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By Bruce Norris .

Vice President and Chief Economist of CAR Leslie Appleton-Young Joins Bruce Norris on the Real Estate Radio Show #281

Friday, June 8th, 2012


Vice President of C.A.R.


(Full Bio)


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This week Bruce Norris joined once again by Leslie Appleton-Young. Leslie is vice-president and chief economist for the California Association of Realtors, a statewide trade organization with over 150,000 members dedicated to advancement of professionalism in real estate. Leslie directs the activities of the association’s member information group. She oversees the analysis of the housing market and brokerage industry trends, member communication, and membership development activities. She also is closely involved in the association’s strategic planning efforts and is a well-known speaker in California.

One of the things Bruce has noticed that has been on the increase is the percentage of equity sellers. This is probably a very significant development because in a way that is an acknowledgement that they are not going to see 2006 prices any way soon. It is an embracing reality and also recognizing that whatever they are going to do next in real estate is a good time to do it. If you are selling today and trading up, you are going to be fine. If you are trading down and possibly dealing with some other investment property, there are a lot of things you can do to get the advantage of the positives in this market, even though you are selling at a price that a few years ago you would have been somewhat disappointed in. When you are buying in the same market, you might ask yourself what the big deal is. People have a lot of emotional attachment as was noted in last week’s radio segment. You have almost 30% of the mortgages in California underwater, so people are in distress and many stuck right now.

Bruce wondered how different the reasons are for people buying in 2012 than in 2006. Leslie said you have more first-time buyers, and you have a little bit more of the trade-up situation going on because those equity sellers have finally realized this is not such a bad time and are going to jump on it. If you look back in 2006 and 2007, it was really a market dominated by REO purchasers and larger and smaller investors. It was more of a situation where certain prices were so low they were going to buy as many as they could and do their business model that way. When you look at the market today, it is much more balanced. It depends on the area. If you look at the sales that closed escrow in April, 58% were equity sales, about 22+% were REO, and about 19.4% were short sales. Therefore, you have a little bit of a balance between short and REO; it is a little bit more on the REO side while the rest are equity sales. When we first started to come out of the bottom, the REO market was well over 50% in many areas and likely close to that statewide as well. We certainly have over the past several years whittled down on at least the available inventory of REOs to the extent that now you have a two month supply, even less in some areas, of REO inventory.

One of the things mentioned in the first segment was shadow inventory. FHA has approximately 41,000 REOs right now, but they have over 700,000 people that are 90 days late. Fannie and Freddie have similar stories, and the loan mods have similar percentages. Bruce wondered what will happen with this inventory, if they are just going to really dole it out over time or take it to the sidelines as rentals. Leslie said they will most likely keep doing what they have been doing, which is to dole it out over time since this is the only thing that really makes sense for them in terms of managing their balance sheet and recognizing the losses on those assets. What is interesting is that it seems like almost every year, not including the last year or two; people would have a date set. They would ask questions like if they heard that on September 15 all of the banks are going to dump all of the foreclosed properties in one day. This never happened, and it will not happen. However, we still cannot say that this problem will not be with us for quite some time, possible 4-5 years in some areas. There is no magic bullet here; it is really one property or loan at a time. The impact of various programs will ebb and flow, but it takes time for the lenders to work through each and every one of these, and it is going to define our market for a while. Every year the market seems to be a little bit different, and certainly this market with fairly robust sales for six months in a row is showing that people are able to be more responsive today to the advantages of the market.

Bruce wondered what percentage of these sales investors are buying. Leslie said the investor sales in California are probably over 20%. In some areas they are significantly higher. All cash purchases have been about 25%. NAR had a number that was in excess of 30% a couple months ago. There are non-investors who are paying all cash for homes, but it is a very significant part of the market. About 80% of them are investing to rent, and possibly the other 20 are reselling, flipping, fixing them up, and selling them. However, this will vary by market.

What is interesting is we have had a big recession, and if you look at household formation, it really didn’t happen. We are way behind on household formation, and at some point the echo boom generation is going to play catch-up. You will see an article from time to time talking about the coming housing boom. When you look at the lifestyle choices that the generation has had to make given how lackluster the job opportunities have been and the doubling and tripling of families, at some point they are going to have the income and the job market is going to be conducive for them to break through or break free and enter the housing market. New construction was just hit very hard and has started to come up the last couple years, but it is still well below the 200,000+ units we need a year to house everybody. Things will be changing, but as long as the economy is as challenged as it is with the euro zone and Japan and India slowing, there are a lot of global trends that will impact our economy and our financial environment.

Things are either a lot more confusing than Bruce ever acknowledged, or it is more confusing than it ever has been. Leslie said she believes it is the latter and recognition of the impact of all these forces outside of our control is more heightened than ever. Mark Zhandi came out with an article that said the GDP is really dependent on the end result of Greece. Some people when hearing this might think that Greece is the size of Rhode Island, so how would it have that big of an impact. It is a little frustrating for Bruce as a local investor in Riverside that he has to pay attention to a lot of things outside of real estate and outside of our country. The financial community is a global community, and everyone is a player. Everyone is exposed to Greek debt and the Euro Zone. With all of that the financial crisis was a real wakeup call that it is not just about me in my little area, but you are directly impacted by what goes on overseas. It really is overwhelming.

Mark Zhandi also said we sometimes have the tendency to create today’s policy to solve yesterday’s crisis. Leslie said she heard him speak in D.C. a couple weeks ago, and he was right on target with comments like this. We are dealing with Dodd-Frank and qualified residential mortgage as if that is going to really be a game changer, and it is not. A lot of requirements for that loan is not necessary. Leslie said it will be a game changer in a very negative direction. One of the things Leslie said she has been concerned about is in order for a mortgage to qualify, the loan needs to have 20% down. You look at the last ten years of what the GSEs have purchased, and less than 15% would have qualified as a QRM under this definition. It is very restrictive, and the data shows that the difference the delinquencies and foreclosures for 10%, 15%, and 20% down are not that different. To focus on 20% is really going to be a burden for a lot of first-time home buyers.

There are a lot of policy implications tied up into what was most likely a real attempt to not let that happen again. However, the pendulum always swings too far in either direction. The timing of this is really not the best, and we don’t need to have the most restrictive lending policy when we have the affordability that is at all-time highs. When you can actually buy something and reduce your cost as opposed to rent, you would think that would be good idea to be more aggressive as a lender than less. There are so many people who, if they could, would just a straight refi that would take them down from 7% to 4%. They would then be able to stay in their home, so Leslie does not understand why this would not be a doable thing. There is really no difference since you are already in the position of 140% LTV, so you might as well be at a 140% LTV with a loan that somebody is going to make a payment on that you can afford. We saw in the San Fernando Valley in the ‘90s that people stayed in their communities even when they were underwater. It is not a completely rational profit utility maximizing decision when people look at their home in their community.

Bruce asked Leslie if she thinks Fannie and Freddie will not exist in ten years. This was the impression the GSEs gave Bruce and Sean O’Toole when they spoke in front of them in D.C. Leslie thinks this message has been sent loud and clear. If you looked at the white paper that the FHFA came out with earlier, you would see that this year they essentially said as much. However, the question is if it is a new entity or a combined entity, and what does it do if it is backstops. There are a lot of unanswered questions that have just not been fleshed out yet, and it is going to take a couple of years for them to do that. However, there is enough possibility of major change in which we all need to be involved. If you look at the mortgage market today, you see that last year well over 90% of the loans originated in United States for home were Fannie Mae, Freddie Mac, or FHA. That is just the way the market is, so the first-pass argument is that whatever you are going to do, don’t do it now. We have an industry and economy that is trying to get back on its feet. Looking longer term, Leslie did not think there was any doubt that there are changes that should, could, and will be made. The point is to do it in a reasoned fashion so that you avoid as much as you can, both pitfalls and distress, that is going to take the economy back where we don’t want it to go.

Bruce thinks one of the things that is going to happen in 2013 is we are going to have to get serious about generating some revenue and increasing taxes. Bruce wondered if Leslie fears that real estate would be one of the obvious targets for some of the policy changes. Leslie said she had the opportunity to go back with her leadership team a couple months ago, walk the halls, and go in and talk to the California Congressional Delegation. Without a doubt there is support for the mortgage interest deduction and a general feeling that this is not a time to mess with housing since it needs to get back on its feet. If and when a major effort at tax reform begins, likely after the election, everything is going to need to be on the table. Leslie said they were told this a couple of times by people who were very sympathetic. The thought was if we take the mortgage interest off, then somebody else is going to their thing off while another is going to take their thing off until pretty soon nothing is going to be on the table. Being realistic about it, everything is going to be on the table, and we will just have to see how things go.

The majority of the California Congressional Delegation has signed on to a resolution that has been passed around for the last two years supporting the mortgage interest deduction as it currently exists. However, if you recall what happened in 1986, you had a midnight deadline for a 3,000 page bill, and there is a timeline where people sign on and you see the mortgage interest deduction get capped at $1 million. It is hard to updo an affordable housing argument against that kind of cap, but it does also leave open the door for further reductions down the line. Leslie said they will be watching this and participating in these discussions with great interest.

When it comes to topics such as Proposition 13, Leslie said she cannot imagine a time that this will be looked at in a realistic fashion to change. It is too much a part of the landscape, and the lore. The public support for Prop 13 is quite strong, and we have a budget in Sacramento that does not hold together for this year or for the foreseeable future. There are commitments made in terms of pensions and medical support that are going to require an increase in taxes, higher revenue, or a reduction in those benefits. It is not going to be for the faint of heart to watch that process going forward because everybody has something to protect. The bottom line is we are going to have to keep cutting back until we can afford what we are doing. Fiscal responsibility is extremely important.

One thing the real estate boom did was provide a lot of revenue that did not exist prior. It looks like we figured out that more revenue does not necessarily solve the problems. We now have a dearth of revenue, but if we are trying to get new revenue sources then this is not really the solution. We really have to go to where the cuts are, which is happening. You are seeing cuts, and you will continue to see more and more cuts. There is a structural issue with respect to the commitments the state has made and what it is legally required to do since it cannot file for bankruptcy. The local municipalities can though, which is what makes Chapter 9 bankruptcy an interesting study. We have seen this in Vallejo and a few other cities. Michael Lewis released a book titled Boomerang in which the last chapter is actually about San Jose and what they are facing with expenditures that were related to an economy that disappeared and that promises that were made to public sector employees are now the bulk of their budget. Hopefully some lessons have been learned, but we are going to have to find our way out of it. This will most likely come with a mixture of cuts and revenue, but it is going to have to be primarily cuts. This is why Bruce believes real estate will not leave the table unscathed. Hopefully they will leave some things that are important. We had quite a price decline, so possibly a reduction in the amount of interest as far as up to a certain dollar amount would not be the end of the world at this point.

Another interesting topic is mortgage settlement for the California market. Bruce wondered which would be likely to occur: $12 billion for write-downs or short sales. Are people looking at reductions with this $12 billion? Leslie said she does not really know since she has not been following this that closely over the last month or two. She has not really seen much in the press about what they are doing. The initial reaction was it was great, but in California it really is a drop in the bucket. She has not read anything that has been an update on where it is all going. Bruce said he thinks he knows where it is earmarked to go, but Leslie said it is probably too early in the game and the process to have really seen an outcome yet. On the city of Riverside’s foreclosure task force, it is anticipating knowing what kinds of funds are going to be available and for what purpose. As of now, they really don’t know. Leslie said it is hard to get even a little cynical after the last five years when you hear about a new program that is going to do one thing, but only ends up doing a tiny part of it. This is not very successful.

Bruce wondered what percentage of the market now is first-time home buyers. He knew it got down to about 37%, although Leslie said it is at about 40%. She said they were going to have their annual market survey in the field next month, and this is really the data that she looks at the most and has the longest time trend on. They recently just completed a homebuyer survey, and about 47% of the people in that example were first-time buyers. Therefore, this is probably the general ballpark. If we had more inventory, it would probably be higher.

Bruce also wondered how the membership is holding up and what the mood is like. Leslie said membership peaked in 2006 at 211,000 realtors this year. She said they are going to come in at about 158,000, which is awfully good considering what has gone on in the market and the percentage of the business done by a smaller subset of agents. All that being said, they really are very busy, very engaged, and they are encouraged by the market fundamentals. This is to say after 4-5 years, there is definitely a new mood of positivity.

To find out more about Leslie’s business and any updates, go to www.car.org.

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.

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Vice President and Chief Economist of CAR Leslie Appleton-Young Joins Bruce Norris on the Real Estate Radio Show #280

Friday, June 1st, 2012


Vice President of C.A.R.


(Full Bio)


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This week Bruce Norris is joined by Leslie Appleton-Young. Leslie is vice-president and chief economist for the California Association of Realtors, a statewide trade organization with over 150,000 members dedicated to advancement of professionalism in real estate. Leslie directs the activities of the association’s members investment group or information group. She oversees the analysis of the housing market and broker industry trends, member communication, and membership development activities. She also is closely involved in the association’s strategic planning efforts and is a well-known speaker in California.

Bruce wondered how 2012 feels compared to some of the past years we have had to cope with. Leslie said 2012 is easily the best year they have seen in five years, and they are seeing that in their sales and in their price state. They have been above the $500,000 annual pace for six consecutive months, which is a very healthy level of sales. The issue has been prices; and what they saw in April was that the statewide median was $308,050, which is the first time they have been over $300,000 in over two years. There are definitely stresses and strains in the market, but compared to where we have been it is a sign of the times that the biggest challenge for the housing market is lack of inventory. We are not just seeing it in the REO moderate to lower end of the market, but we are seeing it throughout all of the prices in the housing spectrum. That is the good news and sign of the continued healing in the market.

Bruce wondered what Leslie points to as the reason for the median price increases. He wondered if that is an actual increase or a shift in inventory sold. Leslie said it is a little bit of both. What CAR has been doing the last couple of years is analyzing the segments of the market that are really markets unto themselves. They have the REO market, the short sale market, and the equity sale market. Prices in California bottomed way back in the beginning of 2009, so we are about 25% above the floor or the trough. When you look at the Inland Empire, the strong pace of sales they had just coming out of the bottom was really testament to people snapping properties up that were often less than replacement cost. This changed a little bit since people figured it out and you had multiple offer situations. You still have a very low inventory for REO. In their April data, CAR has a two-month supply of REO on the market, so that is the ratio of listings to sales. They have a 4 ½ month supply of equity sales or traditional sales where there is equity in the home.

For the short sale category they have a 6.3 month supply in the market, which take a lot longer to close. You have these three separate markets, and Leslie would argue that in the REO market those prices firmed a while ago and have been showing some upward trend, though not double-digits like we were used to when the lending was sealing the rise in prices. That market went down so low it certainly turned the corner, and the data shows we are starting to see some leveling off in the other parts of the market as well. We are turning the corner, and it is not a 90 degree turn, but it is definitely a turn.

Bruce said he noticed in some of Leslie’s presentations she had a price band page where for the REOs priced for either square foot or the median price, there is a huge spread. One might look at this and think there were big discounts being given on the REO, and Bruce can say this is not really true. Leslie said she typically does not include that unless she spends a lot of time explaining it since it is not corrected for the type of property and geography. The moderate and lower-price communities have tended to have a much greater market share of distressed homes, so that has defined what graphs like this look like.

From the peak of the market to the bottom in early 2009, Bruce wondered what the percentage drop was. Leslie said it was about 59%. We went from May 2007 when the California median home price was $594,530 to February 2009 when it was $245,230. That was a 59% peak to trough inside of two years, which is scary. That was very significant. There was no precedent. We had the ‘90s, which we thought were ugly until we had this. This is a totally different animal.

The residual damage is that you have a lot of people who are upside down. The CoreLogic data is now slightly below 30% of the mortgages in California, which are now underwater. This makes these people really immobile; they are no longer buyers. They may be a short sale candidate, but they are no longer a buyer. They won’t be until they go through some kind of a short sale. This is why it has really been difficult to get a good number for the shadow inventory that everyone talks about. It seems to range from $4 million to $11 million nationally. A lot of it really depends on what the people will do. Some of them have not paid on a mortgage in a while, and others are going to be able to pay until their ARM adjusts. We still have a few people in this category. If their ARM adjusts, the price per month might actually go down since you can’t get interest rates any cheaper.

Bruce said the inventory has really changed since January and is significantly down. He wondered if this is because sales are way up or because the inventory has been diminished. Leslie said it is a little bit of both. We have seen acceleration in sales and also a reduction. If you look at ForeclosureRadar data, for example, we have a slight two-year downward trend in the number of properties that are getting a notice of default, getting into, and coming out of the foreclosure process. There are a lot of reasons for that. As you look at an economy that is improving, we are seeing a few more loan mods coming through. Even though it is not a lot, this still gets people out of the pipeline. In general, you have lenders actively managing their treatment of these properties, pushing them all through, and recognizing all of the losses at once, which is not a viable financial alternative. You are getting things managed and spaced out.

In practical terms, it is really starting to work because if you have inventory this low, you are going to have to have higher comps emerge from this situation. This brings up the issue of appraisals, which is a big problem. Appraisals are always viewed as a problem in a turn in the market. There is always a little bit of a lag; but certainly this time around it is a quandary, both on the appraisal side and more generally on the lending side. Leslie said things seem backwards to her. In retrospect, in 2005 and 2006 things should have been really tight since we were at the top. Now that we are climbing out of the bottom, it is very difficult to qualify. The reality is this is rock bottom. The payment that is emerging, which is reflective in your affordability chart, shows numbers we have never seen before in history. This means that the payment in relation to earnings is at a historical all-time low.

With respect to rates, people are savvy and understand that this is a once-in-a-generation opportunity to buy in these kinds of circumstances with affordable prices and affordable rates. The economy has started to show some life, although we need a lot more. If you look at the macroeconomic data over the last six months, it is getting better. The employment data, although not consistently great, is a lot better than it used to be. It is going to be up and down. The consumer confidence data that came out this morning showed some of a retreat. In general, we are still way up from where we were two or three years ago.

Bruce said it would seem to him that if somebody at the top was in charge of seeing if we are better off having people get their housing costs fixed for 30 years at this ridiculous rate so they could pay more taxes, the answer would be a resounding yes. This would be better as opposed to being a renter with a variable housing cost for the rest of their life. Leslie said she really felt like three years ago as we were just coming off the shock and worst of all this, there seemed to be a general consensus that if we fix housing, help these homeowners, HAMP and TARP, then the rest of the economy will follow. It seems that more recently there is not a consensus that it is about housing anymore. Leslie said this is a little bit of a mistake because as Bruce noted, you have a significant number of households, both in California and nationally that are underwater. People need to take responsibility for their financial decisions. On the other hand, there were certainly bad actors and all kinds of other things going on. It seems like maybe more of an effort made to assist housing will help everybody down the pipe.

Bruce has spoken in front of Fannie and FHA with Sean O’Toole, and one of the programs they discussed was a nothing-down loan program. This would be perfectly timely. He does not know what to do with people who live, for example, in Hesperia who owe twice as much on their home. He does not really think we should reduce all the mortgage debt, but we should say that we need to have a certain percentage of occupant owners, which makes sense to Bruce. There is a generation that can get into homes right now; the down payment is really immaterial. It is the payment that results from the purchase that will make that loan safe. You can move a lot of homes to the occupants if they did not have to have a down payment. One little change to the loan program would be if they don’t make their payment, let it walk to another buyer. This would be a simple FHA assumption like we used to have in the ‘70s. With just one loan program change, you could solve this.

Raphael Bostic, who is with FHA, was sitting right across the table from Bruce when he was talking about his ideas aforementioned, and Raphael said he had no problem with this. He had no problem having the loan walk to another buyer. Bruce asked if he could put this in writing for him, which Raphael found funny. He understood that this would be a valuable thing for the market. A lot of these things are not that complicated, we just need to get support and institute it. The problem is that if HUD made a decision, it doesn’t really sit with them but rather in Congress. The feeling is that a lot of the people do not necessarily understand the things they need to understand. Bruce does a fair amount of looking at charts himself, and there has been a really big change in the criteria both Fannie and FHA are willing to loan to.

In 2007 at the peak of the market, 45% of their loans were made to people with 6/18 FICO scores or less. Now, 3% are 6/18 or less. This is a radical shift. Leslie said when she was back in D.C. for the NAR meetings, there were several people from FHA talking about the situation that they found themselves in. They were under a microscope with respect to Congress in order to justify the program, keep the program stable, and prepare for delinquencies that had been on the rise. This clearly is not an accident, but they are trying to reduce their risk exposure. However, things really need to be looked at more holistically in terms of what is going to be good for the overall economy in the long term. Some of those people are probably going to be great credit risks. As far as a safe pile of loans, they have created the safest pile of loans ever in 2011. The problem was when you are loaning in California in 2008 and 2009 as prices descended 3% a month, the equivalent of the down payment, that is not going to work out too well.

The other thing that keeps getting drilled in over and over again is California does not look like the rest of the country. There is a bulk sale pilot coming out of Fannie Mae. CAR has been opposed to this since they have not had problems selling REOs. If they market them for 120 days and still can’t sell them, then maybe it will be okay. Let our industry have a shot at moving things through quickly, in a less costly manner, and give the Californians who are really anxious to own real estate an opportunity to do so. In other parts of the country, this amount of inventory is not a characteristic of their market. California is always out there on its own, and this is another case of that. It has to be really frustrating to be an REO agent with a 1/10 capacity. Some of the people Bruce new personally who had 600 listings in 2008 have 60 listings today. They could easily absorb any percentage of increase of REOs into their business model and benefit the local economy by creating commission, escrows, and repaired houses. We do not need Wall Street to come in and do that for us. Leslie said they have been very vocal on this issue and seem to at least have made the position crystal clear.

Bruce said he hopes everything makes sense to people since one of their mandates is supposed to be to save the taxpayer money. He does not see how selling in bulk accomplishes this. We should let investors or local owner occupants figure out what they will pay. It has to be more than a bulk sale to do a hedge fund.

Bruce wondered what the mood of the buyer is like in the marketplace. Leslie said she would describe it as a mix of elation and frustration. You have to understand that things cancel out, and it is cheaper to buy than to rent. People’s thinking is that this is amazing; they can get FHA 3% down. However, on the other hand it is one disappointment after another. Leslie has heard horror stories from agents in the association about 5 or 10 offers, even up to 30 offers being made, and it blows your mind. It is a very competitive market out there, so it is very important to set the expectations of what they are getting into. Especially for people doing this for the first time, they read the headlines, think it will be a slam dunk and that they can go into a ritzy neighborhood, pay $.50 on the dollar, get a loan, and everything will be easy. It is not like this at all; although Bruce said the nice part is that is priced at $.50 on the dollar, and you don’t have to get a discount.

Bruce said it drives him nuts sometimes when people search for a home. He will be speaking, and someone will come to him telling him they are looking for their residence. They are very specific about what they want, and then they want a deal. Bruce looks at them and says they have a deal.  They have the best price and historically best interest rate, and you are going to miss the opportunity of a lifetime by trying to be cheap.  You really need to figure out that they get to have the house of their dreams at a number per month they could never have imagined. A lot of times the inventory they are chasing is really not being chased by investors. Some of them want what was the $1.5 million dollar house that is now the $750,000 house. You don’t mess with this house. There is a little less demand in this type of product. There may not be a lot of listings, even in this price range, but Bruce thinks people sometimes think a discount is a big deal, when in fact getting the right inventory to live in is much more important.

Leslie said she follows a lot of local areas because the aggregate data is always going to be the aggregate data. You want to look into it much more deeply, and there are not a lot of listings. There is not a lot to choose from, so that creates this environment that it is a great time to buy, so why can’t I buy. The short sale process has to be crazy making if you are an owner-occupant where you make an offer and you really don’t know what the answer is for quite some time. Those rules are going to be changing, so you are going to get a response, thumbs up or thumbs down, within 30 days. One of the problems could be if they are literally so overwhelmed by files from customers. There is one person Bruce knows in the B of A short sale department who alone has 1,000 files. The easy answer would be no because there are no other answers that will emerge inside of 30 days. It seems if you really don’t have time to make an intelligent decision because you personally have 1,000 files, then if the answer has to emerge in 30 days the answer would probably be more negative than it needs to be. You would probably have to start it again.

Bruce wondered if the short sale process has been improving and if agents have said it is at least reasonable now. Leslie said it is mixed. She is hearing that things are much better than they were a year ago. Occasionally you hear of people closing in 45 or 60 days, relatively quickly. Leslie said she talked to a manager out in the Conejo Valley who got his report this morning and said it is getting a little more difficult again. It ebbs and flows, but in general there has been such a spotlight on the whole process for the last couple of years that it is getting better and people seem to be slightly more satisfied with what is going on, some lenders more than others. Bruce has said this is true and varies greatly. There tends to be some significant discrepancies between the experience that the homebuyers, sellers, and agents have depending on the lender.

You can go to www.car.org to keep up on all the statistics. Tune in next week as Bruce continues his discussion with Leslie Appleton-Young.

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.

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262-TNGRadio – Robert Kleinhenz 1-28-12

Friday, January 27th, 2012

Robert-Kleinhenz

Robert Kleinhenz

Chief Economist for LAEDC


(Full Bio)

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This week Bruce Norris is joined once again by Robert Kleinhenz. Robert is the Chief Economist of the Kyser Center for Economic Research, which conducts research on regional, state, and national economies. Dr. Kleinhenz has a Bachelor’s Degree from the University of Michigan, a Masters and Doctorate from USC, all in economics. Prior to joining LAEDC, he served as Deputy Chief Economist at the California Association of Realtors and taught economics for over 15 years, most recently at California State University Fullerton.

Bruce said he recently poked around at a refi and quoted a rate that he could barely understand. He said it was something like 3 7/8 for a 30-year mortgage. Bruce said going back 30 years when he became an investor and had refinanced his house at the time to get the money; it was perfect timing back in 1981 when he paid 17 ½ % fixed. Robert said there may have been a couple recessions in between, but what a difference two decades makes. Bruce wonders if when you are 22 and just starting out if you are thinking that it is in any way normal where you are only accustomed to seeing numbers that start with a 5 or a 4, and he wonders how different the future will be with the particular rate going forward. In this case you are comparing what happened back in the early 1980s to the interest rate situation today.

Robert said if he were to place a bet on what was likely to be more normal in the foreseeable future, he would look at the interest rate climate of today and not of the early 1980s. Back in that time we had high rates of inflation, and we had an economy that was in transition and stagnating in several sectors for several reasons. The main thing was we had a lot of inflation, partly driven by high oil prices. This in turn led to high interest rates and at the time the Paul Volcker of the Federal Reserve Bank of New York led efforts to bring the reign of inflation down. One of the ways it did that was by increasing rates by making it very difficult to borrow. This was a much different climate, and hopefully economists have learned a little bit about keeping inflation in check. Hopefully policymakers have listened to the economists who talk about it, and we are most likely going to stay in an environment over the next few years that either has low or moderate inflation and not double-digit inflation.

Bruce read a quote saying, “Experience is something that lets you recognize a mistake when you make it again.” What is interesting about not being concerned about the people that are in charge of policies is their opinion of how benign the housing problem was going to be. This bothered Bruce; and Robert reiterated saying policymakers are humans like us and sometimes don’t get the information right and sometimes still make poor judgments. We definitely have to be concerned about the fact that mistakes are made on the policy side just as mistakes were made on the business side of things. This gave rise to the situation we face today.

Bruce wondered if Robert was concerned about deflation if not inflation. He said it is not that he is not concerned about inflation, but he does not expect to see high levels of inflation over the foreseeable future, and that is predicated on policymakers and their ability to make the right decisions. It hinges on the ability of the Congress to come up with a credible plan to take care of these federal deficits over the long term. Somebody has to be interested in a bond that the risk-level seems appropriate with the return. What is interesting is the one-year T-Bill in Greece is paying 402% as of yesterday, which would probably give you an idea that you should not invest in it as you are not going to get your principle back.

The likelihood that the United States would find itself in the same position that Greece finds itself in is very low, so we should not be too alarmed. There is a very real possibility that we may face a debt situation, but there are several moving parts here. Fortunately, the ace in the hole that we have here in the United States is the fact that the U.S. dollar is the reserve currency, and our Treasuries tend to be the flight to safety for so many investors around the globe when things go awry elsewhere. Bruce did not know how profound an effect this would have because this is exactly what happened when you talk about a ten-year T-Bill. Most of us would have anticipated seeing something under 4% was pretty astonishing, and then it was under 2%. If someone has not already refinanced their house, you definitely need to be sitting up and taking a look at rates today because those rates are fundamentally driven by what is happening with the yield on the ten-year treasury, which nobody would have expected would fall below 3 or 4%, and here it has consistently been under 2% for quite some time. All of this is courtesy of something that is really outside of our borders. Part of this also stems from the Fed’s commitment to maintain low rates over the foreseeable future through the middle of 2013. There was this policy move and effort to insure that long rates stay low partly to help the housing market and to get investors to pay attention to the stock market where it would theoretically be better returns. There are a number of angles behind the Fed’s move, but this has served to also keep rates down.

To insure that something like what was aforementioned is in the Fed’s control, they would have a limited ability to do it. If the market moves in a big way, they may not be able to buck that trend. However, it does accomplish that end by buying or selling securities in such a way as to maintain rates at the levels that they are targeting at this time. We have a 0-fit fund rate and a mortgage rate under 4%. If we were to have an issue where the Euro zone went into a tough recession, Bruce wondered if there would be a domino effect here that could possibly kick us into a another recession. Robert said the cards we are looking at in 2012 include the situation happening in Europe. If their economy is weakened or there is some concern that we have already seen of economies tipping into recession; then that could jeopardize the situation here in the United States. We’re out of the recession and growing and now in the expansionary phase coming out of the recession, so that could tamper the growth or lead to a stall out in the economy here in the United States. This is economic linkage between the European economies and the U.S. economy.

The other linkage is the financial linkage. If the sovereign debt problem in Europe, not just in Greece but also Italy and possibly France, give rise to problems with banks not unlike what we had a few years ago at the height of the financial crisis, then that could stymie activity in the financial world once again. As a result of that, it could have a feedback effect on the real economy and either slow the growth pattern of the U.S. economy or tip it into recession. You have two things coming out of Europe that have the potential to either slow down or derail our current expansion. When the United States had defaults on the mortgages, mortgage-backed securities, and the CDOs, it had quite a direct effect on the people that invested in the banks.

Bruce wondered if the United States has as much of the investment there in Europe, or is it mostly contained inside of their own banking system. Robert answered that it was incestuous in a way in that there are flows capital that go across international boundaries through commercial banks; so if there is a problem that shows up over there, it may also show up on the balance sheets of banks over here. It is through this particular conduit or channel that we would see problems occur. Robert said he would be very surprised if we have something as calamitous as what we saw in 2008. To look at this situation in the financial sector, we have to recognize that so many financial decisions rest on some confidence of what is going to be occurring in the future. If you lack confidence in the future or just don’t know, then you are unlikely to make a decision or make a decision to do nothing. The problem with financial crises that we went through in 2008 is that they have long-lasting effects and wreak havoc on consumer and business confidence. They then leave businesses and households to sit on their hands until they get a sense that the coast is clear. That is one of the reasons this recession was so deep and continues to keep going as long as it has been. There is a real concern about the outlook, and it is reflected in consumer confidence and business confidence that has just not really shown marked improvement over the last couple years.

Bruce wondered if there is real concern about the oil world and if there is fear about aggressive actions such as the closing of the straight. Robert said if we take a step back to 2011 for a moment and think about all of the wild cards that played out in 2011, there are a lot and a number are still playable in 2012. There was earlier discussion on the European debt situation, which is a wild card that has been played several times over the past few years. The Greek debt crisis seems to be the one that is played most frequently. If you take a look at the Arab Spring, that gave rise to disruptions in the flow of oil and gave rise to higher oil prices. There is always the chance that something in the world of energy that triggers an increase in the price of energy, oil or otherwise, there is always the chance that this could slow down economic activity if not derail a growing economy. The other wild card that we have to contend with in 2012 that we also dealt with in 2011 was political. This year the big political wild card is what will happen in November with the election. It does appear as though we are going to continue to be stepping carefully through 2012, hoping that these wild cards do not wreak too much havoc on the economy. If they do, then they have an adverse impact on confidence. If there is an adverse impact on confidence, then the growth we anticipated is just not going to materialize.

In the employment sector, Bruce wondered how important construction is to the improvement of the unemployment. Robert said it is an important segment of the economy but is essentially flat on its back right now in California and elsewhere around the country. If you look at residential activity in the state of California, permits for example, they are just a fraction of what they were in years past. They have been at this very low level for just a fraction of any long-run numbers for the last few years, but it makes sense. If so many foreclosed or distressed properties are available for sale at a fraction of the cost of new construction, it is going to be sometime until after the backlog of distressed properties gets substantially moved before we see construction pick up in a noticeable way. There is a broad market for housing where distressed property values are probably way down on other properties. Things are also the same way with commercial construction. There are a lot of high vacancy rates for office buildings these days; less so for retail and certainly much less so for industrial. Industrial in Southern California is actually outperforming markets around the country. It has less than a 5% vacancy factor, so it is very much a mixed bag. However, construction is going to be recovering slowly, so meanwhile we should take a step back.

In a general sense, the labor market seems to be at a turning point where in order to produce more in 2012, it seems very likely that employers are actually going to have to add people, not just ask their existing labor force to work longer hours. There should be a general upturn in employment in 2012 compared to 2011. It is just a question of how much of an upturn there will be. We need somewhere around 300,000 jobs added per month across the nation in order to bring the unemployment down in a noticeable way in a reasonable amount of time.

The most recent report, the one for December, showed that we added 200,000 jobs, which was a great number based on the recent history. It is just not a high enough level of growth to bring the unemployment rate down. At 200,000 jobs per month, it could take 4 or 5 years for us to get back to a 6% unemployment rate nationally. At 300,000 jobs per month, it would only take a little less than two years, which is a huge difference. At the present time, we should be banking on the 200,000 jobs per month, barring any of these wild cards being played. If that happens for a few months time, then we might actually see the economy gain some ground.

The sector that is in the driver’s seat here is the consumer sector. Consumers are weighed down by uncertainty about their jobs and their economic outlook. The fact that are assets are not worth what they had been worth and the fact that they may have some credit constraints, access to credit may not be what it had been, especially with respect to buying homes. All those things are constraining growth and consumer spending, and that is really the main thing that we need to look for in terms of the driver behind the overall economy. If consumer spending picks up, then we are going to see job gains pick up as well.

In looking at a chart for mortgage equity withdrawal in 2002-2006, it was responsible for a lot of GDP growth. This driver has certainly been diminished if not eliminated from most people’s possibilities. As we go forward, it is certainly going to be the case that the American consumer is still going to have a place for the use of credit. They may not have access to the same amount of credit that was available when they were able to use their home equity in order to finance so many things. This is not a bad thing because it does seem to have created problems, especially problems that have spilled back into the housing sector. We do not want to go back this way, but we do expect to see that some loosening of credit access on the part of consumers would probable enable the consumer sector to get a little bit more steam and give a little bit more push to the overall economy.

Another issue is shadow inventory. Bruce wondered what Robert’s thoughts on what shadow inventory contains are. The definition of shadow inventory has changed over the last couple years, so Bruce wondered what Robert feels is the shadow inventory and what the best resolution for it is. Robert said it is useful for us to get a sense of how long we are going to be dealing with large numbers of distressed properties. If we use that as the definition and ask what things going to be like two years out, then the shadow inventory is the inventory that is on the books, such as MLS inventory for existing homes plus unsold new homes, and the unsold inventory for existing homes in the state of California, which is about 5 months inventory. Five months inventory is enough to actually sustain increases in prices and not decreases in prices because the average is about seven months, so we are at seven months if we are under five. By then we would go through the foreclosure pipeline, and the thing we would pick up would be the number of REO properties that are held by banks in inventory. This is equal to about another 2 ½ months of inventory. Now you are getting over seven months when you take the five mentioned earlier and add 2 ½ months, then there properties that are scheduled for auction and also another 2 ½ months inventory. However, the timeline for that is a much longer timeline.

For the REO properties, the point in time they go into inventory might be about 6 months or so before they are prepped and sold. The relevant shadow inventory number to use for current market conditions and understand what is happening in the current market is probably MLS based inventory plus new homes plus REOs in inventory. If we are asking the question about how long this is going to be with us, then we are going to go further up the foreclosure pipeline and pick up the properties that are in a pre-foreclosure state, such as an NOD or delinquent property. If this is the case, then you are looking at another 2 ½ months inventory. This is simply by taking the number of properties that are in pre-foreclosure state, which is roughly 100,000, and looking at that relative to total annual sales. You also have to look at the timeline. An NOD that is filed in January of 2012 is probably about 18 months away from going into the REO inventory. These numbers are roughly 100,000 in REO inventory and roughly 100,000 NODs plus delinquencies at the present time for the state of California. The timeframe is not anywhere close to normal as the statutory timeframe is about 6 months. Because of different kinds of policies and other factors, this timeline has been stretched out; and a number of lender and servicers have encountered a number of problems along the way.

The bottom line is as we are going further up the ladder and actually including more and more things in this notion of shadow inventory, we also have to figure out how long it is going to take to push all the properties through the foreclosure pipeline and out through the new home market. Therefore, we are looking all the way into 2014 before things get any closer to normal levels of distressed properties. The housing market is going to feel like it has recovered before that period of time, but we are going to have substantial numbers of distressed properties working through the housing market over the next three years. In Riverside, 62% of the sales are either short sales or foreclosures, which means when you sell 1,000 homes, only 380 buyers emerge. Everyone else is credit damage. This is going to take a while to heal.

If you want to learn more about Robert’s company, the Kaiser Foundation, go to LAEDC at www.laedc.org. Here, you can find out about the annual forecast event that will be happening this February 15th in downtown Los Angeles. This is a ticketed event.

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.

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261-TNGRadio – Robert Kleinhenz 1-21-12

Friday, January 20th, 2012

Robert-Kleinhenz

Robert Kleinhenz

Chief Economist for LAEDC


(Full Bio)

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This week Bruce Norris is joined by Robert Kleinhenz. Robert is the Chief Economist of the Kyser Center for Economic Research, which conducts research in regional, state, and national economies. Dr. Kleinhenz has a Bachelor’s Degree from the University of Michigan, a Masters and Doctorate from USC, all in economics. Prior to joining LAEDC, he served as Deputy Chief Economist at the California Association of Realtors and taught economics for over 15 years, most recently at California State University Fullerton.

The Kyser Center is within the Los Angeles County Economic Development Corporation or LAEDC, which among other things is interested in promoting the local economy and doing what it can do to help local businesses to streamline permitting processes and promote a long-run vision of where the region is headed in terms of the economy and related issues. The Kyser Center’s economic research function is in support of this. They carry on what is happening in the economy and what is happening with key sectors in the economy. They also produce forecasts, one coming up on February 15 in downtown L.A. They have an annual forecast that comes out at the beginning of the year in February and a mid-year forecast update that typically is released in July. This is the one that Bruce took a serious look at a few nights ago, and one of the things that really impressed him was it was not in the least bit promotional. He said it was very informational and quite candid if it had to be negative. This is one of the things that have given rise to the reputation of the Kyser Center and the LAEDC have established over time. Their forecasts have really maintained their objectivity when looking at issues pertaining to the regional economy; so they have a lot of credibility, which they had even before he came on board.

It’s a great asset for the community to have this kind of document. When it becomes promotional and inaccurate, it does not help anybody map out a proper business plan. We are certainly at a key point here. 2012 is a pivotal year where potentially we can see the local economic situation and the national situation accelerate if the right things fall into place. You have to have an objective view on things as business people so that these business people can make smart decisions about their future and the future for their businesses. When you are dealing with the local economy, even one as large as Southern California and Los Angeles, you also have to determine how effective we are by state and federal level decisions. The most obvious impact that we have seen over the last couple of years is that the budget problems that have popped up at the state and have filtered down to the local level have given rise to real job losses in the public sector. Therefore, the private sector is adding jobs that are much needed jobs.

We have unemployment rates that continue to be stubbornly high. The economy and the labor market have both been very slow in recovering from this most recent recession. Anything that detracts from growth is problematic; and unfortunately one of the very weak segments of the labor market over the last couple years has been public sector or the government labor numbers. They have been declining even as the private sector has been taking off, so that is certainly one constraint that we have to deal with in the immediate term. The longer term issue that we need to bear in mind is that the state and county government agencies are often times responsible for so many infrastructures that we rely upon, both physical infrastructure and the education of our young people. Both of these are things that concerns Robert as they look at the longer timeframe and the role the government plays.

Bruce wondered if education needs have started to shift. One of the things Bruce read that was very interesting to him was the manufacturing sector. It is not something we think about being a major player; yet it really is, but there are shifts occurring. As far as education is concerned, you go to high-school through college. Bruce wondered if you emerge as a useful participant in the manufacturing sector in any of the training to where you can take on a high-tech manufacturing jobs and function. Robert said it is safe to say that the jobs that the people who went to high school and college will be taking on through the course of their career are jobs that we know nothing about right now. The most important thing one gets from a college education in particular is learning how to think and to adapt to what is a changing workplace environment. There are really dramatic changes that take place both in the consumer side and in the industry side. You have a sector of the economy that is quite dynamic and is one of the leading sectors here in Southern California. Putting it differently, Southern California is one of the leading manufacturing centers here in the United States. At the same time, in the United States manufacturing is still one of the leading GDP. It is a high-value added segment of the economy, but it has experienced a trend decline in the number of people working in that sector over time because much automation has taken place that has displaced some workers. Manufacturing on a wide, broad scale such as mass production of goods, frequently goes offshore because they can produce at a much lower wage or lower cost of goods produced outside of the United States and certainly outside of Southern California.

When Bruce read the document, he said the thing he found interesting was the number of jobs was down, the number of products produced was way up, and the earnings per worker was up. The people who are working in manufacturing have to be more skilled today than their predecessors had to be ten or twenty years ago. They probably have some training in computers and other types of automation, so it is no longer that you have strong hands and a strong back. You also have to have a pretty nimble mind to be able to do what is necessary in these jobs, which are increasingly automated and require some knowledge of sophisticated machinery. The first question was really if in the education process if we are taking people through it, do we need a college degree to understand how to operate that particular piece of machinery even though it is technical? Do we have trade types of training that are taking that on?

Robert said that particular aspect of education in the United States, which is typically provided by trade schools and community colleges, is one that is often overlooked. However, Robert believes it is very important to training people for jobs that don’t require a college degree but do require something more than an unskilled background. You have to have skilled workers. One of the things we are contending with now and really have for quite some time is that we probably do not dedicate enough of our resources and educational resources to training people for those kinds of jobs. There is so much emphasis and so much pressure on seeing people complete their Bachelors Degree, which is important for the reasons that he mentioned at the beginning. However, it does not really create someone who has a great deal of versatility. However, there are a lot of other jobs. Robert had just spoken with one of the business assistant managers, and he said there are a lot of jobs for which you have to have a certain set of skills. Many people who are running businesses right here in Southern California right now have job openings for skilled workers, but they cannot find people with the appropriate skills to fill those spots. It is a challenge right here and now, and it is an ongoing challenge for years to come.

We also have an aging workforce who with those skills will be retiring, and there will be even more of a need for those replacement skilled people with very high-paying wages. The fact of the matter is the baby boomer generation, particularly the oldest members of the baby boomer generation, turned 65 last year in 2011. In terms of numbers, the first few years that are marked by that boomer generation have fairly small population numbers. However, as you see people who were born in the early 1950s to the mid to late 1950s, you see that this is where you have the real bubble in terms of population growth in that particular generation. In the next 3-4 years, we are probably going to be looking at what could be a fairly large number of people going into retirement. There are probably not as many people choosing to retire as would have been the case before the recession. Still, large numbers of people will at least consider retirement or maybe going to a part-time schedule. This may lead to a void in the workforce in terms of many skills, not to mention the experience that these individuals have accumulated over so many years of work.

Bruce said when you do have this baby boom generation begin to retire, it brings up more pressure on the budget. The California budget and the national budget both have their share of problems. Bruce wondered if we solve it by aggressive cuts and austerity, or do we solve it with some type of growth program that makes sense. Robert said that as far as the budget situation at the national level is concerned, it is important for us to break it into two parts. You have the budget deficit at the federal level, the $1.3 trillion deficit, and the corresponding level of national debt. The high deficits that we have seen over the last couple years stem in part from the weakness of the economy, which has lead to reduced tax revenues. At the same time, especially with the stimulus program that actually came and went the high expenditures that were a part of that stimulus program and other programs has driven a wedge between the amount of money that the government was bringing in and the amount of money that was spending. However, as the economy improves, that wedge should narrow. Robert believes this will improve over time, so he is less concerned about that and more concerned about the Social Security program and Medicare, both of which could escalate out of control and dominate the budget before too long. It would be in the 2020s by which time it might happen, but certainly changes will take place between now and then to prevent that from happening. Robert does not think we would sit back and just let it happen.

There was a joint committee that worked on the aforementioned suggestions; they produced a document, then when it got to Congress it seemed both sides were not interested in the conclusions and looked like they pushed it forward to 2013. Because of that, this was one of the things that pushed rating agencies to downgrade the United States credit situation. Bruce found this interesting because since he is connected to real estate; his assumption would have been that we have a downgrade and an interest rate hike. However, this was not what happened. If we are talking specifically about the downgrade and what happened at the time back in August of last year; that downgrade and the anticipated impact on interest rates for T-Bills and Treasury notes was trumped by what was happening in Europe, specifically the sovereign debt crisis. This was a much bigger problem; so instead of having a spike in treasury rates as a result of the downgrade, we had a flight to safety globally to U.S. government securities. This pushed yields down, not up.

We are fortunate in that we continue the dominant and reserve currency that so many countries around the globe rely on, and we continue to be the safe haven for investors not just around the globe, but also here in the United States. That worked to our advantage that time as it pushed yields and pushed rates down at a time when rates otherwise might have increased. Robert said he is not terribly concerned about the downgrade, but he does think we all need to be worried about the reaction in Washington D.C. to problems with the deficit and the fact that they are not willing to take action. The credit markets are most likely watching this carefully. If after the 2012 election we do not see a real concerted effort and a real plan to take care of these long-term concerns with respect to the federal budget, then he would be more concerned about downgrades of our credit.

If we get to this is 2013, Bruce wondered if we are going to go the route of austerity and how we would produce GDP growth from this. The kind of austerity programs that have been talked about and implemented in the European economies, unfortunately, do damage to the economy in the near term so that they can get their financial house in order. The levels of indebtedness and sovereign debt in countries like Greece and Italy, relative to the overall economy, are much higher than here in the United States. If there was a belt tightening that was required in order to set things straight in the United States, it would certainly hinder a growing economy and could slow down the pace of expansion. For the record, it does not feel like we are out of the recession, but we have been expanding and our GDP is higher now than it was in the last peak. Technically the economy recovered from a recession and started to expand. If we do go through an austerity program of sorts, it would either slow down that rate of growth that is mediocre at best right now; or it could tip us back into a recession. These are things we have to be very concerned about going forward a year or so out.

The GDP numbers have actually accelerated past the former peak, but we had 8 million jobs lost and have only rehired 2 million of those people. This is one of the quandaries we find ourselves in this particular economic cycle, and we should not be surprised by it. We had the recession, and it was the Great Recession; so it was the worst recession in the working lifetimes of many people. It was a large recession with unemployment rates that have risen to levels we have not seen since the Great Depression of the 1930s both in California and in the United States. When that recession hit and when the job losses occurred, the companies became very lean with respect to their workers and their workforce. They also took advantage of technology, which has been partial of the economic story really for the past 30 years, beginning with the PC and going forward. As a result of that, they were able to repair their workforce and replace some of the functions with some kind of technology. Now that the economy is coming back, some of the jobs that used to be there are no longer there because of the displacement by technology. This goes back to the point touched on earlier that people have to be adaptable and have to be able to move in to the jobs of 2012 and 2013, which might well be different from the jobs of 2002 and 2003. Training is very important for these kinds of transitions from the job climate that existed ten years ago to the job climate we have today.

Bruce recently looked at a report that talked about rankings as far as business friendly states, and California was almost at the bottom of the barrel. Robert is in the Los Angeles County Economic Development Corporation having to attract people into an environment that you maybe did not create. In other words, Bruce wondered how you attract people to Los Angeles and Southern California for jobs in a negative environment and it has that reputation in place. This is indeed one of the challenges that we face across all of California, especially in Southern California, with the high cost of labor relative to other parts of the country. This also includes the high cost of other resources, not the least of which would be buildings and land. The perception, if not the reality is that there is a fair amount of red tape that one has to navigate in order to establish a business here. Fortunately, there are entities such as the LAEDC that provide assistance to employers who are interested in locating here to Southern California to help them work through that. The reputation that California has as not being a terribly friendly business state is certainly a hurdle to be overcome. This is something that is a long-term concern and has been a concern for a few decades; and it continues to be a challenge that we have to work on.

Bruce believes Texas might be the favored state and wondered why it is so different with them. Robert said that Texas has, among other things and from the workforce point of view, income tax at the state level and is also a right-to-work state. The presence of unions is not quite what it is here in the state of California and other states around the country. Their permitting and regulatory requirements are also not what they are here in California. When you are in the predicting business, you have to really pay attention to the whole country. Bruce stays up until midnight now seeing if Greece is going to default. It seems to be much more complicated than it ever has been. There is no doubt about the fact that our local economy is more closely tied to what is happening around the state and around the globe than it ever has been in prior years. To begin with, you take a look at things such as mortgage rates, which are determined in the global financial system. A problem in Greece, specifically their sovereign debt problem, will indeed cause difficulties for someone who is trying to finance the purchase of a new home or refinance a home. This is one example of how we are so much more integrated today as a global economy where local meets global in a way we did not really have to worry about or be concerned.

If you go back 40 years in the early 1970s or even the 1960s, which was not terribly long after World War II had ended, you would have seen that the U.S. economy was really the only economy that was untouched by World War II. Its infrastructure was in place, and it was the dominant economy around the globe. Over time it gave way as different economies and different countries rebuilt and then saw Germany and Japan and other economies that had been industrialized become re-industrialized and become more important players on the global scheme. You look at the 1980s, we had another wave of economies that have come onto the scene.

Tune in next week for the second part of Bruce’s interview with Robert Kleinhenz on The Norris Group Radio Show and be sure to visit our website, www.thenorrisgroup.com, for more information on trust deed investing and our loan programs.

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.

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The Norris Group Real Estate News Roundup 11/7/11

Monday, November 7th, 2011

Today’s News Synopsis:

According to the Realty Times, pending home sales decreased 4.6% last September from the prior month.  CoreLogic reported home prices decreased  1.1% in September for the second month in a row.  Over the past 6 months, foreclosure starts have been increasing steadily for private-label residential mortgage-backed securities.

In The News:

Housing Wire - “CoreLogic home price index down 1.1% for September” (11-7-11)

“Housing prices dipped for the second straight month in September, falling 1.1% from the prior month, according to the CoreLogic (CLGX: 13.88 -1.28%) home price index.”

DS News - “Regulators Seize Lenders in Nebraska and Utah” (11-7-11)

“State and federal regulators have closed the doors on two more community-based lenders in Nebraska and Utah, bringing this year’s tally of failed banks to 87. Mid City Bank, Inc. in Omaha has been closed. It operated five branch locations, with $105.5 million in deposits and assets totaling $106.1 million ”

Realty Times - “Real Estate Outlook: Pending Sales Decline” (11-7-11)

“Pending homes sale declined in September, down 4.6 percent from the month prior. Lawrence Yun, NAR chief economist, said the housing market is being excessively constrained. “A combination of weak consumer confidence and continuing tight lending criteria held back home buyers, even though the private sector added nearly 2 million net new jobs in the past 12 months,” he said.”

NAHB - “Improving Markets Index Expands to 30 Metros in November” (11-7-11)

“The number of improving housing markets continued to expand for a third consecutive month in November, rising from 23 to 30 on the latest National Association of Home Builders/First American Improving Markets Index (IMI), released today.  The list dropped two metros and added nine new ones – Cheyenne, Wyo.; Corpus Christi, Tex.; Davenport, Iowa.; Fort Collins, Colo.; Hinesville, Ga.; Lima, Ohio; Monroe, La.; Tyler, Tex.; and Williamsport, Pa”

Housing Wire – “October bank failures tied to CRE exposure, further risks remain” (11-7-11)

“The 11 U.S. banks that failed in October cratered under the weight of commercial real estate exposure, Trepp LLC said Monday.”

DS News - “Foreclosure Starts Rise as Servicers Process Backlog of Delinquent Loans” (11-7-11)

“Foreclosure starts among private-label residential mortgage-backed securities (RMBS) have been rising toward historic averages over the past six months, which will lead to an influx of distressed properties bringing downward pressure to the housing market, according to recent RMBS Performance Metrics from Fitch Ratings.”

Housing Wire – “White House, agencies cut red-tape for some multifamily housing developers” (11-7-11)

“Government agencies are peeling back a few regulatory requirements in several states to make it easier for developers of federally subsidized multifamily housing to develop properties without having to pay for redundant inspections
and other repetitive guidelines.”

Realtor Magazine - “Hedge Funds Eye Troubled Home Loans” (11-7-11)

“As U.S. banks increase efforts to shed troubled residential mortgage assets, more hedge funds are considering opportunities to buy pools of whole home loans at discount prices.”

Los Angeles Times - “Use of ‘target-date’ funds grows in 401(k) plans” (11-7-11)

“According to a new study, Americans are increasing their use of so-called target-date mutual funds in 401(k) plans, and most people report being satisfied with them.  Among active and knowledgeable investors, use of target funds has nearly doubled to 41% today from 22% in 2005, according to the survey of more than 1,000 people by investment firm AllianceBernstein.”

The Washington Post - “Census data show wealt of older Americans is 47 times that of young adults, widest gap ever” (11-7-11)

“The wealth gap between younger and older Americans has stretched to the widest on record, worsened by a prolonged economic downturn that has wiped out job opportunities for young adults and saddled them with housing and college debt.”

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 event 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.

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244-TNG Radio – Christopher Thornberg 9-24-11

Friday, September 23rd, 2011

Christopher Thornberg

Christopher Thornberg

Principal at Beacon Economics

(Full Bio)

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On October 14th, 2011, The Norris Group returns with its award-winning event I Survived Real Estate. An expert lineup of industry specialists join Bruce Norris to discuss current industry regulation, head-scratching legislation, and the opportunities emerging for savvy real estate professionals. 100% of the proceeds support the Orange County Affiliate of Susan G. Komen for the Cure. This event would not be possible without the generous help of the following platinum partners: Foreclosure Radar and Sean O’ Toole, Housing Wire, The San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops and President Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobbie Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Real Wealth Networks, Frye Wiles Web and Branding, MVT Productions, and White House Catering, who will provide the 3-course meal for this black tie event. Visit iSurvived2011.com for more details.

Bruce is joined this week by Christopher Thornberg. Christopher is the founding partner of Beacon Economics and widely considered to be one of California’s leading economic forecasters. He is an expert in economic forecasting, regional development, real estate dynamics and labor markets. He is one of the earliest and most adamant predictors of the housing market crash and of the economic recession that followed. In 2008, he was appointed as chief economist for California State Controller John Chang as well as Chair of the Controllers Council of Economic Advisors. He also serves on the advisory board of Paulson and Company Inc, one of Wall Street’s most successful hedge funds. Dr. Thornberg holds a PHD in business economics the Anderson School at UCLA and a B.S. in business administration from the State University of New York at Buffalo. He has also been on the panel for I Survived Real Estate the past three years.

In one of Chrisopher’s reports, there was a quote that said, “Beacon Economics expects growth in the second half of the year to be 3 ½ to 4% range short of some unlikely turn of events.” Bruce wondered if we had any of these unlikely events, to which Christopher said they had toned down their forecast a bit as this was much earlier in the year. We’re looking at 2 1/2 – 3% growth now in the second half of the year. We have not had any unlikely events, but we know the market is in turmoil and a lot of his colleagues are running around drawing odds, whether it is a 30% or 50% chance of a recession. It doesn’t add up because, first of all, you have to separate slow growth from a recession. There are a lot of reasons why the U.S. economy is not growing fast enough to put people back to work in a meaningful way. There are also a lot of reasons why the U.S. economy continues to struggle in its recovery from the 2008 and 2009 recession. That’s a lot different than saying we are going to have another recession and another period of time where the U.S. economic output is contracting in a real sense and that we are producing less today than we were yesterday. For us to have another recession there has to be a shock and a hit to the system that can cause the type of turmoil that we call a recession. Christopher said if he looks across the U.S. economy today, he doesn’t see where that shock exists.

If you look outside the borders of our country and look at Greece; first of all, you see that Greece has not defaulted yet. You may link a Greek default to potential for a U.S. recession, but that is not what people are doing. They are saying that we are in a recession, but the default hasn’t even happened. The fact that their one-year T Bill is going for 130% interest gives Bruce an idea that it a default probably will happen. There are clearly problems in Greece. The question is whether Greece will default because they don’t need to. If they can continue to clean up their act, which is a big IF, make meaningful reforms, and continue to get the support from the European Union, they can work their way back to some kind of orderly workout over their existing debt situation. Christopher does not think they are ever going to pay all the debt back, but an orderly workout for a debt reduction is a lot different than a massive default. So Christopher is not worried about Greece contaminating other dominoes to fall in the area. People keep comparing Greece to Leman, saying Leman had $250 billion in debt and Greece had them outstanding across the European Union $400 billion. Therefore, it’s a Leman type episode.

It’s not a Leman type episode for a number of reasons. First of all, with Greece we’re talking about a straight debt default. With Leman, there were counter-parties and all sorts of transactions. They were intimately linked to other banks. When it comes to Greece, we know what is coming down the road at us. Leman was a total shock to the system; no one thought Leman was going to be allowed to fail. You have the surprise aspect; you have the counter-party aspect, the market maker-aspect. Leman and Greece are different situations. If Greece did go down, this would hurt some banks in Europe; but then, it’s not known how many people think the French government is going to allow one of their major banks to be pulled down by Greece. The lessons of Leman are clear. You don’t let your major banks default. The French government will step in with a program, recapitalize its banks, the central banks here and in Europe will work to provide the short-term funding necessary to calm investor jitters, and we’ll get through it. You have to have a lot of pieces in place for this thing to truly spiral out of control and start sinking the international banking system. If worse comes to worse and a lot of banks get hit hard, there is another way to deal with it which is simply basic short-term regulatory changes. The reason the banks are in trouble is because they have to maintain a certain capital ratio. If they start taking haircuts on the public debts, they are going to be in violation of the ratios and they are either going to have to raise capital on the fly or be closed down by the regulatory authorities.

There is also a third way, which happened in the U.S. It’s called the suspension of basic rules of asset valuation on bank balance sheets. You step in and say you’re going to suspend the rules for two years, so you better clean up. This way the bank is not undercapitalized and they have the leeway to go ahead and do what they need to do. In the meantime, you have to have the short-term lending from the various monetary authorities that will allow them to offset any kind of short runs that may occur on the banking systems. It can be handled and worked through. The idea that it is going to be allowed to spiral out of control and sink the worldwide financial system is a little far-fetched.

When looking at how things are going in the market and whether or not to be optimistic or pessimistic about it, Christopher will look at the data and know what it is showing him. He has some sense of the politics and what is going on in the regulatory authority’s minds. There is always the chance for a lot of boneheaded moves. Europe has shown us in the past that it can in extreme moments of crisis completely fail to do what needs to be done. This is a remote probability, but this is a lot different than people calling for a double-dip. One problem we have in our own country that may be extending over there is it seems to do something that is painful in the short term but most beneficial in the long-term rarely gets done. A lot of politicians, like most people on a two-year contract, have a “short-timers” syndrome. They are worried about getting re-elected, so everything is about now. It’s a problem, and what it means is we have to stumble from crisis to crisis. Right now, Christopher does not think we are in a situation right now that is going to send us into another hole.

Right now the ten-year T-Bill is 1.7%, which says that the Fed is not going to have much of an influence on the economy right now. You can’t lower the long run with long run rates much longer, and you surely can’t lower short-run rates anymore. Cheap debt is not really the solution for what ails the economy. If you think about the U.S. and ask yourself where the problem is and what the issue is that the nation is dealing with. About 1/3 of our problems stem directly from construction. We are not constructing homes or commercial real estate. That is the tyranny of the inventory. For several years we built too much retail and too many homes, so as a result of that those sectors are basically sitting in neutral until the inventories start getting worked out. The good news is they are getting worked out, and Christopher expects construction will start picking up again in 2012. This will go some distance towards reducing some of the stress on the U.S. economy. In the major markets, for example California, in the areas you have land to build on you have a price structure that would prevent it because is upside down.

In California, we actually have the second lowest housing vacancy rate in the nation according to the 2010 census. We also have the second lowest housing affordability here. It’s funny because you go to Sacramento, and what the regulators want to know is how they will push home prices up again in the state. All the time they are worrying about how to make California more business friendly: taxes, regulations, education, and infrastructure. We need to start with home prices. For example, in Texas the most expensive housing market is Austin, Texas. The median price of a house in Austin, Texas is $192,000. The most expensive housing market in Texas is cheaper than the California housing market over all. It’s on par with the Inland Empire housing market, which we consider to be an affordable housing market. If you think about businesses and think about the location in California locating in Texas, you have to know they are looking at Texas and thinking they don’t have to pay people as much there. Texas has more public employees than California does on the payroll. They have a larger public sector than we do in terms of bodies. They get away with that because they pay their people about 1/3 less than what we pay ours. This really boils down to the cost of housing; it’s better when the median price of a house is $100,000 in the whole state. We here in California need to stop thinking about home prices going up. In the long-run and for the good of the state, we would be benefited by seeing them go down more.

The construction could not possibly come back, but not because the cost of bricks and labor is so high. It’s because the cost permitting the properties is so high. It goes back to the problem of building in the state. You look at some of the cities in California, and up front you are going to pay anywhere between $40,000-$70,000 to permit a single lot, before you even put a single piece of concrete in the ground. This is ludicrous and not how you run a state. You’re much better taxing people on an on-going basis through property taxes than lumping all the costs up front on the builder who is making the property in the first place.

California is the second most unaffordable state in the country, yet it has to be at some of its highest affordability. It was more affordable back in the 80’s, but it is more affordable now that it has been in the last 15-20 years. You would be surprised how affordability has really not increased that much despite the drop in prices. In some places, they have not even fallen back to 2003 levels. As much as they came down, it is more because they have been driven to such unbelievable highs. It’s a little hard when you live in places such as Riverside, which is the epicenter of a lot of the damage. A lot of the Inland Empire is more extreme than most, but if you look in coastal areas like Orange County and San Mateo, prices have not come down much at all. There are a lot of people who owe more than a house is worth, which seems to be the biggest impediment for California. However, the biggest concern should be the overall lack of equity rather than the “underwater folks.” During the bubble, Americans picked up something on the order of $8 trillion in mortgage debt on the basis of what they thought was about $20 trillion in real estate wealth, maintaining about a 60% equity ratio in the housing market. The $20 trillion in housing wealth disappeared when the bubble broke, but the $8 trillion in debt more or less stayed in place. The result is we as a nation are carrying a level of equity in our housing market, which is about 45%. This is more acute in areas like Arizona, California, and Nevada where you had the bigger ups and downs in home prices. This is probably the single largest impediment to a housing recovery.

People talk about foreclosures, but this is not really the issue. They also talk about a lack of credit, which is harder to get out than it was in 2005 due to the markets being broke. For Christopher, the biggest single problem in fact the lack of equity, which is preventing move-up buyers from moving up the food-chain in the housing market. One of the biggest problems with the construction market right now is that you typically build homes for move-up buyers. Unfortunately, this is not going to be the market to work in over the next few years. Rather, you want to be working in entry-level housing. The fixed costs are such that there is very little incentive to build entry-level housing. It’s $50,000 whether you put a 4,000 square foot house or a 1,000 square foot house on the lot. This makes it very tough to build a small house, which is a big problem for the state. You have to go back to the fee structures and how the state pays for infrastructure. We have to get away from the builders’ inactive property taxes, which mean getting rid of Prop 13. This was one of the biggest fiscal disasters ever perpetuated out of the state’s budget.

For people who are elderly, have a house free and clear and have their taxes raised, you would use reverse mortgages. Mortgage your house and pay your taxes. We use the same roads, the same fire services, the same police services. It doesn’t mean that just because you happened to be 80, you shouldn’t have to pay your fair share. We want to be business friendly, giving businesses that have been located here for 20 years a massive cost advantage over a new business trying to start operations is reasonable. You have to level the playing field, and people have to pay their fair share. When you think of California, people think California is a high-tax state, but it’s not. We’re an average tax state. We feel like a high tax state because we have given these ridiculous protections to certain portions of the population and economy that we’re not all entitled to, and those folks are completely under taxed. As a result of that, we have to overtax everybody else to make up the difference. Texas makes their senior citizens pay property taxes the same way everyone else does, as does every other state in the U.S. except for California.

Foreclosure is not the reason for California’s problems, but one thing it does do is it does not replicate a buyer for the next transaction; those people are not buying. 70% of Riverside’s sales is either a short sale or an REO; so every time you have 1,000 houses moved, about 65-70% of people are not buying because they just lost their credit. This sounds good on paper; but if you go back to 2000 and look at the housing market in Riverside, you will see that close to 40% of single family units were actually rented out to other families. They were investor-owned rented out. It is pretty clear that there is a flourishing investor market in the Inland Empire. People buy single-family homes; they rent them out to people who need them, and there is no reason in the world why that process cannot do the job of absorbing some of the excess supply out there. In many ways, right now the administration course has been talking about how we get investors to move into the market to scoop up more units. Christopher’s answer is you don’t have to do anything except get out of the way and let investors have the same rights as individual buyers when it comes to securing financing. This would probably be the end of the problem in a very short period of time, particularly in California because there is not enough housing with it being the second-lowest vacancy rate in the nation. It is not going to fix the problems in Arizona, Florida, or Nevada because the problem there is the vast excess of supply. It doesn’t matter how many investors you pull into the market, it’s just not enough households to absorb all the stock.

What is interesting about this downturn is that as severe as it has been, we have not lost a lot of migration out of California. This is because migration is driven by two things: relative unemployment and relative home prices. As bad as things are here in California, they are bad pretty much everywhere, unlike the mid-90s where things were bad here but the rest of the country was doing okay. At the same time, we had a lot of people leaving in 2005 and 2006 because of the skyrocketing cost of housing. This goes back to the idea that affordability is a good thing and something we should strive for and not fight against. A lot of folks were simply leaving because they could not find a house. With affordability being so much better in California and them providing one of the best standards of living in the nation and many other factors, there is a lot of reason to be in the state. People want to be here. To see more, go to www.beaconecom.com.

Doug Duncan will be on the panel for I Survived Real Estate 2011, taking place on October 14th. The Norris Group would like to thank their gold sponsors for the event: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Conaway and Conaway, Delmae Properties, Elite Auctions, Inland Empire Investors Forum, Keller Williams of Corona, Keystone CPA, Kucan & Clark Partners, LLC, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Pacific Sunrise Mortgage, Personal Real Estate Magazine, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Tri-Emerald Financial Group, and Westin South Coast Plaza. Visit isurvived2011.com for more details.

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.

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243-TNG Radio – Doug Duncan 9-17-11

Friday, September 16th, 2011

Doug Duncan

Chief Economist for Fannie Mae

(Full Bio)

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On October 14th, 2011, The Norris Group returns with its award-winning event I Survived Real Estate. An expert lineup of industry specialists join Bruce Norris to discuss current industry regulation, head-scratching legislation, and the opportunities emerging for savvy real estate professionals. 100% of the proceeds support the Orange County Affiliate of Susan G. Komen for the Cure. This event would not be possible without the generous help of the following platinum partners: Foreclosure Radar and Sean O’ Toole, Housing Wire, The San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops and President Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobbie Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Real Wealth Networks, Frye Wiles Web and Branding, MVT Productions, and White House Catering, who will provide the 3-course meal for this black tie event. Visit iSurvived2011.com for more details.

Bruce is joined this week by Doug Duncan. Doug is Fannie Mae’s vice president and chief economist. He’s responsible for managing Fannie Mae’s strategy division, economics, and mortgage market analysis groups in this leadership role. Doug provides all economic housing and mortgage market forecasts and analysis and serves as the company’s thought leader and spokesman on economic mortgage market issues. Prior to joining Fannie Mae, Doug was senior vice president and chief economist at Mortgage Bankers Association. Doug was recently named one of the country’s top four most accurate economists in 2010 by Wall Street Journal. He was also named one of Bloomberg’s Business Week’s 50 most powerful people in real estate.

It was back in 2005/2006 that it first occurred to Doug when he looked at the real estate market that things were going to unsustainable. In one of the first conversations he had back in late 2005/early 2006, he was talking with the commerce secretary in a business group, and he asked Doug what he thought about house-price bubbles. He told him he was in the Don Ho camp, Don Ho being the recording artist who recorded the song “Tiny Bubbles,” but it turned out the bubbles weren’t so tiny. However, there were some tiny bubbles, and one of the keys that he had an inkling of but didn’t really comprehend was after the end of the 2003 refinance boom when they had expected to see a downturn in employment in the industry. They had forecast about 85,000 layoffs as the Feds started to raise rates in January 2004 through February and March. At this time there were about 30,000 layoffs, which was right along their forecast path. It turned around, and employment started increasing even though total volumes were falling. They puzzled over this for a while, and it took about a year to figure out it was really the growth of the subprime business and this was going to provide support for price appreciation. They were a little slow to figure it out and saw the trigger did not completely comprehend it.

At the time it was not possible to understand the products that were being used, such as the mortgage backed securities and the CDOs. You would have really had to realize that at the moment you had lenders that did not actually care if they were loaning to people that could pay them back. As the discussion of CDOs and other derivatives came to the forefront, they tried to understand them. He recalled someone asking him to give an explanation of them in a public setting in a Q and A session, and he told them that he was reasonably good at math but he could not figure out how you could take the B tronches from ten different securities and put them together into one new security and then rate the top 80% AAA. Doug said at the time this was something he should have paired more concretely with the change in the employment structure, thought about the products, and done a better job of vetting it. It was clear that there were problems, and one thing they did was properly called “the peak of momentum in the market.” What they did not call was the degree of downturn and the breadth of impact it would have on the overall economy. In the October convention of MBA in 2005, they believed that in June of that year the peak of momentum had passed. This came from their observation in the condo market. In condos, a much lower proportion of people who own them live in them as their primary residence. The biggest transaction cost in real estate is actually moving out. This does not show up in financial metrics, but from the human perspective this is the biggest issue. If you don’t have to move out and you can sell it, the price is more sensitive to market movements.

In June of that year, for the first time in four years, the year-over-year price appreciation in condo existing sales was less than non-condo existing sales. They watched in July, and the same thing happened in August; so they concluded that was an early signal that momentum had peaked. The average house price continued to rise through 2006, but condos were falling. The sales peaked in new homes, which are always the second to go. This started to decline in October, and by January of 2006 they were also in decline in terms of the number of units. In about July of 2006, average house prices started to go as existing home sales started to fall. They did call the peak properly in terms of the momentum in the marketplace, they just did not get the degree of magnitude of disruption it was going to be or the degree to which house prices were going to decline, even though they knew they would. It was unprecedented, no one can fault somebody for not picking up that this was the Great Depression of real estate and is pretty much what we’re living through right now.

A survey was conducted back in 2003, the time when you would not have seen much change between this year and 2005 because people were using the products which ended up being destructive in some cases. The pace of appreciation had them frightened that they wouldn’t have gotten access to housing. They were using these different products which had payment characteristics that ultimately proved to be unsustainable in some cases and of course got caught in the downdraft of prices and other cases. It was because the price appreciation was so strong they thought they would not be able to get onto the wagon. In the 2003 survey, people said when asked about the safety of housing as an investment, they even ranked it over insured deposits, which is nonsensical. This could be a warning sign for someone in Doug’s business who is looking to the future when somebody perceives absolutely no risk when signing up for something so large. It should have been another early signal to put things into perspective. Things have changed a lot from 2003 to what the recent survey from August 2011 showed. Clearly they have changed for the worst in general across the whole survey. Even from 2010 we have had some significant movement in attitude, even seeing a dramatic shift in the last two months. If you summarize all the information from the surveys, the public is basically saying they like the economy’s direction less today than they liked it a year ago. More people have seen their expenses go up than their incomes. They don’t expect interest rates to go anywhere, but they expect house prices to actually decline. They expect rents to go up, and they wonder why anyone would think now is a good time for them to make the biggest financial commitment of their life. When you aggregate that on the most recent quarter when they recently asked how people felt about the stability of their job, 26% of employed people were worried about the stability of their job. If you add that to the 9% unemployment rate, you have 35% of all the employable people in the country that are worried about the stability of their job. This is not a good sign for demand for housing.

As Bruce mentioned earlier, when you had a mood that was euphoric that took us too far, you now have a mood that is almost depressed and probably doing exactly the same thing in the other direction. The percentage of people who say they would rent if they were to move in the next twelve months is rising. The percentage who says they would own has been falling. In particular, for anybody that is delinquent, their view of next-time ownership has degraded significantly. In this case, you are talking about one’s desire to own, but now you have to pair this with capability of qualifying. When someone says they are delinquent and might not want to own, they are not going to be able to own. There are a lot of firsts in this downturn, and this is one of them. California has several mixed areas, and Riverside County is one of the harder hit areas. 65% of all of the sales are either short sales or REOs; which means that when someone closes 1,000 sales, they are only producing 350 potential repurchasers. 65% of the inventory is going to go vacant and be bought by an investor or bought by somebody migrating to an area that has 15% unemployment. They would need to find 650 people per 1,000 houses, which is a unique problem. This is one of the reasons when Bruce was talking about investor financing it seemed obvious they were probably going to have to participate.

To find out the significant mood change in the market in the last two months, Doug asked several categories of questions. They asked about their attitude about the direction of the economy, their confidence and changes in the nature of their personal financial situation, interest rates, prices, and rent vs. own. The main question they asked was whether or not they liked the direction in which the economy was going. In the last two months, the percentage of people who feel it is going in the wrong direction has increased by 14 points. In the most recent survey, 78% of the people who took the poll said it was heading in the wrong direction. If you go back two months to the debate over the debt ceiling combined with the re-emergence turmoil in Europe, they concluded that consumers were watching with one eye the debate in Washington for clues as to whether there was going to be a serious addressing of the longer term fiscal health of the United States. They came away from the debate dissatisfied that it had really solved the problem. With the other eye, they were watching Europe with in mind that that was a potential future for us if we don’t get our fiscal health in order. This is an inference that they weren’t asked to articulate. However, when you look at the changes in their attitude about all the other things related to their personal situation and their housing choices, it seems to be a reasonable conclusion to draw what was aforementioned. There were not other significant events at the time that would have driven so big a change in attitude.

It seems like just the idea of buying a house has become more complicated just because people are being forced to consider some of the other factors involved. If one thinks they are just going to buy a house in California and see if they make enough money, it’s not that simple. They also have to not only think about if their job is going to be stable, but also factors like whether or not countries like Greece will pay their debt. It’s a lot to think about. Also, the size of both the deficit and the debt that we are accumulating make it more apparent to people that somehow it’s going to have to be paid for and that it is people and households that ultimately pay for that one way or another. You’re seeing a continued financial conservatism on the part of households as they attempt to get their household balance sheets back in order, reducing debt, and increasing savings. All of that is a demand-side problem for housing. What is hard to imagine is that there is hesitancy buying a property when the financing is something like 3. To become an investor, Bruce refinanced his house that was almost free and clear at 17 ½% fixed in 1981. Doug just bought a house in Florida, and on 15 year fixed money it was 3 ¾%. It’s an amazing thing, and people recognize that. When they ask them in the survey whether or not it is a good time to buy a house, a very high percentage say it is a very good time to buy a house. What they are not saying is it is a good time for them in particular to buy a house.

Bruce mentioned the front cover of Time Magazine and how it really bothers him because of its description. Its title is Rethinking Home Ownership: Why Owning a Home May No Longer Make Economic Sense. This drives Bruce crazy because he is thinking that going forward they are probably going to have some inflation. No one that owns a rental is going to let somebody tie up a fixed-rent for 30 years. If you get to borrow money at something that starts with a 3, you will have a real hard time convincing Bruce that it is a bad economic decision ten years later when your neighbor is renting for twice your house payment. This is one of the things that is a practical attribute of homeownership that gets lost and is one of the reasons that there is a difference between how households behave with their mortgage and what we teach in introductory finance classes in college. There is a practical attribute to the mortgage, which is as long as you make it through the first three or four years of that mortgage successfully, typically it is with a growing income. After a while your income grows away from that fixed obligation and becomes less and less significant; whereas to Bruce’s point as economic conditions’ rents change annually and don’t have the same attribute as the fixed lending. If you don’t own in the future, the housing bill will always take the majority of your income. If you are able to buy and lock in a fixed rate, it will become less and less a part of a percentage of your budget. You will have spendable money and will be able to absorb higher tax levels where it will still leave you with a lifestyle with which you are okay. The difference in the cash flow also allows you to diversify your investments and increase your overall financial strength through other diversification of ownerships.

The biggest hurdle to a normal housing market is employment. Going back to the survey, with 26% of the people saying they are worried about whether their job is stable and another 9% unemployed, this means 35% of the employable market is worried about their job. On that side of things, stability is really critical. Doug and Fannie Mae have tried to fix employment without having construction be a participant, but he said this slows things down. Typically, about 10% of new jobs are in the construction space in any expansion. When housing is not a contributor, then it is much slower. It would seem like we would have to resolve a backlog of homes that are below replacement cost before we get to somebody building a significant amount of homes. The pile of properties that would be called shadow inventory would still be a significant issue. It is both a current issue and will be a longer-term issue with regards to price appreciations. There are folks who would like to sell their house but know that they cannot get the market price that would make it make sense for them to sell unless they are under pressure. There are also folks who have had to sell; and with prices falling and lots of distressed sales, investors have appropriately stepped in to assist. Some of the investors will take a long-term buy and hold strategy for the investment value, both for the capital gain and also for the cash flow returns. Others will be helping make the market as it transitions to absorb the supply and will put them back on the market as price appreciation sets in. The implication of that is that price appreciation for sometime into the future would be slower than what folks have seen in the past. If you look at the instances where there was a significant regional price decline in Los Angeles in the late ‘80’s or even in New England in the Boston area. The pattern that you see with a precipitous decline is in a very long and slow recovery period, something along the order of a decade.

Right now we have the risk of a recession as a coin toss. The triggering event is usually a surprise when it occurs, but sometimes you can get it right. One of the things that could cause another leg down for housing would be a major bank failure in Europe, which could lead to a layman type of event in Europe. They are our biggest trading partner, so that would definitely be a hit to the U.S. economy, both in terms of trade and general economic activity. However, we also have significant interbank relationships in our financial system with them. This is the thing Doug and Fannie Mae are watching most closely today. If something was to happen and we were to go into another recession, there would be additional downward movement in prices. The degree would depend on the degree of the recession.

Doug Duncan will be on the panel for I Survived Real Estate 2011, taking place on October 14th. The Norris Group would like to thank their gold sponsors for the event: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Conaway and Conaway, Delmae Properties, Elite Auctions, Inland Empire Investors Forum, Keller Williams of Corona, Keystone CPA, Kucan & Clark Partners, LLC, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Pacific Sunrise Mortgage, Personal Real Estate Magazine, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Tri-Emerald Financial Group, and Westin South Coast Plaza. Visit isurvived2011.com for more details.

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.

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