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.