The Norris Group Blog

Christopher Thornberg Principal at Beacon Economics (Full Bio)

This week Bruce is joined by Christopher Thornberg. Christopher is an expert in the study of regional economies, real estate dynamics, and business forecasting. In 2006, he confounded Beacon Economics which is economic research and consulting firm that specializes in real estate markets, local economic development, and public and private policy issues.

Beacon Economics will be doing its first Los Angeles Forecast Conference in the last week of July. There will be a panel of CEOs representing health care and the financial industry who will be talking about the changes occurring in their industry. It will be their first annual event. They are partnering with the LA Chamber of Commerce and Pepperdine to make this event happen. Southern California is the economic center of gravity within this state, and the center of Southern California is Los Angeles.

Bruce asks if a company is looking to relocate would find California to be a leading option. There are some things you have to consider if you come to California. You have to worry about where your employees are going to live. Nowadays homes are much more reasonably price compared to a few years ago. Companies coming to California will be able to rent commercial property for a lower price per month as well. The prices have not come down as much as they should have though, because of the leasing situation, and because there are still some landlords who seem to be in denial about the shape of the economy. Residential and commercial property are two sides of the same coin, and yet they come at different stages of the business cycle. Residential leads the business cycle, and commercial lags it.

The commercial real estate market is about to feel the same hit that the residential market has taken, but it is taking more time to mature. Part of the reason the commercial market is taking longer to go down is because the banks are not pursuing bad debt. The banks have more incentive to be lenient towards people they have lent money to, because if you foreclose on a loan then you actually have to mark that loss down in your books, but if you do not foreclose then the FDIC will allow you to keep that on the books at face value. They call it extend and pretend.

In the residential market there are a lot of properties that have not begun foreclosure, and some people have not made payments for 18 months. There are some banks that are willing to delay the foreclosure process, and some banks just can’t catch up, and there is also a problem with moratoriums that are slowing this situation down. Christopher thinks that if you have a problem then you should be trying to work through it and move forward, but we seem to be fond of dragging this problem out. Some will tell you that you want this problem to be solved over time, because the economy is already so weak, but Christopher says that there is very little evidence that foreclosures significantly hurt the economy. Moratoriums on foreclosure make it a lot longer problem.

On Christopher’s website there is a quote saying, “It’s not what Wall Street troubles me to California, it’s what California troubles me to Wall Street.” When we had a big financial meltdown last year, many reporters called Chris saying “What does this mean for California?” Christopher laughed at this, because Wall Street has presented itself as the leader of all financial things, but that is nonsense. The stock market can change its direction in the afternoon if it gets afraid. California has been in a recession since 3rd or 4th quarter of 2007, yet Wall Street made many bad bets and it did not seem to affect the economy for close to a year. If you did have a true meltdown in the financial system then you would have massive deflation and things would be far worse than they are now. We had a depression expert in the Federal Reserve, and he wasn’t going to let that happen.

Trillion has replaced billion as the cost of solving problems, but Christopher says inflation does not seem to be a likely outcome of the spending we are doing. This is because a large portion of the money we are spending is being done through treasury bonds. That does not have an inflationary effect. What does have an inflation effect is the expansion of the money supply. The Fed, through its program of quantitative easing, has expanded its monetary base by 100 percent over the last year. If that money was to get into the real world then it would have an inflationary effect, but it hasn’t. Most of the money that the Federal Reserve has made has ended up in bank reserves. If the banks started lending that money then we would have an inflation problem, but Christopher thinks that if that ever happened that the Federal Reserve would start to get rid of that excess liquidity.

Bruce asks Christopher what the ramifications will be for 12 to 13 percent in California. Christopher does not think that unemployment is going to be a big problem. Unemployment is a lagging indicator. However, it does increase the amount of stress being put on the financial system. People over their heads in debt and underwater in their home but beyond that he doesn’t see a direct effect on the economy.

Bruce asks if he thinks lower wages will be an issue. Will renegotiation for lower union rates will come up? Christopher thinks it will have a little impact. Hours are already being cut for government and education jobs.

If California is one of the leading states in unemployment then it will affect migration patterns in the short run. The number one reason people move is for job opportunity. The number two reason is relative home prices. This means people will not have as much motivation to move into California for a while, but some people may start moving back into California because of the low home prices.

Builders couldn’t possibly be interested in creating building lots right now, so Bruce is worried that there will be a housing shortage around 2012 or 2013. Christopher thinks that is possible but he does not see us having an issue with single family housing. There are lots of lots ready out there, and as soon as someone sees the opportunity they will build. Christopher does think there will be problems with rental houses. When people start moving back, there will not be enough housing for low income families. Christopher hopes the state will make policy changes to encourage multi family production.

Bruce thinks that it might be a solution to give investors financing so that they can hold properties for a reasonable price because then the market would dictate what the rent would be. Christopher thinks we got into this mess because of too much financing but now there is not as much financing as people would like. Christopher wonders if there is a true market failure occurring right now or are people simply suffering from credit withdrawals. There was never too much financing for investors who buy and hold properties and eventually pay them off. The financing problems occurred when speculators and owner occupants got involved. If your goal is to find reasonable rentals, they are all over the place in Moreno Valley and San Bernardino, but the financing is not available for investors to get these homes. What seems like a sure deal to investors does not seem like a sure deal to the banks.

Bruce thinks that the number of bank owned properties is going to dramatically increase in the next year. Bruce asks if Christopher sees more price damage coming to California because of that. Christopher does not think that these bank owned properties are not going to really decrease prices but they will help hold prices down. There is pent up demand for housing. If you go to an auction, you will see people who want to buy foreclosed units. Bruce thinks that this is true in the short run.

Bruce wonders how we can have pent up demand when we have the most generous financing programs in existence. It is surprising to Bruce that there is this much demand when there are so many people who have been artificially allowed to participate before they were ready.

In Riverside and San Bernardino, rent is more expensive than the PITI payment. That has never occurred in California. This is occurring because there are many people who cannot qualify for mortgages because they already have a bad mortgage on their payment. Unemployment and foreclosures are at a record, so Bruce does not understand who is actually going to borrow the money to buy these homes.

Christopher thinks there are more potential buyers who smartly sat on the sidelines and waited for these opportunities to come up. There may be other people who are being co-signed by their parents. If you talk to bankers they will tell you that there are people coming through their doors who have a recent foreclosure, and they will look the other way because they know that these people have made a mistake and there is no point in turning down a potentially good loan. Bruce agrees with Christopher here.

Most of the mortgage market is being dominated by Fannie Mae and Freddie Mac. Unless Fannie and Freddie are willing to back mortgage product and buy them off of banks, there is going to be very little money available.

Current loan modifications in California do not change the principal balance. Christopher does not think these have any chance of working. You cannot expect to have a true recovery by simply modifying the payment. People are not fooled by these modifications. Even though we are modifying their payments, they are still in an incredible amount of debt. It will take many years for them to get rid of the debt they have taken on, and their credit score will heal faster than their equity position. In 2008, 7 out of 10 people who applied for a loan modification ended up in foreclosure eventually.

Bruce asks Christopher what he thinks will indicate that real estate is starting to get healthy. Christopher thinks that sales are important and mortgage delinquencies from the Mortgage Bankers Association. For California, about 9 percent of all mortgages are delinquent. That tells you that we are no where near the end of this problem.

We look forward to Christopher being on our panel for I Survived Real Estate 2009.

Christopher Thornberg is a founding partner of Beacon Economics. Dr. Thornberg is an expert in the study of regional economies, real estate dynamics, labor markets and business forecasting. He has been involved in a number of special studies measuring the impact of important events on the economy, including the NAFTA treaty, the California power crisis, port security, California water transfer programs and the September 11th terrorist attacks. Prior to launching Beacon he worked with the UCLA Anderson Forecast where he regularly authored the outlooks for California, Los Angeles and the East Bay as well as performing a number of specialized forecasts for regions and industries. Dr. Thornberg lectures on a regular basis at a variety of public and private events, has appeared on CNN, Fox News and CNBC and is widely quoted in the press. He received his Ph.D in Business Economics from The Anderson School and his B.S. in Business Administration from the State University of New York at Buffalo. He specializes in International and Labor Economics. Dr. Thornberg continues to teach in the MBA program at UCLA and previously held a faculty position in the economics department at Clemson University.

Christopher Thornberg Principal at Beacon Economics (Full Bio)

Bruce Norris is joined once again this week by Principal and Co-Founder of Beacon Economics, Christopher Thornberg.

Bruce and Christopher continue their conversation about paying the debt we are currently giving our children. Christopher talks about World War II and how quickly we paid the debt back. Christopher doesn’t have a problem with raising money but government has a problem sometimes paying it back.

Bruce brings up that the State of California can’t raise money so how do you fix the issue. Christopher says California’s problem is $40 billion of a $1.8 trillion in economy which is only 3.5%. It’s not that big of a number. California is 18th in the list of states as far as paying taxes. We’re a little above average. We just collect them in strange ways. Instead of taxes on a ton of small things, we have larger taxes for a smaller bunch of things. Christopher says we have the most regressive property tax. There’s a small group of people who pay a larger portion of the taxes. There’s other ways to make California more tax friendly and pay off debt.

Bruce brings up Prop 13. Christopher thinks Proposition 13 is ridiculous. Voters would have to overturn that proposition.

Bruce brings up Citibank and the concept of cramdownsn which they agreed to cooperate with in bankruptcy court. Bruce asks if that’s possible and Christopher said it is. There’s a new president and an administration that’s more left leaning. Certainly some would pursue bankruptcy as a way to do so but it does incur costs above and beyond just losing your home. Other assets will be at risk. Christopher asks if judges will really consider this alternative as some of these people lied on their loan applications. Bruce says we haven’t put much pressure on the people who exaggerated income. Christopher says the FBI came out early and said they would not be pursuing the consumer. He finds it hard to believe a judge would take the same stance if a consumer blatantly lied on their application and then were seeking a cramdown.

Christopher talks about the huge issue of people going in to default after the payments are adjusted through loan modification. Reports suggest 50% go back into default.

Bruce brings up TARP and the term crawl back which is when CEOs have to give back bonuses if the banks restate their earnings. Christopher says they should have to give it back. Christopher says the problems in the market stems from the problem with executives in the financial system because they were grossly compensated for short-term returns. Christopher talks about some of the ways these executives made millions. He brings up a Lehman executive who made $400 million in six years and how he did it. Executives need to have some skin in the game.

Christopher says mortgage backed securities were used to hide risk. Bruce brings up what they used to call these instruments in the 1900s and how they were made illegal. Christopher is not apposed to derivatives, they’re just extremely complex. We just need to understand them more and the motivation for why people use them.

Bruce asks what the next shoe to drop will be in California. Christopher says asset values are now returning to normal. Savings rates are ridiculously low and debt is way up. Americans thought they were rich. Wall Street tricked these people into believing they could retire early. America has to get spending under control. It’s healthy but painful in the short run. Our economy is too reliant on feeding consumers what they want. It’s not we are buying too few cars today; we bought too many the past few years.

Bruce brings up that the consumer spending was a lesser percentage of the GDP in the past as it was in recent history. Christopher expects that to get back in line. Huge trade deficit was also part of this equation. There was a trade deficit and a savings deficit. In two years, there will be more exports, less imports, and less consumer spending and then we’ll have a healthy economy ready for growth. Bruce brings up that China won’t appreciate it much.

Bruce talks about a report Christopher Thornberg wrote called “Waiting to Save” which is about the habits of the younger generation (24-34) and their saving habits. Bruce says this generation will be picking up some tabs that they didn’t even create. Christopher says this generation grew up in a market where you borrow to speculate. People have to learn to live within their means.

Bruce asks about defined benefit plans. Christopher says for the most part they have left the room and only reside in government. He’s afraid these benefits might never happen and we might figure that out in the coming years. Many of these programs have lost much of their value.

Join us next week for a chat with Mike Cantu before we release his Rental and Property management seminar February 21st.

Christopher Thornberg is a founding partner of Beacon Economics. Dr. Thornberg is an expert in the study of regional economies, real estate dynamics, labor markets and business forecasting. He has been involved in a number of special studies measuring the impact of important events on the economy, including the NAFTA treaty, the California power crisis, port security, California water transfer programs and the September 11th terrorist attacks. Prior to launching Beacon he worked with the UCLA Anderson Forecast where he regularly authored the outlooks for California, Los Angeles and the East Bay as well as performing a number of specialized forecasts for regions and industries. Dr. Thornberg lectures on a regular basis at a variety of public and private events, has appeared on CNN, Fox News and CNBC and is widely quoted in the press. He received his Ph.D in Business Economics from The Anderson School and his B.S. in Business Administration from the State University of New York at Buffalo. He specializes in International and Labor Economics. Dr. Thornberg continues to teach in the MBA program at UCLA and previously held a faculty position in the economics department at Clemson University.

Christopher Thornberg Principal at Beacon Economics (Full Bio)

Bruce Norris is joined this week by Founding Partner and Economist with Beacon Economics, Dr. Christopher Thornberg.

Bruce asks what Christopher thinks about the phrase, “Since the Great Depression.” Christopher says it’s a bit of an exaggeration and there are definitely sectors that have been hit hard but it’s not that bad. Some assets are still holding well.

Bruce asks about the benchmark numbers that clue us in on a depression. Christopher says that before World War II, every recession was a depression. The word “recession” was created so there could be talk about economic downturns without alluding to the Great Depression which might cause panic. He says you could categorize a really bad recession as a depression.

Bruce asks about employment and if they’re measuring differently as there are several categories including under employed. Christopher says employment numbers are measured the same and there have always been those other categories. We’re mainly talking about people who want to find employment but can’t.

Bruce asks if Christopher thought he would ever see these big financial corporations fall. He said he did about six months before it happened because they had really leveraged themselves and it was unsustainable. Debt to equity ratios were 80 to 1. It became apparent any turmoil would cause a failure. The thinking was the more leverage, the more return. During bad times, that same principle works the other way; it magnifies losses. Now the government is picking up the pieces.

Bruce talks about the rating systems that we thought were independent and we find out they were getting commissions. Christopher says people who listen to Moody’s and S&P need to understand the system a little more. Many of these assets they were rating were new and didn’t have much history. Their ratings came from modeling so there was not a complete knowledge of risk. Bruce says that’s an issue because people were looking to these companies and they thought they could trust them. Christopher says people have to do their own due diligence. People stopped looking at fundamentals and weren’t doing their homework. When the market was working, people got lax. Bruce and Christopher talk about Bernie Madoff and how he could possibly get away with that for years without getting caught.

Bruce asks why it seems that when our bubble popped it seemingly caused the rest of the world to collapse. Christopher says that the U.S. is definitely the financial guerilla in the world at 25% of the world economy. However, the U.S. was not the only place where abuses of the financial systems were going on. The kind of borrowing going on in Eastern Europe is a perfect example. Some countries are in much worse shape than we are currently.

Bruce asks Christopher if there are ramifications to the U.S. and its reputation because of the fall. Christopher says there won’t be. Our dollar is good by comparison. In the U.S., you know what you’re getting and we have a very diverse and large asset base. U.S. Government debt is considered the best. The talk that everyone was going to Euro was all talk. In 2005 there were some issues but the problem spread to other banks in other countries and the dollar got everything back that it lost in 2005.

Bruce talks about TARP and if Christopher thinks the first half was spent wisely. Christopher said yes. Congress is upset that there is not enough oversight. Christopher says TARP was not meant to force banks to lend money. It was meant to stabilize the banking system. The system is still in horrible shape. There was an enormous increase in asset value and not just in real estate. The delinquencies on all sorts of debt are way up. Banks will possibly lose trillions. The banking system needs to keep going and we have to step in and help the banks recover.

The initial TARP program Christopher did not like. They were going to go in and overpay for assets. They’ve been taking chunks of the money and give it to banks that are too big to fail (Citigroup, Bank of America) and small banks that are healthy that haven’t participated in the debt frenzy to allow them to expand. It allows these banks to pick up other banks as they fail.

Christopher says the TARP money is all borrowing and the government creating Treasury bonds. The government is also facing a huge fiscal deficit so they need t borrow.

Bruce talks about interest rates and its effect on inflation and trillions in deficits. Christopher sees about another two trillion to total 11.5 trillion. It will be 15% of GDP. It’s all relative and it’s not that bad. And they unfortunately have to pick up next week. More about Christopher and Beacon Economics at beaconeconomics.com.

Christopher Thornberg is a founding partner of Beacon Economics. Dr. Thornberg is an expert in the study of regional economies, real estate dynamics, labor markets and business forecasting. He has been involved in a number of special studies measuring the impact of important events on the economy, including the NAFTA treaty, the California power crisis, port security, California water transfer programs and the September 11th terrorist attacks. Prior to launching Beacon he worked with the UCLA Anderson Forecast where he regularly authored the outlooks for California, Los Angeles and the East Bay as well as performing a number of specialized forecasts for regions and industries. Dr. Thornberg lectures on a regular basis at a variety of public and private events, has appeared on CNN, Fox News and CNBC and is widely quoted in the press. He received his Ph.D in Business Economics from The Anderson School and his B.S. in Business Administration from the State University of New York at Buffalo. He specializes in International and Labor Economics. Dr. Thornberg continues to teach in the MBA program at UCLA and previously held a faculty position in the economics department at Clemson University.

Christopher Thornberg Principal at Beacon Economics (Full Bio)

Bruce Norris is joined by Principle at Beacon Economics and panelist for I Survived Real Estate 2008, Christopher Thornberg. Bruce and Christopher discuss how Christopher got started in the prediction business, letting the data speak to you and street smarts, how this journey caught so many off guard, the duration of bubbles, how the downturn is worse then expected, looking at past real estate bubbles and how they compare, the chance that people who can afford home payments walk away because their neighbor owes half what they do, looking at what caused most of the damage, subprime being the fuel for the fire, the main problem being people paid too much, how falling prices will eventually allow people to get back in the market, home prices and consumer spending, unemployment and what that can mean for migration, when it might turn, if downturns hit coastal regions, the price decline and how it works its way out to coastal regions, returning to more reasonable ownership levels, following the foreclosure lists and realizing that investors weren’t the problem, how lenders are tightening financing, how Fannie Mae and Freddie Mac are exposed in volatile markets, the large amount of leverage within banks, equity position of banks, the story behind pent up demand, commercial real estate in the coming years, the land price bubble, false wealth and consumer spending, how to notice a commercial bubble is popping, the Federal Reserve and how they’re dealing with the market, dealing with inflation compared to past cycles, and what policy Christopher would change in the current market.

Christopher Thornberg is a founding partner of Beacon Economics. Dr. Thornberg is an expert in the study of regional economies, real estate dynamics, labor markets and business forecasting. He has been involved in a number of special studies measuring the impact of important events on the economy, including the NAFTA treaty, the California power crisis, port security, California water transfer programs and the September 11th terrorist attacks. Prior to launching Beacon he worked with the UCLA Anderson Forecast where he regularly authored the outlooks for California, Los Angeles and the East Bay as well as performing a number of specialized forecasts for regions and industries. Dr. Thornberg lectures on a regular basis at a variety of public and private events, has appeared on CNN, Fox News and CNBC and is widely quoted in the press. He received his Ph.D in Business Economics from The Anderson School and his B.S. in Business Administration from the State University of New York at Buffalo. He specializes in International and Labor Economics. Dr. Thornberg continues to teach in the MBA program at UCLA and previously held a faculty position in the economics department at Clemson University.

Christopher Thornberg will join our panel of experts on August 23, 2008 at the fundraiser, “I Survived Real Estate 2008.” Proceeds will go to the Orange County Affiliate of the Susan G. Komen for the Cure. See iSurvived2008.com for more information.

Christopher Thornberg Principal at Beacon Economics (Full Bio)

In this second interview, Christopher Thornberg and Bruce Norris discuss how builders are adjusting to the new California real estate reality, how builders are notoriously optimistic, why builders continue to build, inflation pressure and why it’s hard to predict, consumer spending, when the subprime peak will occur, possible policy changes and the presidential elections, how property taxes will cause problems for cities around the nation, employment, out migration, and the commercial market.

Christopher Thornberg is a founding partner of Beacon Economics. Dr. Thornberg is an expert in the study of regional economies, real estate dynamics, labor markets and business forecasting. He has been involved in a number of special studies measuring the impact of important events on the economy, including the NAFTA treaty, the California power crisis, port security, California water transfer programs and the September 11th terrorist attacks. Prior to launching Beacon he worked with the UCLA Anderson Forecast where he regularly authored the outlooks for California, Los Angeles and the East Bay as well as performing a number of specialized forecasts for regions and industries. Dr. Thornberg lectures on a regular basis at a variety of public and private events, has appeared on CNN, Fox News and CNBC and is widely quoted in the press. He received his Ph.D in Business Economics from The Anderson School and his B.S. in Business Administration from the State University of New York at Buffalo. He specializes in International and Labor Economics. Dr. Thornberg continues to teach in the MBA program at UCLA and previously held a faculty position in the economics department at Clemson University.

Christopher Thornberg Principal at Beacon Economics (Full Bio)

Christopher Thornberg is back with Bruce Norris discussing recent CEOs being fired or leaving financial firms, past bubbles vs. current real estate bubble, bond ratings, affordability issues in real estate, Super SIV fund, how real estate will change consumer spending, how foreclosures will effect prices, foreclosures in some of the most respected and stable financial institutions, possible bank solutions, what rental markets will do in the coming years, and why banks will have a hard time if they set bad precedents.

Christopher Thornberg is a founding partner of Beacon Economics. Dr. Thornberg is an expert in the study of regional economies, real estate dynamics, labor markets and business forecasting. He has been involved in a number of special studies measuring the impact of important events on the economy, including the NAFTA treaty, the California power crisis, port security, California water transfer programs and the September 11th terrorist attacks. Prior to launching Beacon he worked with the UCLA Anderson Forecast where he regularly authored the outlooks for California, Los Angeles and the East Bay as well as performing a number of specialized forecasts for regions and industries. Dr. Thornberg lectures on a regular basis at a variety of public and private events, has appeared on CNN, Fox News and CNBC and is widely quoted in the press. He received his Ph.D in Business Economics from The Anderson School and his B.S. in Business Administration from the State University of New York at Buffalo. He specializes in International and Labor Economics. Dr. Thornberg continues to teach in the MBA program at UCLA and previously held a faculty position in the economics department at Clemson University.

Christopher Thornberg Principle at Beacon Economics (Full Bio)

Bruce and Christopher Thornberg of Beacon Economics continue their conversation on the current real estate market. Just why is it that some economists are always so rosy?

Christopher Thornberg is a founding partner of Beacon Economics. Dr. Thornberg is an expert in the study of regional economies, real estate dynamics, labor markets and business forecasting. He has been involved in a number of special studies measuring the impact of important events on the economy, including the NAFTA treaty, the California power crisis, port security, California water transfer programs and the September 11th terrorist attacks. Prior to launching Beacon he worked with the UCLA Anderson Forecast where he regularly authored the outlooks for California, Los Angeles and the East Bay as well as performing a number of specialized forecasts for regions and industries. Dr. Thornberg lectures on a regular basis at a variety of public and private events, has appeared on CNN, Fox News and CNBC and is widely quoted in the press. He received his Ph.D in Business Economics from The Anderson School and his B.S. in Business Administration from the State University of New York at Buffalo. He specializes in International and Labor Economics. Dr. Thornberg continues to teach in the MBA program at UCLA and previously held a faculty position in the economics department at Clemson University.