going down, not a lot but they are soft. As far as occupancy, they have rentals and have not had trouble keeping people in the properties. Mike does not do his own property management since it is part of the business and does not have the patience. He has property managers, he just does not enjoy it as much. They get on it, it gets done, and he does not have any trouble in this regard. He does not have trouble with people paying the rent since he keeps it reasonable.

Mike does not keep raising it on people, nor does he have payments that he has to make where he has to make a certain amount, and this is what his rent is based on. This is what the hedge funds are doing. They paid a lot of money for a lot of these houses, and they are trying to get the rent that makes the cash flow. Often times rental properties and people who count the investments minimalize the overhead of having a rental. They minimize the management costs and repair factors, and people are misled.

Bruce asked when he was dealing with the RTC in the last round of REOs in the 90s, Bruce wondered if there was any Wall Street effort to dominate them in the market the way it is going on today. Mike said not at all. Some of the PMI companies he used to deal with had a lot of people who invested in the jumbo loans who were in Wall Street companies. They got out of it and all got soured on. The stock market in those was more stable and had a lot more steady rise. People were making money, and he does not know what the fascination is for them to leave the stock market. Bruce’s take on this was that as soon as life returns to normal in the areas they are used to, their money will flee. You get concerned when you see the rents they are trying to get and what they are paying for some of these houses. It gets to a point where the numbers just do not make sense.

Tags: bruce norris, Mike Novak-Smith, reo, The Norris Group Real Estate Radio Show
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Rick Solis Joins Bruce Norris on the Real Estate Radio Show #330

Friday, May 17th, 2013

Appraiser and Investor

(Full Bio)

Bruce Norris is joined this week by Rick Solis. Rick wears a lot of hats. He is an investor, an appraiser, hard money lender, a landlord, and on occasion he puts on his teacher’s hat.

Bruce asked what Rick’s least favorite thing is out of everything that was just mentioned he did. Rick answered that it was being an appraiser, which surprised Bruce. Rick said he does this to pay the bills, but when the other things give off enough cash flow he usually does not do the appraisal. Rick said he stopped doing appraisals from 2004-2008. In the next stretch after things mature, he may be able to exit the appraisal definition and possibly even the landlord definition. Rick said he probably dislikes the landlord duty even more than the appraisal. The appraisals are a challenge, and he used to enjoy them a lot more before 2006.

Bruce asked what has changed and if this change has continued into today. Rick said the main changes are that the lenders are so skittish now that they are back in their 2008/2009 mentality. The requirements for the appraisal are a lot more time-consuming, and it seems that no matter what they get they are never satisfied. Rick used to spend four hours on an appraisal report, give them 3-4 comps, and everybody was satisfied. Now he spends close to 7-8 hours on way more comparables, documentation, and photographs. Despite all this, they are still not excited about it and want more.

Bruce wondered if there was a review process that could trump his appraisal pretty easily. Rick was actually talking with an underwriter about this since he wanted to find out, and she said that on every transaction they do they get an automated appraisal done on the computer. These are similar to what Zillow does, although a little better quality. They get to double-check the appraisals, and if there is too much of a disparity between the computer-generated report and the appraisal report, then they order a review appraisal. A lot of times if the first appraisal going in is not extremely strong with 9 or 12 comps, then a lot of the time the review appraisal will come in low and squash the deal. If the review appraiser comes in low, he must be right. Rick said this is not just the case with the review appraiser, but it is also the lowest appraiser in the transaction who is right. If they have multiple appraisals and a review appraiser, the lowest person wins.

This is not the case with the AVM (automatic appraisals) since these are double-checked. However, with the AVM there are also comparables with which the underwriters will review and question them. This is a huge red flag. Bruce wondered if they are mostly concerned about the possibility of them buying back loans if they go into default. Rick actually asked his underwriter about this also; and what she said was after the loan ends up at its final destination, at various times throughout that transaction they will also pull a computerized AVM appraisal. At any point during that time if there are issues, then it does come back on the original lender and appraiser. She said this is not as big a concern for them right now because property values are increasing. This means the AVMs 2-3 months from now will be higher than the AVMs today. It is not as much of an issue now, but in 2008-2011 it was an issue.

Bruce said he would imagine prices going up is going to start affecting a lender’s relaxing standards. Rick said this was what occurred last time. Bruce said it has also happened every time he is aware of, but this time we almost have the only lenders available are Fannie, Freddie, and FHA. Bruce talked to another gentleman when he was trying to understand the ability for an FHA borrower to be qualified. He has a company that is stricter than some other companies. Even though they work with all FHA loans, they have a source where they go to where that company does loans that others won’t do. This is driven by the fear that they may have to buy back the loan, not that FHA would say no to the loan. It is all about how many of them they are going to have to hold for the duration of the loan. Enough of those buybacks will put a small company out of business. Their credit line is being used up solely on existing loans instead of collecting points.

When you have price increases, it seems like that solves most of our problems. Bruce asked Rick what he is seeing as far as price movement and if it is more uneven than normal. When he is appraising properties in a market before it is moving up, it seems like it floats most boats at the same time. Bruce wondered if this is happening or if things are skewed. Rick does not do a lot of the high-end things, but on the low side it is all moving up and moving up fairly rapidly to even 3% a month. In some areas he is even seeing huge shifts. Moreno Valley just did one, and the closed sales are at 175, and they all closed. Everything in escrow was around $10-$15 grand higher than that, and they all went into escrow relatively quickly. This makes Rick think they are going to close fairly close to the listing price. The few active listings that are available are even way higher than that at $200,000+. He is not even talking about 2,000 square feet anymore, but rather 1300-1500 square feet. The active listings are literally close to 20% higher than the ones that closed in March.

At the last bootcamp where Rick helped out, Bruce happened to pull Moreno Valley $150 and under. In, for example, the thirty-day period there was 90 closings in that price range, there were 130 pending and 12 available listings. This is less than a week’s inventory. Bruce does not know how many of these pending sales are going to close, but when you have 12 available listings then you are going to start moving to the next available price range, $175-$200, pretty easily. The 12 all seem like they are much higher than everything else, and they are just either waiting for the market to catch up to what they want or are waiting for somebody to get so desperate that they are going to pay it. The other thing strange about one done in Moreno Valley was that out of the six comparables, four of them were cash sales all at high end values. It was worth $175, and they were paying $175 in cash.

Bruce asked Rick if he happened to notice which investors were local and which were wearing a hedge fund hat. Rick said he did not, although Bruce thought there would have been some of each. However, Bruce thinks the majority of them are being bought by private people as opposed to hedge funds. Rick worked out some comparables, one in Torrance, the second an individual out of Arizona, and the third a private family out of Temple City. What is the most interesting is that these are all far away and not even local.

When Rick says he is required to have 9-12 comps, Bruce wondered if this is commonly available at this point. Rick said he is actually not required to have this many; but they are only required to have four or five. The nine comps he uses for comparables allow the appraisal goes through the transaction with no issues and nobody comes back to him. There is no review appraiser that is going to put that level of effort into smashing the appraisal or cutting the value. You can usually get by with 6, but if there is any question, it is a top of the market sale, and you are having trouble justifying the transaction, then he will put in a couple additional pending sales. He can then document the ones that went into escrow in a week, the listing prices, how close they are. He will then go the extra mile, which costs an extra hour or two with each transaction to make sure the appraisal does not have any issues down the road. If he does not do this, then there is a good chance the people will come back at him and make him spend the extra hour or two anyway.

Bruce asked Rick if he sees a lot of price movement in Moreno Valley, specifically $200,000 and under, then is this true for Moreno Valley at $400,000. Rick said no, and it seems like $200,000 is the cutoff right now. However, it probably will not be the cutoff by the end of the summer. Bruce said something interesting they run across a lot in the boot camps is that you have a 1500 square foot house selling for $200 grand and a 2200 square foot house selling for $230. All of a sudden, you end up asking how much the extra square footage is worth. It usually comes down to $20-$30 a foot. Rick said he has seen this many times, especially in all of the low income, lower-priced areas. The bigger houses usually price around $230; but if you want an even bigger house that is around 5-6,000 square feet larger, then it may go up $10-$15 grand.

The other possibility is getting the standard home where the more the market is willing to buy in that area, the less you get back. Bruce does not remember this holding true in years where you really had established bull runs. In the years 2003-2005, it seemed the square footage was bonused a lot larger. Rick said this is supposedly true in the years 2003-2005; but in going back to approximately 1989, in most of those years they were either gradually dropping or flat. During those timeframes, square footage is not worth as much. Rick said that during the boom times people are willing to pay a lot more.

Bruce thinks the next price range that will have that experience will be the bigger homes and that investors will move to some of that inventory. It would not be a bad plan to loan up on everything now while you do not have to pay a whole lot extra. You could then get a premium for it 2-3 years from now. The only drawback is that it costs a lot of refloor and repaint it every time a tenant moves out. This is the downside of the bigger properties.

It will be interesting to see what builders end up building this time. The rumor was they were going to build a scaled-down house, but he doubts it. Rick thinks there is a huge demand for things that are below 2,000 square feet from 1200-2,000. He says the land, permit fees, and everything the government adds on is so expensive that they really cannot build a 1400 square foot house and make it work. However, there is huge demand for this if they can. The profit at the end of the day is what they are going to look at and ask why they would build a 1300 square foot house when they can build a 3,000 square-foot house. The lot with all the permits and everything costs the same $150 grand for them, whether it is a large house or small. You can see that this will probably not change if they can sell it.

What it will do is delay the timeframe for them to be able to start it. You cannot pencil these homes, yet as far as construction costs you are only getting $20-$30 a foot or less. For the extra 1500 square feet it is hard to build this. This is kind of a shame since there is a huge demand, especially for the 55+ crowd, for a 1-story house or condo that is less than 1800 square feet. When that type of inventory hits in an area where a lot of that type of borrower wants to live, they go on a huge premium. This is especially true if it is a 1-story condo. This will sometimes sell for $50 grand more than a much larger two-story unit right next door. He especially sees this in Glendora, Upland, Claremont, and other areas where the retirees with no children want to live. They just do not build this anymore since this is a product with a huge demand.

Bruce wondered about the Moreno Valley inventory and where it all was a year ago. Rick said it was 30% lower, possibly even more. He also wondered what would be the equivalent price range in Corona where you are having the explosive movement, and then you top out to where the movement is not so great. Rick said Corona is doing well also, but he does not think prices are escalating as rapidly as Moreno Valley. When he did his last comparable in Corona, it seemed like they were going up closer to 2% a month. Everything in Moreno Valley looked like three. This is on everything lower-end in Corona; he is not talking about a 4-5,000 square foot mansion but rather everything below 2500 square feet.

With the square footage he just mentioned, they recently bought a property at a trustee sale they thought was $400,000 six month ago. They bought it for $325,000, but they had a difficult eviction that was going to take six months. They listed it for $500, and it went pending with two all-cash offers in one day. What’s funny is this is like what a quadrant four bonus is: it is anything that takes more time.

Rick owns a fair amount of properties in the High Desert, mostly Hesperia and some of Victorville. Bruce wondered if any of the hedge fund activity affecting his ability to collect rent as far as higher rents go. Rick said they have not been able to raise rents since they started buying in 2009. Lately in the last six months, they have had to drop them and have noticed that there is a lot less tenant selection. When something goes up for rent, instead of having fifty interested people he may have ten. The quality of this ten is pretty low since they are a lot worse than they were ten years ago. When drives through this area either to buy something or look for vacant houses on which he can write numbers, he notices a lot more rent signs than he did a year ago. Since last summer it has been a lot more challenging, and there are no rent increases coming in the immediate future. Just like Moreno Valley, prices up there have also been rapidly escalating.

Bruce asked Rick what he thinks the main cause is of all that is going on with properties. Rick said he thinks it is similar to Moreno Valley in which they have been rapidly escalating. Bruce wondered what the main cause is, to which Rick replied it is a lot of investors flooding in trying to get whatever they can. He does not think there are a lot of owner occupants up in Hesperia as well as in Moreno Valley. There are a lot of cash buyers paying retail, some even paying a little more than retail.

Bruce asked Rick if he thinks inventory levels will be radically different a year from now. He doesn’t think so since it seems like inventory fluctuations are slow. They may be a little higher than now. Once people who started buying in 2009 and 2010 realized they had enough equity to sell what they had instead of living in what they just barely qualified for in 2009, selling it, walking out with a big chunk of cash, and buying something they really want that they will start buying. This is when things are really going to start picking up and prices start going through the roof. A lot of times Bruce hears others say that when those people that are upside-down receive equity from selling, then there is going to be a block of inventory. However, in the next minute they will also become buyers. Rick was surprised that the realtors are not out in force. If he was a real estate agent he would be knocking on every door in Moreno Valley, Fontana, Rialto, of anybody who bought anything between 2008 and 2011. These people all have equity now. This may not be the exact area they wanted to end up with, but they at least ended up with starting somewhere so they can have enough money to move on elsewhere. They all have $40-$50 grand to work with and the rates are lower, so they probably get the same payment for a much nicer home in the area they want.

Rick did very few appraisals prior to last month, in fact almost none to where it was a double transaction. In this situation somebody was selling to buy something else. Prior to 2006, almost 100% of the sales he did were this exact situation. The owners have mostly been short sale along with a lot of investor resales and first-time buyers. There are not too many REOs anymore. On the hard money loan side, Bruce wondered if the private sellers are catching up to short sales. Rick said it almost seems like 1/3 REO, 1/3 short sale, and 1/3 private party.

Bruce asked if Rick saw similar price movements in LA and Orange County. Rick does not work these areas as much, but with the few he did it seemed like it was not as rapid as Moreno Valley. This is usually the case with the higher-end things. The lower-end things in Moreno Valley will just shoot up like crazy. Everything in LA County seems to be 1 ½ – 2% a month for the entry-level housing. This is still at 18-24%, which is amazing. Rick never thought he would live through another time period like this in his lifetime. Rick is really betting that Bruce is right, and he was really happy to hear his opinions. Bruce said what is important is he does not really draw conclusions and then try to prove them.

Rick bases a lot of decisions on inventory levels. When he sees that inventory is tight and everybody is scrambling to buy something, he gets very excited. Bruce wondered when the last time Rick saw these kinds of inventory levels was. He answered that it was almost never, although possibly 2006. Back then we had already spent all of our room as far as affordability. It seems we have a long way to go before we get to anywhere near the house payment of 2006. This is an interesting point he makes because it is important to realize that this is where it could be over. However, we usually take a long time to get there. It will be very interesting to see how long it takes us this time. Rick said it seems right now they are going up as rapidly as they were going down, which is amazing. They were dropping 3-4% in 2008-2009, and now it seems they are going up at that pace. What happens is you have people who build equity at very quick paces to where they can become move-up buyers. This is when things get really good for the realtors, the title companies, escrow companies, everyone. This feeds on itself when afterwards everybody goes out and starts buying things and it begins to pick up more.

For the research on the report he is writing, Bruce looked through the history of magazine covers. It always lags what is next, but in 2005 you had a picture of a guy hugging his house on the front of one of the magazines. This was exactly how we felt about real estate, and Rick is glad to see people are feeling the same way now. They just came out with the first “Real Estate is Back,” so we are not hugging it yet but it won’t take long at all before we do. This is especially true with all the social media we have and the way everyone talks with each other. They are starting to find out how difficult it is for their family and friends who are looking to find things, and we are trying to get out at the same time.

Tags: appraiser, automatic appraisal, bruce norris, cash buyer, comparables, FHA, Hard money lender, inventory, Moreno Valley, price increases, reo, short sale, The Norris Group reale estate radio
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Rick Sharga, Vice President of Carrington Holding Company, LLC, Joins Bruce Norris on the Real Estate Radio Show #329

Friday, May 10th, 2013

Rick Sharga

Vice President of Carrington Holding Company, LLC

(Full Bio)

Bruce Norris is joined again this week by Rick Sharga. Rick is the vice-president of Carrington Mortgage Holdings and one of the country’s most frequently quoted sources on foreclosure, mortgage, and real estate trends. Rick has appeared on every major network and news show in the country, and he has even briefed government organizations such as the Federal Reserve and Senate Banking committee on foreclosure trends. Prior to being with Carrington, Rick was senior vice president of RealtyTrac, which is responsible for marketing and business development.

Bruce and Rick touched on the subject of low interest rates and affordability. Bruce heard Leslie Appleton-Young do a talk and mention that these interest rates are at 50-year lows. Bruce asked her where she got these statistics from, and she said it was from one of the data providers. Bruce called the provider and asked them where they got their information, and they told him that was as far back as their data went. Bruce thought this was an interesting comment since sometimes we really don’t have data that goes far back enough. He and Sean O’ Toole went to Washington D.C. to the Library of Congress and pulled up microfiche from 1850 to the present. They looked at the Sunday advertisements for real estate interest rates. No one alive has seen these interest rates.

Bruce said this was all interesting since for him this sets off an interesting scenario regarding affordability. You have had a lot of price increases, but the affordability is still very high. Even with the price increases we have seen over the last year to 18 months, we are really only back nationally to 2003 price levels. Essentially, an entire decade of home appreciation vanished. LPS and CoreLogic both put out recent reports on affordability; and the LPS study suggested that if interest rates don’t go up, with current income levels prices could go up almost 35% and still be within the normal range of home affordability levels. CoreLogic’s report was similar in that they said home prices could go up another 22% even with a marginal rise in interest rates.

It clearly is an amazing time to be able to buy in terms of affordability. The catch is how few people how few people actually qualify for the loans. This is a little bit of a Catch-22, but what is interesting is that it usually comes around as loan programs do not produce losses. Bruce said he would think that when we look back at 2011/2012, we are going to discover that was the safest batch of loans ever written. The performance we have seen on loans in the last 2-2 ½ years is better than historic averages. The delinquency states of loans after twelve months are below 2% for the last three years’ worth of loans. Normally, you have a percent of your loans in foreclosure and about 4% that are delinquent. They are performing roughly twice as good as you would expect them to perform.

Bruce said you are also given a ratio because normally the ratio is two delinquencies for every foreclosure. When you have price increases, those delinquencies very rarely result in a loss. What fed some fuel to the real estate boom back in the early part of the 2000s was that home prices were rising ridiculously fast. However, even if somebody got themselves into trouble they were able to get out by simply selling the home at a profit. It really was not until home prices flattened out that all of this became as apparent as it was. You look at your portfolio and see that everybody is qualifying with their eyes closed and we still are current.

Somebody wrote a book in California about a crash coming, and it seemed pressing at the time. You look at the numbers and realize the funny part that you wrote it and don’t even know what a collateralized debt obligation is. The funny part is there were huge financial institutions in New York that were issuing them, and they didn’t know what they were either. It turned out there was only a handful of people who actually knew how to bet against the income that was so obvious if you took time to look at it. The solution that keeps coming out of a certain group of politicians is we need more regulations and regulatory control. The regulators missed all of this, and this was really one of the reasons why the fallout was as bad as it was. It was not just the value of the homes or the mortgages issued against the collateral, but it was all of the exotic financial products that were layered on top of it that really added to the enormous losses.

Rick has been at the forefront about reporting statistics, and he has talked about shadow inventory. Whatever definition you put toward it, which has changed over time, it does not really look like it is going to have the impact that we once thought. Rick said he has been wrong a fair number of times in making predictions, but early on he said shadow inventory was not going to be the big problem that everybody thought it was going to be. It just seemed incredibly unlikely that the entire financial services industry would suddenly release hundreds of thousands, even millions, of distressed properties into the market all at once. All we would see would basically be a smoking pit of rubble where there used to be a housing market.

If you look at the number of REOs that are not listed for sale, properties in foreclosure not listed for sale, and homes where the borrower is seriously delinquent, you see those numbers go from about 6 million down to about 3 million today. The housing market is very interested in buying distressed properties. There were about 1 million short sales last year and half a million REO sales. You can see that distressed inventory being absorbed by normal demand over the next few years without really causing any major repercussions. The flip side is that as long as we have that backlogged, it does keep housing prices from accelerating even more rapidly because there is always that shadow of distressed priced properties waiting to come to market.

What relieves this better than coming onto market as a distressed inventory is a price increase that does not make it underwater. The really amazing part is how few underwater borrowers are actually delinquent. The overwhelming majority of people that are upside down on their loans are still making their payments on time. With home price appreciation, a single percentage point increase puts a whole slew of people from negative equity to positive equity, and this relieves a lot of the pressure. In California, if we had a 20% price increase, half of the upside-down people would have no more problems. This is a huge deal and completely changes the dynamic in the housing market. It also has to change the payment patterns if there are going to be somebody who was thinking of defaulting. It is encouraging to see a price increase against your loan get pretty close to breaking even. If you have already hung in there for as many years as it has been upside down, you are still going to make the payment.

History will most likely indicate that the majority of people who did default on those kinds of loans probably did so because there was a life event. It was not just because they were upside-down, but something else bad happened. From what analysis they have been able to see, this does seem to be the case in most instances.

Bruce asked Rick what he would say was the main reason we have had price increases. Rick’s answer was simply that there is no inventory. This is classic supply and demand economics if you look at what is available on the market. In some California markets, there is less than a month’s supply of homes available for sale. For those people looking to buy and those looking to take advantage of today’s low interest rates, there is a lot of competition for so little supply. This drives up prices. The other factor is that the mix is changing a little, so we are not seeing 40-50% of the sales being deeply discounted distressed properties. We are starting to see some higher-priced properties moved as well, and this changes the numbers pretty dramatically.

Bruce said he was always looking for these deeply discounted properties in the last couple years, and he still does not understand the discrepancy between what he sees in the marketplace and what seems to be a big discount when your chart shows the difference between an REO and an equity sale. Those discounts do not represent the same discount as what is showing. Rick said Bruce is a lot more precise in his calculations, and he looks at one specific house compared to another specific house that is the same model and size. If you are looking at large data pools, what you wind up doing is blending everything together. Rick knows from working on some of the reports in the past that if you simply did something like adjusting the numbers for price per square foot as opposed to flat costs, you would end up with less of a discount. A condo was measured against a mansion, so the numbers became at least something of a gauge. The discounts were either going up or down, but most people did not get 30-50% discounts on property.

Rick said there are three ways you can get inventory in the market. You can have new homes, existing homes for sale, or distressed homes for sale. Nobody has been building new homes for the last five years, so new home inventory right now is at about a 40-year low. There are simply not a lot of new homes to go around at the moment. We have been in a position for the last few years where 25% of homeowners were upside-down on their loans. They did not want to sell those properties at a huge loss, so we do not have a lot of existing inventory on the market. Partly because of things like the robo-signing scandal and legislative maneuvers, we have seen foreclosures take much longer to process and get to market. Once they get to market, they are getting sold off pretty quickly. An anomaly right now is that all three categories of housing stock are at unusually low periods.

Bruce asked Rick if he sees any of this changing in the next twelve months. Rick said he does because we have seen foreclosure starts increase over the last couple months, and we have also seen building activity and housing starts both go up in the last few months. Rick said he could see a situation where a year from now we may have a little bit too much inventory for what is available in terms of loans. However, there is not enough where we will see a huge falloff in home prices. We are seeing a softening, then acceleration, then this starting over again. Bruce wondered if when Rick says we are avoiding a huge fallout in price that he believes we will have at least a flat price. Rick said he does not think we will continue to see prices accelerate at the rate they have been both this year and last year. Certain markets will probably be outliers, but Rick looks at it as being a saw tooth recovery. We are going to see prices go up and down, and generally trend upwards. However, it is not going to be a straight shot up.

Bruce specializes in a part of the country where this could be one of the outliers. We have seen the most highly accelerated prices in the markets that had the most precipitous fall off from the peaks. If you are looking at San Bernardino, Riverside, or somewhere else in the Inland Empire where prices literally fell off a cliff, you could see sustained home price increases in those markets. It is other markets that are going to behave a little more traditionally.

Bruce looks at the inventory levels, and he sees that they are a third of what they were a year ago. Bruce wondered how you would get this tripled since this would literally be to get back to a six-month inventory. To go from two to six you have to triple, and Bruce does not see how this is possible. Rick said it probably is not, so it will take longer for that area to normalize. You are starting to see some home building getting started again, and some of these distressed properties will come to market. The other thing that will happen over time is as home prices go up, fewer and fewer borrowers will be upside down. There have to be some borrowers in those situations who would have already sold their house and, if they had a chance, re-enter the market. You will most likely not see an immediate tripling, but over time you will see all three of those categories start to fill back up again.

Bruce wondered if they will be repeat buyers who will sell and go on to another home. This has not been happening in the last few years. Those people have been doing short sales, taking a loss, and they are gone. Rick thinks we are also going to see increased household formation, which is going to provide more renters and homeowners over the next couple years as parents decide it is time to kick their kids out of the basement. What is interesting is that there is definitely the generation that is dating everything late. What is funny is Bruce has heard people speak on how this generation does not even want what the other generations want. You come to find out that at about thirty, they do the same thing as the prior generation.

Rick said he remembers in the ‘60s you could not trust anybody over 30, and now he does not trust anybody under 30. This is also tied into employment. If you looked at the recent homeownership rate report that came out; the group that had the lowest percentage of homeownership was the 35 and under group. Rick believes only about 43% of them were homeowners. This was a huge drop from the national averages. Rick thinks they are waiting longer, but this is also the group that has the highest unemployment in the country. Until they are gainfully employed and in a job they want to stick in for a while, they are probably not going to be anxious enough to sign up for a 30-year mortgage.

Bruce asked Rick if he thinks college debt is as big a deal as people are saying. Rick said what is interesting is that the only category of consumer credit spending that is going on is student loans. Rick thinks it is a mitigating factor when it comes to the length of time it takes a younger person today to buy a home since they do have to get that college debt paid down. It is a debt that will follow them forever. Bruce asked why we can’t sell them the house with nothing down in California. Then they can own it for two years and pay off their debt. Have them start a business that has to hire five people. Rick said you could have them default on the house, then pay them $20-$30,000 to leave. Then they could use that to defer the student debt.

Bruce asked Rick what he expects in price movement. Rick said if you are looking at median prices nationally, we are probably looking at somewhere in the neighborhood of a 4-5% price range increase this year over last year. California is obviously going to be higher than this, but he does not have any specific numbers on what they are expecting in California. One of the categories Rick brought up was the construction of new homes. It is like when you have an interest rate hike and someone says interest rates went up ½ a percent. You say to yourself that it is all the way up to four, but to Bruce and Rick this is laughable to have something that is under 6. When you say construction of new homes is up 25%, it may be up this amount but it is down by 90%. It is going to take a long time to come back.

Rick Sharga said at the peak of the boom they were selling 120-150,000 new homes a month across the country. We are at a 40-year low in inventory and a 30-year low in sales. Whether we are talking about home price appreciation or new and existing home sales, we have to keep this recovery in context. This is not 2005 again. Home prices are all the way up to 2003 levels. New home sales are up to a third of what they used to be. Inventory levels are a third of where they are in a healthier market, and we are still going to sell 2 million properties less this year than we did at the peak. We are off the bottom and coming back. Although it feels better, we are not yet where we need to be to really call this a successful recovery.

Bruce asked Rick what he would call a successful recovery. Rick said the obvious ones are you look at sales volume as one metric, and until you are up over 5 ½, approaching 6 million units a year, it will be hard to believe that you would be at a real recovery. The other is you look at inventory levels. Until you have a steady 6 months’ supply of inventory, it suggests you are going to have a lot of the volatility we are seeing today. Bruce said the truth is you never have a 6 month supply of inventory once you start a price increase, specifically in California. This is why Bruce looks at charts and does not really know about caring about the average, but he can say that when you have price increases in California you have a real hard time having inventory increase.

Rick talked to the Chief Economist at a conference a couple weeks ago, and they have a metric out right now where they say the housing market is 56% back to normal. Somebody asked when it was 100%, to which he laughed. He acknowledged that it is really never at 100%. Sometimes it is at 101, other times it is at 73. It is kind of a floating number. The other number he looks at is on the distressed side of things. With foreclosure activity being where it is, it feels a lot better than it did back in 2010. However, we are still running at 3-4 times normal levels, so this is another metric to watch in terms of where the market is and how much further it has to go.

Sometimes the California Association of Realtors will do a presentation showing that Riverside is still in the 45 percentile of some type of forced sale, whether it is a short sale or a foreclosure. Normal is probably 5%, so even at the improved levels we are about 5-10 times that level. This shows the very serious localization of real estate trends. We talk about national tendencies, but it really comes down to a local market and what is happening in Riverside and San Bernardino. It is very different than it is across the border in Orange County, even if you split it between the north and south counties. Rick looks at broader market trends to see if everything is going the right direction.

What is interesting is that when Rick mentions us being back to 2003 price levels is if you convert that to a payment level, that is more revealing in the sense that you look now at what percentage of income is being required to buy the median price home. Getting back to the affordability discussions, it is probably about half of what it was at the peak of the real estate boom. The affordability levels are at, if not all-time lows, they are at least as good as they have ever been.

Tags: affordability, bruce norris, Carrington Holding Company, Federal Reserve, inventory, price movement, Realty Trac, reo, the norris group, The Norris Group Real Estate Radio Show
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Rick Sharga, Vice President of Carrington Holding Company, LLC, Joins Bruce Norris on the Real Estate Radio Show #328

Friday, May 3rd, 2013

Rick Sharga

Vice President of Carrington Holding Company, LLC

(Full Bio)

Bruce Norris is joined again this week by Rick Sharga. Rick is the vice-president of Carrington Mortgage Holdings and one of the country’s most frequently quoted sources on foreclosure, mortgage, and real estate trends. Rick has appeared on every major network and news show in the country, and he has even briefed government organizations such as the Federal Reserve and Senate Banking committee on foreclosure trends. Prior to being with Carrington, Rick was senior vice president of Realty Trac, with is responsible for marketing and business development.

Bruce asked about what kind of experience it was to speak in front of the Federal Reserve and Senate Banking Committee. Rick said it was an eye-opener, particularly when you realize how broad a range of subject matter on which these people have to become instant experts. This was especially true in talking about some of the more arcane aspects of foreclosures, how the processes work, and how there are 51 different jurisdictions across the country that all operate a little differently. This gave Rick an appreciation for the magnitude of the job they try to do because there is so very much that they need to try to absorb.

Speaking in front of the Fed was a little humbling for Rick. He was talking to the chief micro economist and the chief macro economist, and they were asking for Rick’s opinions on the market. He said it should be the other way. It was very gratifying for him and humbling to have enough of a reputation within a certain subject matter to be able to share it with other people who can put it to use.

It is a daunting task for the committees when you think about all the subjects on which they have to get up to speed. They most likely invite experts in and tell them to get them up to speed. This explains why well-intended and seemingly logical legislation that gets passed goes so horribly wrong. There really isn’t the expertise that comes with the business aspect of being involved in the everyday aspects of the operations like a lot of people like Rick are. The other part is you have agendas that really step up to play, so you really have to consider if you are hearing facts or if you are hearing wishful agendas. Rick jokingly said he was shocked that Bruce thought there were agendas playing in Washington.

Bruce asked where Carrington Mortgage Holdings is located. Rick said their headquarters is in Orange County in Alisa Viejo. They have an investment group that is headquartered in Connecticut as well as servicing operations with facilities in Santa Ana, California and Fishers, Indiana. Bruce also asked how many people all together are employed by the company. They have a little over 2500 employees and are continuing to grow. They are seeing growth in a number of their businesses, including the servicing business, loan origination, and real estate brokerage. Rick said it has been an interesting transition coming over to Carrington and seeing all these various aspects of mortgage and real estate related businesses we never had.

Bruce asked if this was the very definition of vertically integrated. Rick said they stopped talking about vertical integration because nobody really understood it. Rick said the CEO does like to say that they do just about everything involved in residential real estate transactions outside of cutting down the trees. It is an integrated operation in the regard that they have business units that invest in pools of loans, that write loans, service loans, buy and sell properties for consumers or investors, write title insurance, do property preservation and construction. It is really does run across the board; and the flip side of that is, depending on the customer, they do not have to work with all those entities.

Bruce said it would sound like Rick and the employees have been in the business for fifty years, but that is really not the case. It is like an accidental success story that the company really started as an investment management business. They began in 2003 investing in pools of subprime loans and managing the credit risk on the loans. When the market went sideways, the company bought the loan servicing business from New Century when they filed bankruptcy. They did this primarily because the loans that had been purchased were sitting in that servicing platform, so it was a defensive move. Bruce Rose, their CEO, likes to say that he had visions of running a hedge fund in Connecticut and suddenly found himself with a 600 person servicing operation. All the other businesses really have grown since then to support some of the other businesses.

It’s funny how things work out sometimes. Rick said Bruce Rose never had a master plan to be involved in all the various aspects of mortgage and real estate operations, but he has certainly been flexible enough in that he had a vision once he got started to put together a good business model.

Rick’s company also has a new loan origination business. Bruce wondered if this was originating loans only for owner-occupants or for investors as well. Rick said it is primarily for owner-occupants. It is aimed at this market, and they do a lot of FHA loans. They also do refis and retail lending. They have branches in about 22 states, and they have a wholesale channel, so they are also working with mortgage brokers and helping them to get consumers funded.

One of the services Rick mentioned was he buys existing note pools. Bruce wondered if this is usually a national note pool. Rick said a lot of the pools are regional, although they are buying nationally. Very often the pools have some regional influence to them. What they are really buying mostly are pools of non-performing loans since their servicing group is very good at getting those loans to re-perform. This is a win-win since it is best for the borrower and ultimately best for the investor as well.

Bruce wondered who the seller typically is, whether they are FHA or Fannie. Rick said they have participated in both government agency pools as well as pools sold off by large lenders or other financial institutions. Typically they work these loans through their servicing group and ultimately wind up foreclosing on less than 20% of the loans they purchase. The guys are very good at finding a way to come up with alternative disposition strategies other than foreclosures. It is a big deal when 8 out of 10+ families get to stay there and retain ownership. Bruce wondered if this is typical, or if they turn to lease or sometimes renters. Rick said no but that this is an interesting phenomenon. They really expected to see more of an interest in people handing over the deed and taking a lease. What they found was that the people who want to stay in the homes really want to stay in as the borrower and just do a loan modification. Since they are buying the loans at a discount, they can usually pass on some of the savings in terms of lower payment prices on a mortgage.

A lot of the people don’t really want to stay anymore, so they become very good candidates for short sales or even sometimes deeds in lieu. In other cases, people are really just ready to move on and get on with the rest of their lives and are happy for the opportunity to do a short sale so they don’t have debt hanging over their head.

Bruce asked Rick if a high percentage of the time the occupant owner is cooperating with a short sale or if they are getting the loan recast and stay to make the payment. These two categories make up the 80% that he talked about with Bruce. A lot of it depends on the pool and what part of the country you are in, whether the Northeast or elsewhere. If you are in the northeast and in a state like New York where you have 1100 day foreclosure cycles, it is sometimes harder to get a borrower to agree to a short sale since they know they do not have to do anything for a couple years. It takes 1100 days for a foreclosure in New York and 1,000 in New Jersey. It will ultimately wind up having a negative effect on the real estate recovery since the distressed inventory will be around for so long.

Bruce asked if Rick thinks we will ever see a national foreclosure law. Rick said probably not, at least not in our lifetime. The CFPB recently put out national loan servicing standards, and those were mostly aimed at servicing of delinquent loans. After they issued their national standards, they issued an addendum saying that state laws trump these national laws. From the perspective of a company that does loan servicing in many states, it would be great to have one set of foreclosure rules and one set of servicing standards, but it really does get into the whole state rights versus federal rights issue. Right now foreclosure laws are all managed by the states.

Carrington is also buying properties, although very selectively. They think the market is very frothy right now. Rick and Bruce have talked about how well some of the business models hold up or don’t hold up as home prices appreciate very rapidly. Right now there are better opportunities in things like non-performing loans and mortgage servicing right now. They are just not willing to pay 125% list price for a property they are going to hold onto and try to get a rental return. At the same time, there seems to be a new player willing to do that almost every day. Everybody has a different business model. There was an announcement recently about one of the companies having an IPO. If you are overpaying a little bit but put some leverage into your purchase by getting other people’s money, sometimes the returns look better. Rick said he does not know what the implications are for the people that are doing the follow-up investing on properties that were intrinsically over-valued. There is a lot of money coming into the return rates, so it will be really interesting to see if they are able to deliver what their perspectives indicated they would.

Rick is probably a lot more familiar with the different business models that are out there. For Carrington’s purpose, Bruce wondered if whenever they bought a property it was always the intent for them to have it occupied by a renter for some period of time and then resell it for a profit. Rick said typically when they buy a property this is the model. It is almost always with the notion of having somebody rent the property out for a period of 3-5 years and then sell it as home prices appreciate. Their model was and is a hybrid model. There are rental returns built into it as well as home price appreciation. When a market overheats, it really makes both parts of the model difficult to achieve because the underlying collateral is potentially over-priced.

Bruce wondered what surprised Rick as he went through the buying effort. He wondered if there was something more difficult than he thought it would be originally. Rick said there were a couple things, and the two biggest really come down to inventory. The properties of REOS and lender-owned properties really dried up much more quickly than they or anybody had anticipated. As part of that, there had been speculation that they would see a lot of bulk sales and fairly large pools of properties sold. This has really not been the case as there has been a couple exceptions over the last few years, although really not that much. The other surprise was how much interest developed in the particular asset class so quickly. It seemed there was a new company announcing a new $100 million fund every day. It went from an interesting idea to the investment topic de jeur.

Bruce said when they are bidding at the trustee sale they can always tell that somebody has gotten their first $100 million since it is usually spent in a 3-day period. Along these lines, Rick heard an anecdotal piece from an auction in Atlanta where one of the institutional people ran out of checks. What is sad is that because they are doing so much business, the auctioneer actually waits for them to come back. From the auctioneer’s perspective, it makes sense to wait for the person who is coming back with the fresh set of checks.

Since people worry a lot about home price inflation rather than appreciation, the encouraging thing Rick has seen is that as the investors have come and gone from some of the markets, the prices have held. They may have accelerated the price appreciation and driven prices up a little faster than they would have gone on their own. However, once they have hit that new level they have generally held. This suggests that the value is still right for the properties that are being purchased. Rick brings up a really important point and something that is really a concern of people that are investors. Bruce does not think the homeowners really thought things out because this is a new experience. Bruce does not recall ever having this money invested in single-family homes. To Bruce, this is an unprecedented group of people. Collectively, all of these companies together have become market-makers.

Rick thinks the aforementioned is over-stated in the press right now. On a localized basis you could sometimes make an argument that they could become market makers. If you look at Phoenix last year and Atlanta, you see it happening. Collectively, there was $10 billion of funding announced last year, which was not all spent. $10 billion as a percentage of the overall housing market where there were about 5 million units sold is really a rounding error. Bruce has been studying foreign buying, which is about $800 billion. Rick does not think the institutional investors are really market makers in a broad sense. It has been interesting press conversation since it is not a new phenomenon. In terms of actual impact on the overall market, this affect has been overstated.

Bruce wondered if he also feels the same way about rent values. He wondered if they would not have so much inventory that they would sway. Rick said not yet since rental units are still occupied somewhere north of 95% across the country. What they have seen on a short-term basis is you take a neighborhood in Phoenix, and suddenly there are a lot of homes on the market for rent. You might have a temporary over supply because you cannot break their lease and move into something new. There could be some softening of rental rates, but he does not think it is because the entire inventory is hit at once.
FHA just announced that they were selling 40,000 notes this year, which is in a competitive bid situation. Bruce wondered if the FHA retains part ownership of this. Rick said he is not aware of any of those types of arrangements where the seller retains partial ownership. Rick believes they are all at right sales. The government pools, specifically FHA pools, tend to come with more specific requirements and language about what the buyer may or may not do with the pools. In the FHA pool that was sold earlier this year, there was some language that restricted buyers from being able to foreclose on properties for a certain period of time. It required a certain percentage of loan modifications. There were more restrictions and requirements with the government pools than with the private pools, and Rick believes they are all outright sales.

Bruce wondered if these are all auction type settings to where it is just the highest bidder who receives it. Rick said he is sure highest bid is one of the factors, but there are also performance and disposition considerations. He is not sure it is necessarily 100% based on the highest bid, but they do at least have to be competitive.

Carrington has a model where they are going to buy and sell a property. Bruce wondered if there are other models he is aware of that are going to have the single-family homes with a different disposition where they may be putting the homes into a scattered apartment type REIT. Bruce said they would not come back on the market; although Rick said they will at some point, and this is one of the differences between a traditional apartment REIT and a real estate investment trust. It would make sense to build flexibility into a REIT like this where you can move certain properties out and replenish with other properties as they come to market. Rick is not aware of anybody’s plans that call for a permanent hold of the rental properties. The big variances tend to be the length of the potential hold and how much of the return for your investors you are planning to get for rental rates as opposed to home price appreciation.

Rick talked to a group in Indiana, and they were looking at 18-20% annual yields on the rentals, but they were really ultra holds. They did not see prices appreciating in a suburb in Indianapolis any time soon. Rick said they saw another big investor get out of Northern California since they were buying three $400,000 homes. You cannot simply have rental yields since you cannot charge $3-$4,000 a month rent for too many tenants. What they saw was home prices appreciating more rapidly than they thought, so they got out and made their profit. The REITs would be long holds. What you are basically counting on is the cash flow from the rental units being what you are investing in. Those building units would stay in the REIT longer than a typical buy and short-term hold. There could be some transactions that move properties in and out of that REIT.

Bruce asked Rick what a long-term hold would be. Rick said it would probably be anywhere from 5-10 years, which is a long-term hold. The average for most people going in was they were looking at a 3-5 year old. If you are looking at a REIT, you are probably looking at something a little longer than that. Bruce said it would seem to him that most of the product they would have in the REIT would have to be bought in the next 6-12 months. One of the largest investment groups looking into this was Blackstone, and they really believed there was about a two-year buying window, and we are in the second year of this right now. As prices go up, it gets harder to get the returns you are trying to find.

Bruce wondered if they keep switching locations, or if they do them all simultaneously. Rick said you are actually seeing a movement right now away from some of the more popular states. Typically everyone started where the foreclosure numbers were the highest, so you go for states such as Arizona, California, Nevada, Florida. What we are seeing now is a movement into second tier states, or states that did not have as terrible a fall from peak to trough in terms of home prices. In this case, you can buy reasonably priced homes and get a reasonable rental yield for the next few years. It is really not a buy/flip business so much as it is something that already cash flows and you might as well keep it.

Bruce asked Rick if he thinks this model is going to be gone at some point and they will find something more traditional to do with their billions of dollars. Rick said as there are other opportunities to deliver good returns, you will see less interest in this. However, he thinks you will see a more permanent group of large investors in the single-family rental space when we come out of this cycle than when we started.

Tags: bruce norris, Carrington Holding Company, Federal Reserve, FHA, mortgage, Realty Trac, REIT, senate banking committee, the norris group, The Norris Group Real Estate Radio Show
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Peter Schiff, CEO of Euro Pacific Capital, Joins Bruce Norris on the Real Estate Radio Show #327

Friday, April 26th, 2013

Founder of Foreclosure Forum

(Full Bio)

Bruce Norris is joined again this week by Peter Schiff. Peter is the CEO of Euro Pacific Capital and bestselling author of The Real Crash: America’s Coming Bankruptcy – How to Save Yourself and Your Country. He is also the host of the nationally syndicated Peter Schiff show, heard daily from 1-3 Pacific Time at schiffradio.com.

Bruce asked a question very near and dear to most of his clients’ hearts. Bruce asked about Riverside where the prices are so low that a builder could not possibly create a building lot or build a house for a profit. He wondered if this makes it underpriced or if it is still over-priced. Peter said that California is certainly not one market, but there are many local markets within the state. To the extent that property prices are below the construction cost, it is an indication that the market in that area may not be as overvalued as it is in other areas. In many cases, this depends on what the land is being valued. The land may actually be worthless in that respect, and the only value is the improvement. The improved property does depreciate over time, so if it is there to be used then it is also wearing out. If you cannot really sell it, then you have to factor in the depreciation until there is a point where you can factor it.

A lot of people who were in California during the Bubble were getting priced out of the market and started to stretch into distant Inland Empire type markets. Here they had about an hour commute, but they thought it was worth it because it was the only way they could get into the real estate game. They wanted to get rich, so they figured they would endure the long commute. Now that the bubble is burst, there is really no reason to live so far away from where you work, especially with the higher cost of gasoline now making it so expensive to get to work. This is assuming you still have a job. Peter said he thinks more people would rather rent something closer to work than buy something an hour away, even if it is a bargain based on what it may cost to build it. There could be no reason to build it. You could build a house in the desert and say it is selling for a lot less than it cost you to build it. However, there was no reason to have that house out in the middle of the desert.

In some respects you cannot say a property is selling below construction cost because it maybe should not have been constructed in the first place. It may have to go down a lot more before it makes sense for people to buy it. Usually when you think about California you think about the San Francisco Bay area, Los Angeles, and Orange County. Even here prices are still way out of whack with people’s ability to pay. The only reason that people are still able to afford these high prices is because of massive government subsidies. Right now we have the lowest mortgage interest rates ever in the history of the country. This is what it is taking to pop up real estate markets. In addition, interest rates should not only be at record lows, but the Federal Reserve is buying $45 billion worth of mortgages a month.

Without the Fed buying up the market, mortgage rates would be rising. The only reason they are not rising is because the Fed is buying them all. The government is directly loaning money to people to buy houses at the lowest mortgage rates in history. This is the only thing holding onto the market. Eventually, the Fed has to take away the punch bowl; interest rates have to go up. This means mortgage rates have to go up and real estate prices have to plunge. Once interest rates go up, people cannot afford to buy these houses at these inflated prices. The other problem with California is the fact that the jobs are going to go. No entrepreneur in his right mind is going to move a business to California since plenty of entrepreneurs are planning to escape from California. Peter talks to people all the time who are planning to move to Nevada or someplace else and get out of California. You have governors, such as Rick Perry from Texas, who almost lives in California now recruiting California businesses to move from California to Texas. With a 13% income tax versus 0% along with work the California Labor Board is doing, the tax base will most likely be eroded. It is very expensive and risky to hire people in the state of California. People will most likely be leaving the state, not coming into the state. This means more houses will be up for sale and not as many people up to buy them. It is a disaster in the making for California real estate.

Peter is not opposed to signing up for a thirty-year payment at this level. If you own a house, you have to take advantage of the money. The worst way to own real estate right now is to own it free and clear and own it all-cash. The only way that you make money as a homeowner is by being a debtor. You are not really making money on the value of your house going up, but rather on the value of the debt being wiped clean. If you can buy a property with a 3 ½% down payment, which you can with an FHA loan, then you get a lot of leverage and can take advantage of the chief financing. When inflation wipes out all the savers and debtors, they also wipe out your mortgage debt. Therefore, Peter definitely thinks if you are going to own a house, then it should be done this way. However, if you are looking at an investing in property, he would not be buying in California.

There might be places where the economies are likely to be better, such as Texas, but the national economy is still going to suffer. This is because of the policies that come out of Washington and the Federal Reserve that affect everybody, even if you are living in a state that is getting it right. You are still living in a country that is getting it very wrong. In general, real estate is not a preferred asset almost anywhere. Peter said if he is right about the US economy headed for a major collapse, the financial crisis, the sovereign debt crisis, the dollar crisis, then it is not a good market for real estate. People are losing their jobs and will be spending more money on food and energy. They will not have as much money left over for rent or mortgage payments. Peter said he also thinks that households will be destroyed.

In the late 1990s, people were graduating from college, were getting good jobs, and they immediately bought a house. This is not going to happen anymore. People are graduating from college, cannot get jobs, and are drowning in student loans. There is no way they can afford a house, so there would be no reason for them to want one. There is no compelling reason to buy since the reason to buy before was that you could get rich since the prices were increasing. Now, people start to appreciate the cost of owning a house. There is a money pit, and you have to pay taxes, insurance, maintenance, and everything that costs money. People forgot about the cost of owning a house when prices were rising since it cost them nothing. The appreciation offset all those costs and caused money to be left over. Houses are not appreciating if they are just keeping pace with inflation. It costs you a lot of money to own them, so a lot of people cannot afford it.

You also have older people now who are retiring, but they do not have any income since they are getting 0% interest on their savings. They cannot afford to stay in their homes, so they are putting their homes on the market for sale. They have to downsize because they do not have the income to sustain themselves. You have a lot of people leaving the workforce now, so you have people who want to downsize, young people who cannot afford to buy, and the old people who have to sell. The supply and demand imbalance is going to be enormous, and you have all the backup in foreclosures. The whole process has been dumbed up for years, and there is a huge shadow inventory of property that is not on the market right now because people don’t think they can sell. The minute people see some kind of uptick in prices, you are going to see a lot of properties come right back on the market. Most of it will not be able to sell since there are not enough buyers. It is not going to be good if you are really worried about inflation and want to buy gold, commodities, or foreign stocks. If you want to buy real estate, buy it in Asia, Australia, or anywhere the economy is going to improve.

Peter lives in and owns a home in Connecticut. His home is way underwater even though he just bought it a couple years ago. He did not buy it as an investment, but rather because he was tired of moving. He rented it before he bought it. However, he bought the property for about 60% below what the guy who sold it to him paid, and he is still losing in it. It is still down because he spent money fixing it up, and he probably lost about 70% of the money he improved. Whatever he spent improving the house, he got back on the appraisal about 30%. The house went down anyway even though he bought it in December 2009. He bought it for half of what the price was in 2002. The person who sold it to him spent a lot of money on it and fixed it up. He really took a hit since he owned it for several years. Peter did not buy it because he thought he was picking out of the bottom. He bought it because he had enough money that he did not care how much money he lost on the house.

Peter owns a boat, which he said is not a smart financial decision since he only uses it about three or four times a year. At what it cost him to maintain the boat, he could rent a much better boat and save a lot of money. However, he does not own the boat as an investment. It is a lifestyle and something that he wanted to have, just like his cars. He buy cars he knows will go down in value every year, but he buys them anyway. This is the same attitude he has about a house. This is why you should not buy a house if you are not prepared to lose money. Otherwise it is rent. For most people, renting is cheaper. Brokers always try to con you into thinking you are throwing away money when you are renting. You’re not because you are getting a place to live out of it. For years he was renting houses and paying his landlord such a low rate of rent that they were in negative cash flow.

Peter was getting a great deal renting because he was avoiding all the headaches of owning a home. Now he owns a home, which he enjoys. However, it costs him a fortune. Things are breaking in his house all the time. Even though the house was built in 2002, things are still going wrong in it. There are workers at the house fixing something every week. Part of the problem is a lot of hot money has moved into the real estate market. There are a lot of private equity people who have borrowed a lot of cheap money and bought all these single-family homes. A lot of the home sales that have taken place recently are not legitimate buyers. They are flippers and speculators who have bought these houses up, are putting them up for rent, but they are hoping to sell them when the market comes up. It’s like a war because when interest rates go up, the prices are going to come down and they are going to start losing money on these houses.

With interest rates going up, if they take just the money they borrowed to buy them, they are not going to collect enough in rents to cover the interest on the borrowed money. As the economy worsens, some of the tenants may lose their jobs. Peter thinks you will see a lot of these speck homes coming down in the market. These guys are levered up, but when the investors want their money, they are just going to sell. They are just going to hit the bids, so you can see a big drop in prices because of all the speck money that is trapped in residential housing right now. Single families, for example, did not just buy an apartment, but rather huge blocks of single-family homes in Nevada, Arizona, Florida, and even Riverside, California. They think they are going to make money and are trying to catch a falling knife. However, they are going to end up catching it right in their stomach.

Peter has a son named Spencer who is ten years old and another on the way. Right now Spencer is too young to have an opinion on what he will have to deal with, but it probably starts early in the Schiff household. Peter does have one book he wrote that young people can really read, understand, and enjoy. It is called How an Economy Grows and Why it Crashes, which a lot of ten and eleven year olds have read. Peter recommended if you have a young child to buy the book for them, and when they are done to read it yourself.

Peter uses the term decoupling to describe a situation where, using the analogy of the global economy as a train, all the trains are attached to one another. If one moves, they all move. In that analogy, most people think of the U.S. as the engine with all the other trains. However, the idea of decoupling is that a train can decouple from that engine and keep on going. This means the U.S. might can stumble, but emerging markets can still do well. Peter’s idea about decoupling is that the U.S. is not the engine, but rather the caboose. Decoupling will actually benefit all the other cars because America is not pulling the train, but rather the train is dragging America’s dead weight. The reason Peter says America represents a dead weight is because we are net importers. We consume more than we produce, which means we are living off the global economy. If America just disappeared, then the world would have more, be able to work less, and enjoy more consumption from the work they are currently doing. They would have more. This kind of decoupling is going to be very positive.

A lot of people think if the US economy crashes, we will take the whole world down with it. Peter thinks it is the opposite and that it is actually popping the US economy up that is holding the whole world back. If the world lets the dollar collapse and stops subsidizing our economy, then their economies will take off.

One of the questions Peter asks in his book is if we will default in order to avoid a crisis, or will we react to one. Peter said he does not think we are going to avert a crisis. The only hope we have of eventually doing the right thing is doing it in the aftermath of a crisis. This goes to the nature of politics. Politicians follow their own self-interests, their own need for preservation, and their need to be re-elected. They are never going to deliberately do something to bring on short-term pain, even if it is exactly what is needed. They are never going to ask them to swallow medicine that is bitter, even if it will cure us. They would rather give us some sugar or something that tastes good just so they can get re-elected, even if in the process the disease gets worse since we are not treating it. Once it comes to the point where it is so bad they cannot do it anymore, then they may finally be forced to do the right thing. However, they will try everything else first.

Bruce said it seems like the one suggestion of just giving a one-time tax of the wealthy certainly seems like the sentiment is leaning toward people who have done well and have savings. They want to tap that spigot and tax it as hard as they can. Bruce said this feels like a pretty dangerous trend to him. Simply confiscating wealth through a confiscatory tax plan is not going to solve any of our problems. First of all, whatever money the government confiscates is just going to spend it. It is not like it is going to help the economy. However, you also create a very dangerous precedence that what you own is not yours and the government can steal it. People will not be trying to accumulate more wealth, but rather trying to hide whatever wealth they have out of the county. Once you start this, you are pretty much finished. What we need to do is restructure the debt by simply not paying back what we borrowed. This is not confiscating anything; this is simply defaulting.

Individuals declare bankruptcy all the time, but it does not mean we are no longer a nation of laws and that we no longer have a market. The market allows for bankruptcy. Stockton, California just declared bankruptcy. Cities can declare bankruptcy if they are broke. The US government is broke, and there is no way to pay its bills. All we can do now is keep interest rates at 0 so that we do not have to pay our bills. $1 trillion is being printed a year so we don’t have to pay our bills. This is damaging the economy much more than if we just defaulted. What we are doing now is far more dangerous to the economy than a legitimate restructuring of our debt where we tell our creditors we cannot pay them back. If we were to immediately default on our debt, nobody would want to loan us anymore money. This is a good thing. The best thing that can happen to America is that nobody wants to loan the US government any money because then the government has to stop spending. If they cannot borrow, they cannot spend.

In addition, we have to tie the Fed’s hands and make sure they cannot print. Right now the Fed is monetizing all this debt. They have to stop doing this. They have to stop giving the government an easy way out. We need a better Fed sharing with some backbone to let interest rates increase and to refuse to monetize any of this debt. This would force the government to cut spending. However, because the Fed gives them an easy way out they do not have to cut spending because there is no immediate negative consequence to the budget deficit because the Federal Reserve modifies them. However, this is creating grave long-term consequences. Peter said he is not talking about 10-20 years from now, but rather we are going to face these long-term consequences in the next few years.

Peter mentioned Stockton, California earlier. This is a real test cast for a lot of people who have debt who are in line, Calipers being one of them. There was another event with Cypress recently that probably makes people feel uncomfortable with large deposits. This could even be true with small deposits since initially they talked about giving everybody a haircut, including the accounts that were insured. If you have a bank account in the United States, you are going to lose. One way or another, you are going to lose. Your bank is going to fail, the government is not going to bail you out, and you are going to lose some of your deposits even if your account is insured. We have $8-$10 trillion of insured deposits, and the FDIC has about $20 billion worth of treasuries to back them up.
One scenario is that your bank fails, there is no bailout, and you lose and don’t get back your money. The other scenario is the bank does not fail because the government bailed them out and you get back all your money, but your money is not worth anything because the government had to print trillions in order to bail everybody out. Either you lose to inflation, or you lose to default. The lesson is don’t maintain a large bank account. You just need to keep enough money to clear your rent check or your mortgage check, and don’t keep any significant amount of money in the bank. You have to do something else with it, whether it is to invest it, buy gold, silver, stocks. Even buying real estate is better than leaving your money in the bank. Peter said he likes buying foreign stock or dividend-paying stock. Do something with your money. You have to buy something that the Federal Reserve cannot print.

One of the hardest things about investing now is because of the manipulation and interference, it is hard to say how it is going to play out in the short term since it is so volatile due to the interference. There is a lot of noise and a lot of things happening to manipulate the market. We also have foreign central banks, including the Bank of Japan, the Bank of China, the European Central Bank. We have banks all around the world and emerging markets in Latin America and Southeast Asia that are all interfering to prop up the dollar. All of this is delaying the day of reckoning, and it is impossible to know when this day will arrive. The only thing we know for sure is that it will arrive. The longer we have to wait, the worse it is going to be.

If you are interested in learning about how to build a globally diversified portfolio of foreign stocks and bonds, you can talk to one of the brokers at Euro Pacific Capital. The website is www.europac.net. If you want to buy physical precious metals, he also has his own metal company. You can visit him here at schiffgold.com. If you also want to listen to more of what Peter has to say, he also has his daily radio show he does on weekdays 7 am to 9 am California time Monday through Friday at schiffradio.com. He repeats the show every two hours in case you missed it the first time.

Tags: bankruptcy, bruce norris, bubble, debt, decoupling, Euro Pacific Capital, Federal Reserve, FHA, mortgage rates, Norris Group real estate radio show, Peter Schiff, the norris group
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Peter Schiff, CEO of Euro Pacific Capital, Joins Bruce Norris on the Real Estate Radio Show #326

Friday, April 19th, 2013

Founder of Foreclosure Forum

(Full Bio)

Bruce Norris is joined this week by Peter Schiff. Peter is the CEO of Euro Pacific Capital and bestselling author of The Real Crash:America’s Coming Bankruptcy – How to Save Yourself and Your Country. He is also the host of the nationally syndicated Peter Schiff show, heard daily from 1-3 Pacific Time at schiffradio.com.

Euro Pacific Capital is a broker dealer and a registered investment advisor. They work mainly with individual investors on helping them to build portfolios of chiefly non-US assets. The reason he focuses on corn stocks, bonds, natural resources, and precious metals is because his major concern is for the value of the US dollar. At the end of this crisis is where all the chickens will come home to roost. The Fed will most likely keep printing money until the bottom drops out of the dollar. When it does, Americans will most likely be wiped out if their investments and savings are denominated in dollars. They look for stronger currencies; invest in places such as Switzerland, Norway, New Zealand, Australia, Singapore, and Hong Kong. They buy quality companies that pay good dividends in currencies that are going to retain their value and not lose it due to massive money printing.

Bruce was curious about Peter’s experience in speaking about a crash prior to anything bad happening in 2006. Bruce wondered how the reception was at that point and how it changed after some of what he said came true. Peter said that from 2005-2007 he had a lot of press and tv coverage for his forecasts. CNBC started calling him Dr. Doom, and he got a lot of air time since he was one of the only people who was negative. If you wanted to balance out all the positive analysts, he was one of the few people to whom you could go. Most of the people made fun of him for it because of all the crazy things he was saying about the housing bubble, the looming financial crisis, the artificial recovery, and everything the Fed was doing wrong that were going to lead to disaster. Everybody dismissed him as a chicken little.

Then, when everything collapsed along the lines he said it would, some people started to give him credit for it. However, most of the people in the media started ignoring him and stopped interviewing him. Most of the shows he is on now are totally different shows than the shows he was on back then. The shows he used to be a regular on when he was predicting a crisis don’t have him on anymore. However, they have the same people on who were laughing at him. Peter thinks they don’t like to be reminded of the fact that the warned about the crisis and they all laughed at him. They wanted to pretend that nobody could have seen it coming because they think it makes them look better. The problem is that the same fools who were oblivious to the 2008 financial crisis are oblivious to the next one; and this is even bigger. They are singing the same song that they did back then, everything is fine, and they won’t listen to anyone who questions this.

If you look at the reception that David Stockman got for writing his article in the New York Times, he was eviscerated from everybody for pointing out what should have been obvious. When the Novocain/stimulus wears off, we are in for a world of pain. Government intervention has certainly helped assets such as California real estate. Bruce wondered if the reverse is also true and if it should not have happened to real estate the way it did. He also wondered if it has negatively affected things that should have worked better than they did. Peter answered that real estate prices are too high, especially in California where they are much too high. Prices started to correct in 2007/2008, which was good. The government should get out of the way and let prices continue to fall since they are too high. However, the government does not want this because the banks are all levered up and exposed to this real estate collateral. Rather than allow the market to correct the imbalance, the Fed has tried to blow more air into the bubble to try to delay the day of reckoning. All this does is further damage the underlying structure of the economy by diverting our resources into housing that are badly needed in other sectors. However, they are not going here; and as a result we are not going to have a real recovery or create jobs for the unemployed. All we are going to do is pile more debt on the debt we already have so we can go on spending more money that we don’t have to buy things we cannot afford. This is going to lead to a bigger disaster than the 2008 financial crisis since the Fed is doing exactly what it did to cause the last bubble, only much bigger. The consequences will therefore be bigger when this bubble bursts.

One of the things Peter’s title has done is really touch on a third rail, which is America’s bankruptcy. If he was in the mainstream media, that would probably be one interview he would not want to do. David Stockman did a piece where he basically advocated a one-time 30% wealth tax on the rich to pay down the debt. Peter said he does not advocate this and thinks we should default on the debt, and the rich people who own bonds will lose out. Peter said he does not think we should do this completely, but we should at least restructure. It is really impossible mathematically for us to ever pay back the debt. There is no realistic way to get the tax revenue from the American citizens to repay the debt. The only reason we can maintain the illusion of an ability to service this debt is because the Fed is buying $1 trillion worth of it every year and keeping interest rates at 0. In 2013, the projected cost of interest on the national debt is only about $228 billion. The last time our interest bill was that low, Ronald Regan was president. However, we have added $14 trillion in debt since then, yet we have not added one dime in interest payments on that debt thanks to the Fed.

Eventually, interest rates have to go up; and when they do we cannot pay. Bruce said the same story is probably playing out in Japan. This country also had a problem in that debt to GDP is about 240%, which is larger than ours. However, our debt to GDP numbers are not accurate since they do not count the debt the government has guaranteed, Fannie Mae, Freddie Mac, FHA, student loans. When you throw all this on top, we have a higher debt to GDP than Japan. The bigger problem is that Japan’s GDP is actually more legitimate than ours since ours is a lot of fluff. It is service sectors, health care, retail, finance, education. Japan, on the other hand, has a lot of manufacturing and exports and therefore have a more reliable and legitimate GDP than we do. The numbers are worse, but the one thing Japan has in common with us is foolish monetary policy. The bank of Japan is trading a lot of yen in order to drive down the value of the currency so that prices will rise and Japanese consumers will have to pay more money for the things that they need. This will cause the value of Japanese savings and wages to decrease. Unfortunately due to stupid economic policy we don’t have a monopoly on it, but Japan does. Peter thinks Japan is in better shape than the United States, but they are not in perfect shape.

When Peter talks about a bankruptcy, he is not talking about walking away from our debt, but rather he is talking about either restructuring the debt or printing your way out of it. Bruce wondered which of these is less painful. Peter said he is trying to avoid the printing press method. Since it is physically impossible to pay off the debt, the only question is how we default on it. The way we are planning on doing it is to inflate, to just print money and to pay our creditors back with money that has a lot less value than the money they loaned them. If we print enough money, we will pay people back with worthless money. This is the same thing as a complete default. Peter thinks the best way to get out from under the problem is to admit that we cannot afford to pay, renegotiate the terms of the debt, and have a reduction in the principal that we owe. We can then impose a haircut on our creditors honestly as opposed to doing it dishonestly through inflation. The economic damage from an honest approach is going to be far less severe to everyone, including our creditors, than if we simply inflate the debts away. This will not only wipe out our creditors, but it will wipe out our country and destroy the economy completely.

Bruce wondered who the creditors are we are talking about buy and large. Peter said the largest creditor is the Federal Reserve itself. You also have intra-government agencies like the Social Security Trust Funds, which don’t really count. You also have intra-government debt, but you also have foreign central banks outside the United States, which are the next biggest holders. China and Japan together hold over $2 trillion worth of treasuries, so some of the losses would be borne by them. U.S. American investors own U.S. Treasury bonds, mutual funds, or pensions. Insurance companies and banks hold Treasury bonds, so there would be losses there as well. However, there is going to be losses no matter how we look at it. Either the losses are going to come about due to depreciation of the currency inflation, or to a default. There are going to be losses, so the question is what the best way to do it is that is also the least economically damaging.

When you default, the loser is legitimately the person who bought the bond. If you create inflation, everybody loses, even people who don’t own any of the bonds. People who have money stuffed under their mattresses lose. Peter said he would rather punish the people who engage in the activity. Anybody who is buying US treasuries is basically loaning money to a bankrupt nation. They deserve to lose their money since if they did their homework they would know not to buy treasuries. They would realize the government is not good for the money; so if you lend money to somebody who cannot pay you back you deserve to lose. You don’t need a bailout where your losses are socialized. What really happens is when they create inflation; they try to spread the losses among everybody in the country, even the people who were not involved in the transaction. Somebody could have their money in private investments because they don’t trust government bonds. Why should they be taxed to subsidize the losses for people who were dumb enough to lend money to the US government?

Bruce wondered about the hit on credibility. Peter said they will most likely do inflation if that was Choice A since this is the easy way. If we default, we have to officially acknowledge that we cannot pay. If we print, we still pretend we are paying. When prices skyrocket, the politicians blame speculators, OPEC, or greedy capitalists who are gouging consumers with high prices. They will not accept responsibility for the inflation, but rather they will try to create scapegoats. That is the most politically convenient and expedient way to do it, which is why so many nations have gone down that route. It has always been a disaster.

What is interesting is it seems like we have a blueprint, but we are repeating the same process. Unfortunately, in other areas of human endeavors, such as finance or medicine, each generation builds on what the prior generation learned. We are always advancing and progressing. However, when it comes to economics we do not learn anything. Each generation simply repeats all the mistakes of the previous generation and learns nothing. A lot of this has to do with human nature. People act in their own self-interests, they want something for nothing, and this never changes. Voters vote for politicians who promised them something for nothing. Politicians want to get elected, and all they care about is how to do this. They think you have to pursue a certain kind of policy to get elected which is to kick the can down the road and postpone the pain as long as possible, even if it exacerbates the pain. Humans have not changed today compared to 1,000 to 10,000 years ago. We are the same mentally and act the same way. No matter how much more science we know or technology we have, we still repeat those basic human mistakes. Other people have to recognize that this happens, and it is not hard.

Those who do not study history are condemned to repeat it. It’s not hard. You see what happened and see that it happens over and over again. You just have to prepare for it. Generally, the majority of people are surprised by things that happen. The financial crisis in 2008 shocked just about everybody except anybody who really understood history. Anybody who really understood economics was prepared for it. The vast majority of the public and the establishment were shocked because they were brainwashed.

Anytime you are writing a negative report about something not happening at the moment, it is very hard to accept because the feeling of that investment is good and comfortable. Meanwhile, when you are talking about getting out of it completely it is hard because human nature does not want to go through all of that. Peter experienced this as a broker firsthand back in the 1990s when he was trying to convince people to sell their internet stocks. Nobody wanted to part with these things. It was the same when he was trying to convince people in 2003-2005 to sell their houses, particularly in California. Nobody wanted to do this, but instead they wanted to buy more houses. This affects your perception and you cannot see the forest through the trees. You are in a bubble you do not know is a bubble since you are inside it and cannot tell. Peter said it was easier for him to see the bubble since he was an outsider looking at it. He knew they were in a bubble, but they were in there with everybody else and had no idea.

A lot of people have a vested interest for people who work on Wall Street, and they do not want to believe that the stock market is only going up because of the Fed. They want to believe that it is legitimate and that the economy is actually improving. If they acknowledge that it is a bubble, then they know it is going to burst. They want to assume that it can go on forever, and therefore they have to assume that the rally is legitimate and based on real, positive fundamentals instead of just bubble-blowing by the Fed.

Bruce asked about the benefits of being the reserve currency and how long we have before this might change. It is kind of a two-edged sword since it was a benefit and a curse at the same time. The benefit is that you can live beyond your needs, but this is also the curse. Since we can print money, we do not have to work as hard as other people. We do not have to produce as much since we can just run money off a printing press and use it to buy oil, manufacturing goods, or other things. Other nations do not have this privilege. If you are in Australia and want to import goods from China, you have to export something to China. You have to make something that the Chinese want in order to buy the things that the Chinese have. However, Americans do not have to do this. If we want goods made in China, we just run some more hundreds off a printing press. This is all we have to do. Other countries cannot do this. However, the fact that we had the benefit of that has also been a curse since we have come to rely on this. Our economy has transformed itself over the last couple generations to where we are dependent our ability to print money, export it, and import the products that our country is no longer capable of producing. The problem is eventually the dollar is going to collapse, and the economy is going with it.

In one analogy, a lot of people are living on an island who all know how to fish, but all of a sudden someone started dumping free fish on the island and people got used to the free food. If the free food stops coming, you can all starve to death if nobody remembers how to fish. This is really the situation. We used to manufacture and export, but now we don’t do it anymore because we just live off of what we get for free from everybody else. The problem is the rest of the world does not realize they are giving us all these things for free. They think we are paying them because they have trillions of dollars stock piled up. However, when the dollar collapses and they realize they are not worth anything since they cannot buy anything, then the bubble bursts, the dollar crashes, and we are out of luck. Because if this, places like Wal-Mart are going to be a ghost town; shelves will be empty and the few things that are there will look like Saks and 5th Avenue.

If what Peter says occurs and the United States is in reserve currency, then Bruce wondered what takes its place. Peter said he is not sure, although gold could be a possibility. The only reason the dollar became the reserve currency was because it was backed by gold and legally redeemable in gold. When the dollar became the reserve currency, if you took $35 to the Treasury they handed you an ounce of gold. They were required by law to do this; so the dollar was backed by gold. It is not backed by gold anymore, so we need to go back to gold as the reserve. When the dollar was the reserve currency, gold was the reserve because the dollar was as good as gold. It was better than gold because the dollar paid interest and gold did not. Now that the dollar is another piece of paper with no intrinsic value and nothing behind it, then what sense is there to have the dollar as the reserve? How do you anchor your currency to something that is adrift? This is not going to give you any stability. You need to anchor your currency to something that is stable, such as gold. Peter thinks we are going to go back on the gold standard and there is no single currency that can replace the dollar since there is no currency backed by anything.

If a currency were to back itself by gold and to have enough gold reserves to pull it off, then maybe they can get back to that position of trust. However, that may take some time. Peter said the most likely thing is the dollar collapses and the main reserve will be gold. Central banks will probably hold foreign currencies of various central banks in reserve, but the percentage that will be dollars will be dramatically reduced from what it is today. Bruce wondered how this affects the U.S. citizens’ lifestyle. Peter said it will be dramatically diminished. Americans are in for a big decline in their standard of living because our money is going to lose value, our purchasing power is going to plunge, and many things that Americans take for granted today will be unaffordable.

Things that are now common will be luxuries, and Americans are going to have to find a way to get by with a lot less. They are going to use a lot less energy and not drive their cars as often. They may sell two of their cars and be left with one. Americans may find themselves renting out rooms in their houses. Two family homes may be reduced to one, and parents may be moving in with their children or vice versa. Americans are also not going to be shopping as much for things. People will learn to sew again and repair things. Right now if your television breaks you just go buy a new one. Now, they are going to be repairing their old television sets. People will not be getting a new cell phone every year, but rather the same cell phone for 5-10 years. We just don’t have the money or resources, and things are going to be too expensive, so we are going to have to be rationing down our lifestyle.

This means the whole economy is going to change. We have more retail space per capita in America than any other country. We have more shopping space than any other place. This is going to change since a lot of these shopping centers are going to shut down since no one will be shopping here. No one will have any money, and the prices will be too high for them to buy anything. We may be buying used things more, but we will not be buying brand new things the way we are used to doing. Americans will be spending much bigger percentages of their incomes on food and energy. Right now the typical household spends about 10-15% of his income on food and energy. After the crash it might be 30 or 40%. The question is what Americans are going to give up when they have to spend so much money just to eat.

Americans are going to have to move their diet down. They are not going to be eating as much fresh fish or beef. People are going to eat more potatoes, which are probably going to cost what a steak costs now.

For more information on Peter’s company, you can visit him on the website at europac.net. He also has a precious metals company you can find at schiffgold.com. He also does his own radio show on the internet at schiffradio.com. He is one five days a week from 10 am-noon Eastern time. He has also written a book called The Real Crash, which Bruce recommends. Tune in next week as Bruce and Peter discuss real estate clientele.

Tags: America, bankruptcy, bruce norris, credibility, David Stockman, Euro Pacific Capital, Federal Reserve, gdp, Japan, market crash, Norris Group real estate radio show, Peter Schiff, the norris group, The Real Crash, third rail, wall street
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Ward Hanigan, Founder of ForeclosureForum.com, Joins Bruce Norris on the Real Estate Radio Show #325

Friday, April 12th, 2013

Founder of Foreclosure Forum

(Full Bio)

Bruce Norris is joined again this week by Ward Hanigan. Ward is the founder of Foreclosure Forum.com and the educator of real estate investors for the last 20+ years. He is the most recognized name in trustee sales training and one of the most respected men in the business.

Ward mentioned in the last segment how he received a surprise speaking invitation. At this speaking engagement, there happened to be a 28 year old in the audience named Greg Metcalf who was not doing well at the time; and Ward changed this. He was looking for something else to do since he had his own janitorial service business servicing a couple broken down office buildings in the Orange County area. He hated doing this and was going to real estate meetings to search for something onto which he could latch. When he heard Ward speak, he was absolutely thrilled.

Two weeks later Ward showed up at the area Congress for real estate’s meeting, and this same guy was there again. This time he latched onto Ward and told him he knew what he wanted to do and asked if he could teach him. Ward told him congratulations, but unfortunately he did not know anyone he could recommend him to who was qualified enough to train him. Ward simply told him to do what he did, such as reverse engineering the foreclosures he watched down at the sales and to go to different libraries and read the codes on foreclosures and a book by John Beck on foreclosures. Greg really wanted Ward to teach him, but unfortunately Ward had to tell him he wasn’t a teacher or trainer. Greg was actually lucky he caught him in the first two talks since he was probably not going to give anymore after that. Ward gave him his phone number and told him if he had any questions to call him. He wanted Ward to train him when he would not even know where to start. He had not even thought about training anybody and would not know how long it would last.

In the end he agreed if he did train him it had to be three days. One day would be on basics, the next on title record searching, and the third day would be taking him to the recorder’s office and having him demonstrate to them that he had mastered title searching skills. He would also have to teach him formulas to figure out where to stop the bidding, which is known as the Best Bid. Greg said he would do anything Ward asked him to do, and he told him his wife didn’t really want him doing it since they didn’t need to create their own competition. Greg said he would sign anything his attorney came up, but he would never come into Ward’s area of San Diego. To this day, he never has come to his area.

They kept talking between each other, and finally he started speaking for other speakers since he enjoyed it so much. Somehow Greg would find out where he was speaking and would be at this event. Finally, he told him it would take three days and would not balloon it into a longer time period. He could not give three days to somebody for nothing, and Greg said he would not expect him to do that. Ward’s wife told him to charge $1,000, which he thought was crazy. She said this was the point and that Greg would say no. If he is still living at home, he is not going to have $1,000. He came back and gave him this price, and Greg said this was fine. He ended up training him in what he called his jack-in-the-box training.

He had nothing set up for it, not even a classroom. He went out to the stationary store and bought a small white board and tripod. He put this beside his desk and called it jack-in-the-box training because as he went through it, he would see a good formula a go through the file to dig it out. Ward gave Greg a folder containing about 30 forms as a well as a copy of his own resource manual he created to keep track of all the tricks he learned himself. Greg went right back and used his dad’s 401k money to buy two properties. Within about a month, his father was so flabbergasted with the deals that he did not want to resell them but keep them. He also did not want to refinance them, so all of a sudden Greg’s mom called Ward to convince his dad to refinance the properties or sell them so Greg could get going again. Unfortunately, his dad would not. Greg went to get a job at First American Title Company since Ward told him he would not talk to him again if he went back to janitoring. When he took the job, Ward told him that he sucked them dry and was right in the middle of the castle. Ward, an atheist, and Greg, a born-again Christian, are the closest of buddies, and at the end of the day he has been fairly successful and is worth millions.

Greg took something and just ran with it, and he has a tremendously maniacal work ethic Ward has not seen in anybody else. Seven days a week, from 6 in the morning to nine at night, he would be working. He decided after two years that he had learned as much as he possibly could. Ward implored him to leave on good standing and wanted him to have an open door between himself and First American, which he did. They even let him keep his key to the company after he left. This meant he could go in to use the computer and all the other services, which Ward thought was cool for him. His dad also ultimately relented, and he now has a pile of cash. Before he did this he started a foreclosure notice service up in Orange County since Ward told him there was only one there originally. He told him to create a service, and they would build it up to be his service he would own. He could then sell the company for $60, $80, or $100,000. He could then use this cash to get into the business. He said they would work together and he would help him as much as he possibly could, and off they went.

Ward would go up to Orange County about once a month on Saturdays, which became known as the “help day.” He would go up there about 8 in the morning and leave at 6. They would use the community room at a bowling alley since his wife was quite a bowler. He learned they had community rooms they let you use for free if you had a group of people who might be eating in the restaurant. This also included free parking, and these were door buster kinds of meetings. Unfortunately, nobody was doing this kind of thing. However, you could not come in unless you were subscribing to Greg’s service and were a paid-up subscriber.

Annually Ward has a gathering for all of his students if they wish to come. Usually about 100-120 show up, and most of them are successful in the business. These people are the doers. There are so many types of people in the business; those who have the brains, the money, and are motivated. However, when it gets right on down to brass tax, it is absolutely flabbergasting to Ward that the people he thinks will take off don’t ever seem to do it. The people who come to these meetings are usually those who are doing something in the business; and they love fraternizing. They have had people get married who met at these reunions. They have also had all kinds of business people get together to combine their tasks and money.

Ward has been training people for a long time and has seen people who have all the ability who don’t use it. Bruce wondered what the ingredient is for the people who do use it versus the ones who don’t. Ward said he almost thinks it is because they are not desperate enough. Ward did not get into the business originally when he knew there were foreclosures. He poked at it in 1976 and saw he didn’t have the time; then he did it again in 1978. He waited another four years after this until 1982, and he had absolutely nothing going for him. It was a blessing in disguise that he had no job where he was making a lot of money. He had a job where he was making a lot of money at it, but he could not stand it since it was so boring and did not use all of his native abilities. However, you don’t want to go out and bet on yourself to try something else.

Bruce asked how the industry has changed since the downturn. There has been a big price damage, and for a few years prices were going down like a rock while not many lenders were cutting loose with properties. Bruce wondered what the first good year after the downturn was for people in the trustee sale business where there were margins and properties. Ward said he would think that 2006 was the time it seemed to come unraveled. From 1996 to 2006, this was the time period when things were fantastic. In the old days when Ward started in 1982, there were only three people who showed up all the time to bid. Every once in a while you would have a new person show up, hang around for about a month, and you would never see him again. Even then we were over 1 million population, and even then most people did not even know how to spell the word foreclosure. They had everything to themselves and would present to the newcomers who came. These people became part of the regulars, and this became the popular thing.

All of a sudden they hit a critical point where foreclosures were in the newspaper, on television, and even movie scripts are being made out of them. This cheapened them and made people think that anybody could get into foreclosures and it couldn’t be that difficult. They would have people show up to bid and buy terrible properties. They bought something in which they did not even know all the liens against it.

Bruce wondered if there is much protection at a trustee sale if you are about to make a mistake and the fellow bidders will come to your aid. Ward said no and that there is no way of this happening. Ward said he once did it and was rebuffed for it, and he said he could understand why. There was an older gentleman who Ward was suspicious may not have known he was bidding on a second. He thought he was bidding on a first, which made it a bad situation. He walked up to him and asked him if he had done his research, and the gentleman just told him he had everything handled. This person ended up losing thousands of dollars on this property. It is natural for people to think you are trying to throw them a curveball in a very competitive environment on the foreclosures. They think if you went down there to bid, then why would you be telling a complete stranger some important information. Ward just gave up doing this after a while. Bruce said it is interesting he even attempted it in the first place. He said he did not do it once, but a couple times.

Here we are now in 2013, and news article come out now about price aggression and price increases. At the same time, however, there is not a lot for sale in the MLS. Bruce asked Ward what he makes of this market and where he sees opportunities for investors to make money. Ward said he has a steady stream of his paces and had an open door policy with his trainees, telling them they could call him until they died regarding any questions regarding their training course. This open door has allowed him to really keep up with the tempo as time goes on. He asked the guys what is happening now, what their biggest problems are, and what they wish they could take away. It seemed to be prospering by looking into the niches, in the areas that are not the most obvious. This includes bidding at the foreclosures of junior liens, seconds, properties with IRS liens, properties that are older than ten years, and anything that the hedge fund guys and newbies turned their nose up. Often there is a gem in this pile. If they just have a mom and pop operation low overhead, make $30-$40,000 on the deal and stitch together 8-10 of those a year, then this is a good deal firm.

Bruce asked if the easy access to information changed trustee sale business. Ward said it absolutely has. He saw this very early in the game and seriously thought of buying a foreclosure notice service company and then just closing it. He and his wife had a discussion, and she told him what would happen is somebody else will open one up in the vacuum. Are you going to keep buying everybody who starts a foreclosure notice company? Sean O’Toole has a fabulous service that deals with these kinds of things, and the more fabulous the service is for the average man, the worse it is for a pro. If everybody knew what Ward knew, they would be competing against themselves. This is why Ward has a saying, “What you think is good is bad, and what you think is bad is good.” Ward really believes this; and this started way back in the days when personal computers came out and everybody was jumping up and down with joy over them. Ward already predicted it was not going to be good.

Bruce asked if it was a good time to accumulate dingbat investments and also what these even are? Ward said a dingbat is a niche in the rental market. Everybody thinks that a tenant is a tenant. This could not be further wrong. Ward made a timeline for a person’s life and showed that from 0-25 you are just growing and learning. You then join the work force from 25-65, the forty years when you have a lot of disruption in your life. This includes marriage, having kids, and changing jobs. This manifests itself with people wanting to move for all these reasons. From 65 you are retired, have your gold watch, and you will probably not get married or have kids after this age. Things settle down and there are far fewer disruptions. Ward loves renting to people from 65-85 since this is the absolute sweet spot in a rental market. This tenant wants exactly what Ward wants, which is no surprises, no changes, he just wants to be left alone and not bothered. Ward rents to single retired seniors, especially if they are on Section 8. He then has the guarantee that the government is going to cover their rent or at least the bulk. Usually 16.2 years is how long a tenant stays, and it is always a one-bedroom, one-bathroom house.

Tags: bruce norris, First American Title Company, foreclosures, Greg Metcalf, IRS liens, junior liens, Norris Group real estate radio show, san diego, SEAN OTOOLE, the norris group, Ward Hanigan
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