Christopher Thornberg

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

Friday, September 23rd, 2011

Principal at Beacon Economics

(Full Bio)

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.

Tags: Beacon economics, bruce norris, business economics, California, chief economist, Christopher Thornberg, Controllers Council, economic forecaster, housing market crash, John Chang, Prop 13, the norris group, The Norris Group Real Estate Radio Show
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The Norris Group Real Estate News Roundup 6/27/11

Monday, June 27th, 2011

Today’s News Synopsis:

Realty Times reported mixed results for the market this month: an increase in housing starts but a 3.8% decrease in existing-home sales. Analysts at Capital Economics found that cheaper and lower-quality homes will steadily decrease faster than homes at the higher end of the market. The Wall Street Journal reported that more mortgage applications are being rejected due to banks being extra careful about lending.

In The News:

DS News - “Homes at Low End of Market Remain Most Vulnerable to Price Drops” (6-27-11)

“A continuation of tight credit conditions for first-time buyers and a foreclosure pipeline full of homes bought with subprime loans will mean that house prices at the low end of the market will continue to fall at a faster rate than prices at either the middle or high end, according to analysts at the research firm Capital Economics.”

The Wall Street Journal - “Tighter Lending Crimps Housing” (6-27-11)

“The percentage of mortgage applications rejected by the nation’s largest lenders increased last year, spotlighting how banks’ cautious lending practices are hampering the nascent housing market recovery. ”

Bloomberg - “Mortgage-Bond Slump in U.S. Deepening as Jumbo, Alt-A Loans Extend Losses” (6-27-11)

“U.S. mortgage bonds without government backing are extending losses as signs of a weakening U.S. economy and concern that Greece may default on its debt curb risk-taking.”

CNN Money - “The tax man doesn’t want housing to recover” (6-27-11)

“During the housing boom, governments enjoyed windfalls from property taxes tied closely to home prices. But since the real estate bubble burst, the revenue stream officials had come to rely on to help pay for everything from education to roads has dried up.”

Housing Wire - “Florida court upholds foreclosure ‘rocket docket’ system” (6-27-11)

“A Florida appellate court denied a request from the American Civil Liberties Union to keep a property seizure case out of an accelerated foreclosure system, known as the ‘rocket docket’.”

Inman - “Denver home prices steady, some sellers on sidelines” (6-27-11)

“Metro Denver heads into the prime summer season with fewer available homes on the market. The monthly inventory of unsold homes in May declined 11.1 percent year-over-year to 19,573 units.”

Realty Times - “Real Estate Outlook: Mixed News amid Rising Initial Jobless Claims” (6-27-11)

“It was mixed news this week in the real estate market. While new housing starts were up after a month of declines, existing-home sales were down 3.8 percent from April.”

San Francisco Chronicle - “More than 1 in 4 denied a mortgage” (6-27-11)

“The pendulum has swung the other way. Banks have been blamed for being too lax in their lending practices in the past, haven given mortgages to millions that couldn’t afford them and contributing to the foreclosure debacle. Now, they are being cited as being too restrictive. Their conservative approach, critics say, is hampering the housing market from finding some stable ground, as willing buyers are being denied a mortgage.”

DS News – “Analysis: Private Markets Key to Preventing Housing Meltdown Sequel” (6-27-11)

“According to an analysis authored by Patric H. Hendershott and Kevin Villani, responsibility for the failure of Fannie Mae and Freddie Mac falls directly on regulators and indirectly on their political overseers.”

Los Angeles Times - “Treausury bond yields rise as some investors shun new debt sale” (6-27-11)

“Some investors have lost their appetite for U.S. Treasury bonds with yields at their lowest levels since late last year. Government bond yields rose Monday after the Treasury faced surprisingly weak demand at its auction of $35 billion in new two-year notes, the first of three note auctions this week.”

Housing Wire - “Freddie Mac economist sees sunny economy in second half” (6-27-11)

“Freddie Mac Chief Economist Frank Nothaft said the overall economy should begin to accelerate in the second half of 2011 with an improved housing market close behind.”

Tags: ACLU, Barclays Capital, bruce norris, Capital Economics, Case-Shiller Home Price index, Cato Institute, Christopher Thornberg, Denver, Dodd-Frank, economist, fannie mae, Federal Housing Finance Agency, Federal Reserve, Florida, Frank Nothaft, freddie mac, Home Mortgage Disclosure Act, Kevin Villani, NAHB, Patric H. Hendershott, rocket docket, Standard & Poor's, the norris group, treasury bond, U.S. Treasury
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The Norris Group Real Estate News Roundup 1/14/11

Friday, January 14th, 2011

Resources:
New York City Comptroller Issues 2nd Request for Audits from Banks
GSE mortgage securities boost record Federal Reserve payment to Treasury
Federal Reserve posted record profit of $78.4 billion last year
Prices down 4 months in a row
Mortgage Refinance Applications Increase in Latest MBA Weekly Survey
U.S. Foreclosure Filings May Jump 20% in 2011 as Crisis Peaks
Freddie Mac mortgage rates decline for second consecutive week
CA foreclosure starts fall, but more auctions set

Today’s News Synopsis:

Recent research from ForeclosureRadar showed an increase in set foreclosure auctions in December despite the decrease in foreclosures for that month. According to Housing Wire, nonperforming loans and repossessed foreclosed homes increased 27%, as reported by JP Morgan Chase. Different states are feeling different effects from the recent robo-signing issues due mostly to varying laws for each state regarding foreclosures.

In The News:

Housing Wire- “JPMorgan nonperforming loans up 27% from a year ago” (1-14-11)

“JPMorgan Chase (JPM: 44.91 +1.03%) reported $13.3 billion in nonperforming loans and repossessed homes through foreclosure in the fourth quarter of 2010, up 27% from a year ago.”

Bloomberg - “Big Lenders May Lose Under Plan for Simpler Mortgage Disclosure” (1-14-11)

“The Consumer Financial Protection Bureau said it will soon begin writing and testing a simplified mortgage-disclosure form aimed at making it easier for borrowers to compare deals from different lenders.”

Inman - “Robo-signing impact varies in West” (1-14-11)

“Foreclosure activity in December varied in five Western states tracked by ForeclosureRadar — perhaps because loan servicers are faced with different laws in each state as they work to put robo-signing issues behind them, the company said.”

RisMedia – “California Bucks National Foreclosure Trend in 2010″ (1-14-11)

“Fewer Californians grappled with foreclosure last year, bucking a national trend and giving homeowners fresh hope that the state’s housing market could be on the mend.”

Housing Wire – “Record long foreclosure delays spread past judicial states: BarCap” (1-14-11)

“Procedural problems cut the rate at which homes are moved from foreclosure to REO in half during October and November, but the drop did not occur in judicial states alone, according to research from Barclays Capital.”

DS News - “Free Online Resource Aims to Help Americans Facing Foreclosure” (1-14-11)

“Free online software for the creation of personalized mortgage modification applications under the federal Home Affordable Modification Program (HAMP) and otherlender programs is now available from FreeMortgageFix.com. Borrowers can complete an application to modify existing home loans via the site’s user dashboard.”

The Wall Street Journal - “Mortgage Rates Decline to 4-Week Low” (1-14-11)

“Home-mortgage rates declined for a second straight week, according to data released Thursday by Freddie Mac, but the housing market continued to face
headwinds from a supply glut and the struggling employment situation.”

NAHB - “Housing Moving to Higher Ground in 2011″ (1-14-11)

“Housing will see gradual improvements in activity this year as the nation’s economy and job market continue to move to higher ground, establishing momentum that will produce more considerable gains in 2012, according to economists who appeared at the NAHB International Builders’ Show in Orlando on Jan. 12.”

The O.C. Register – “CA. foreclosure starts fall, but more auctions set” (1-14-11)

“While foreclosure starts fell in California in December, slightly more foreclosure auctions were set than in the previous month, the latest research from ForeclosureRadar.com shows.

Realtor - “Homes Get Smaller, More Energy Efficient” (1-14-11)

The average size of a new single-family home in 2010 was 2,377 square feet, down from 2,438 square feet in 2009 and down from the peak of 2,520 square feet in 2007 and 2008, according to U.S. Census Bureau data presented by Rose Quint, assistant vice president of survey research for NAHB at the International Builders’ Show in Orlando Thursday, Jan. 13.”

Looking Back:

The 30-year fixed mortgage rate fell to 5.06 percent the week of January 10, 2010, according to Freddie Mac. 2.8 million properties received a foreclosure notice in 2009. Interactive Mortgage Advisors sold $130 billion worth of Ginnie Mae’s servicing portfolio. President Obama proposed a tax on all companies who received bailout money, which lasted until all bailout money was paid back.

Tags: American Bankers Association, ARMs, Barclays Capital, Christopher Thornberg, Citigroup Inc, Consumer Financial Protection Bureau, federal housing administration, foreclosure, ForeclosureRadar, freddie mac, hamp, JP Morgan Chase, NAHB, RealtyTrac, robo-signing, U.S. Census Bureau, Wells Fargo
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194-TNG Radio – I Survived Real Estate 2010 10-02-10

Friday, October 1st, 2010

I Survived Real Estate 2010

(Full Bio)

September 17^th, 2010, The Norris Group returns with its award winning event I Survived Real Estate 2010. The video also now available on The Norris Group website.

The Norris Group has assembled an incredible line up of industry experts to discuss the state of REO from the inside. Topics will include regulatory intervention and aftermath, bulk buying, myths and facts, and opportunities emerging for real estate professionals. 100 percent of the proceeds support the Orange County affiliate of Susan G. Komen for the Cure. This event would not be possible without generous help from the following platinum partners: Foreclosure Radar and Sean O’Toole, the San Diego Creative Real Estate Investors Association and Bill Tan, Investors Workshops and Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobby Alexander, Claudia Buys Houses, The Business Press, Frye Wiles, MVT Productions, and White House Catering.

This week The Norris Group Real Estate Radio Show is broadcasting I Survived Real Estate 2010.

You must have 2 different criteria for Bruce’s no down payment program in order to prevent foreclosures. The reason why this program will work is because it is set up to serve 3 borrowers simultaneously. Yes, you are going to have a failure rate with a no-down mortgage, but you pick the percentage. When your payment is less than rent, is it going to be 20 percent? Bruce doubts it. But for the sake of argument, let’s say that foreclosure rates are at 20 percent under this program. If 2 million people sign up for the no-down program, and 400,000 people walk away, then let that loan get assumed by the next buyer without qualification. The likely target buyer will be the person who lost their house in foreclosure during the past 3 years. They can’t get new credit, but they might want to return to those “pride of ownership” homes. They will write a check, and save the system from 1 more foreclosure. The original intent of the program is to get first time buyers into a house. The secondary benefit is it will get homes back to the people that lost their homes.

Have you ever noticed that if you have great financing, then you can get more for a property? You could probably get a premium for financing on Bruce’s program.

A secondary feature of this program is that when it goes to trustee sale, the opening bid would be just the back payments. Example: Lets say you have a loan amount of $150,000 at 4.5% interest. 3 months behind, people begin the foreclosure process. 4 months later, the foreclosure sale begins. You’re 7 months behind on the property’s payment, with $1,000 dollars of payment per month. If the opening bid at the trustee sale was only $9,000, how many do you think would revert to the lender? None of them. We would fight over them. At 4.5% financing, that is an amazing deal. Not a large percentage of the sales would get to that point, but they would provide financing to investors; the group that no one wants to finance. Investors would overbid on a situation as competitive as that.

What would we do with the excess money being raised from these properties? Lets not reward people who do not do what they sign up to do. Let’s build a fund for something that does good. It doesn’t even have to be a government program. Bruce frequently sees ads in the newspaper in which wealthy people are encouraged to donate their money. We should donate this money to a nonprofit company who can make this loan. Doing this will cause no losses, and it will end in a yield. Bruce cannot see this program losing money.

Over the next few weeks we will be broadcasting the speeches given by the rest of panelists. These panelists are Peter Wayman, Christopher Thornberg, Joseph Magdziarz, Sean O’Toole, Tommy Williams, Daniel Phelan, and Sarah Letts.

Peter Wayman joined Freddie Mac in January 2010 as Sr. REO Sales Director. In this position, he oversees the design of sales strategies and how they are applied across REO portfolios. His group oversees the retail sales process as well as auction and investor sales. Peter is also responsible for the affordable strategies selling homes to organizations engaged in neighborhood stabilization.

Wayman came to Freddie Mac with 32 years of executive relocation experience working with various organizations including Cartus, Prudential and Citigroup. He was recognized for a lifetime industry achievement and inducted into the Hall of Leaders by Worldwide ERC. Peter is a graduate of Cornell University with a BS in Hotel Administration.

Christopher Thornberg is an expert in the study of regional economies, real estate dynamics, labor markets and business forecasting. In 2006 he co-founded Beacon Economics, an economic research and consulting firm that specializes in real estate markets, local economic development, and public and private policy issues.

Dr. Thornberg has established a reputation as one of the state’s leading economic forecasters. In December 2007, he was appointed to California State Controller John Chiang’s Council of Economic Advisors – the body that advises the state’s chief fiscal officer about critical economic issues facing California. Dr. Thornberg also serves on the advisory board of Paulson & Co. Inc., one of Wall Street’s most successful hedge funds. He has been involved in a number of special studies measuring the effect of important events on the economy.

Joseph C. Magdziarz, MAI, SRA is the President Elect of the Appraisal Institute. Magdziarz has been an active member of the Appraisal Institute for 38 years. He has served in a variety of capacities at all levels of the organization.

At the regional level, Magdziarz has served two terms as Regional Vice Chair and two terms as Region III Chair. He has also been a regional representative for many years. On the national level, Magdziarz served two terms on the Appraisal Institute’s National Board of Directors. He has served as Chair of the Education Committee for five years and has also chaired the National Audit Committee, Instructor and Faculty Committees, and Education and Publications Committees. In addition, he has served on a number of project teams.

Mr. Phelan is President and CEO, charged with the day-to-day leadership of Pacific Southwest Realty Services mortgage operations. Pacific Southwest Realty Services is an investment firm focused on commercial real estate, representing and advising both real estate clients and institutional investors in debt and equity placement, strategic planning, property sales and loan administration. Pacific Southwest Realty Services brings competence and integrity to helping Investors and Owners meet their capital needs.

Mr. Phelan joined Pacific Southwest Realty Services in September 1973 after graduating with a B.S. from Creighton University and has been working in the mortgage banking industry ever since. He is both a Certified Mortgage Banker (CMB) and a Charter Realty Investor (CRI) and has been very active and has held various positions in the Mortgage Bankers Association (MBA), California Mortgage Bankers Association (CMBA), local building industry trade groups and the CRI Society Board.

Thomas L. Williams is a graduate of Penn State University (B.S. Animal Science) and the Certified Auctioneers Institute (CAI). Representing the third generation of Williams family auctioneers dating back to the mid-1800s, Williams is also a graduate of the historic Reppert School of Auctioneering. He has over 40 years experience in real estate auctions, land development and real estate investment. He currently serves as Immediate Past President of the National Auctioneers Association.

A founding partner of Williams & Williams, Williams served as president from 1986-2000, and became board chairman in 2001. He also co-founded and served as managing partner of Lowderman & Williams Auctioneers from 1965-85. He has conducted over 10,000 auctions in all 48 of the contiguous United States and Canada, and is an advisor to auctions conducted throughout Western Europe, South Africa, Australia and New Zealand.

Sean O’Toole is Founder & CEO of ForeclosureRadar.com, the only company that tracks every foreclosure in California with daily updates on all foreclosure auctions. Prior to ForeclosureRadar Sean spent 15 years building and launching software companies before entering the foreclosure business in 2002 where he has successfully bought and sold more than 150 foreclosure properties.

Sarah Letts is responsible for implementing Fannie Mae’s neighborhood stabilization strategies including pool sales of REO to government entities, land banks, and nonprofits. She joined Fannie Mae in 1999, and prior to her current position, she specialized in debt financing and equity investments for affordable housing. Before joining Fannie Mae, Sarah developed affordable housing on behalf of community development corporations in Los Angeles and Chicago. Sarah received bachelor’s degrees from Stanford University in economics and political science and a masters degree from UCLA’s graduate school of architecture and urban planning.

Thornberg was the next speaker for the event.

Thornberg begins by disagreeing with Bruce over his zero down program. He explains that FHA loans have been spiking over the last 10 years. Bruce asks, “What about the first 35 years?” Thornberg believes that the activity over the last 5 years is the most relevant, but Bruce believes it is the pricing structure that is most important.

Paul Romer from Stanford University once said, “A crisis is a terrible thing to waste.” Thornberg believes we have wasted our most recent crisis. We keep hearing how the consumer has taken over too much debt, but this is not the case. We learned in the Great Depression that banks should not be allowed to leverage up. Leveraging up turns a small problem into a huge one.

In 1960, of all private sector debt in the U.S., 10% was from the financial sector. In 2007, the financial sector represented 43% of outstanding private sector debt. Consumers didn’t really leverage that much.

We still haven’t really addressed the problem of leveraging. After Lehman Bros fell, they created TARP, and handed money to the organizations causing the problem.

Bruce has a hard time understanding how inflation emerges when it is difficult for wages to increase, and when it is difficult for businesses to ask for product increases. Because Bruce read a book given to him by Thornberg, he now understands that inflation actually drives both of those things. Inflation occurs when the quantity of money rises more rapidly than output. This is known as real GDP. The more rapid the rise in the quantity of money per unit of output, the greater the rate of inflation.

Bruce asks, “If Milton Freedman was looking at Japan’s growth of money over the last 20 years, haven’t they created a lot of money?” Thornberg replies, “no”. Economists agree that the problem with Japan’s central bank is that they have been unwilling to poor liquidity into the economy. Japan went through a period of quantitative easing. All their cash sat in banks as a form of excess reserves. Japan’s banks refused to let money leave their reserves, and so their money supply did not expand.

In Argentina, the government prints money and they spend it directly. That is automatically inflationary, because it is instantly being put into the economy.

Ben Bernanke was once known as “Helicopter Ben”, because he had an interesting proposition. If you quantitave ease with the banks, they may not lend it out. If they don’t lend it out, you can give the money to the government to spend, or you can fly around in helicopters and throw the money out in bags. Thornberg does not think that this is a bad idea. One might even argue that this is a better idea than giving the money to the banks or letting the government spend it.

Right now, we are going through a period of quantitative easing. Our government poured money into the banks, and most of it is sitting in the reserves. However, some of the money has gotten into the money supply. As a result, we are staying in the 1 to 2 percent growth range, which is not deflationary.

Thornberg believes price levels can be effectively controlled by policy, if you are willing to go far enough. Ben Bernanke has stood in front of congress, and has announced that he will go far enough. If he sees any hint of deflation, he will pour more money into the system. If he has to go up in a helicopter and throw it out, he will. Ben Bernanke has an incredible amount of control over the price level. The biggest potential problem is that if he fights it too dramatically, then he could set off inflation. At this point in time, Thornberg thinks Bernanke has done a great job with keeping things balanced. Inflation might be a little too low, but we haven’t gone into an unhealthy range of inflation or deflation.

If Bernanke had not poured trillions of dollars into the system, we may have gone into a deflationary situation. That would have lead to deeper problems inside the economy. Bruce worries that we may be mortgaging our future, but Thornberg is not concerned about this, so long as Bernanke is willing to pull the money out at the right time.

Thornberg is not concerned about what Bernanke is doing with the Fed’s cash, but he is concerned about the fiscal problems that may develop. Fiscal changes occur when congress chooses to spend $4 trillion, but only tax $2.7 trillion. In this case, they would have to borrow the extra $1.3 trillion from the rest of the world. That $1.3 trillion must be paid back. When Bernanke moves money around, he doesn’t cause any future liabilities, because he can withdraw that money.

When Bernanke chooses to withdraw that money, it will have a significant effect on the real estate business and the entire economy. Bruce owns a book named An Antique Book of Interest Rates, which was made in 1955. The lowest interest rate in the book is 4.5%. This is not as low as the rates we have right now. This is what Thornberg is most worried about right now. We are in a bond bubble.

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Tags: auction, Christopher Thornberg, credit, Daniel Phelan, down payment, economic, FHA, foreclosure, homeownership, investor, joseph magdziarz, Lehman Bros, norris group, option ARM, Peter Wayman, real estate, recession, reo, Sarah letts, SEAN OTOOLE, stimulus, subject to, subprime, Tommy Williams, trustee, VA, Warrent Buffet
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189-TNG Radio – Christopher Thornberg 8-28-10

Friday, August 27th, 2010

Christopher Thornberg

Founder and Principle of Beacon Economics

(Full Bio)

September 17^th, 2010, The Norris Group returns with its award winning event I Survived Real Estate 2010. The Norris Group has assembled an incredible line up of industry experts to discuss the state of REO from the inside. Topics will include regulatory intervention and aftermath, bulk buying, myths and facts, and opportunities emerging for real estate professionals. 100 percent of the proceeds support the Orange County affiliate of Susan G. Komen for the Cure. This event would not be possible without generous help from the following platinum partners: Foreclosure Radar and Sean O’Toole, the San Diego Creative Real Estate Investors Association and Bill Tan, Investors Workshops and Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobby Alexander, Claudia Buys Houses, The Business Press, Frye Wiles, MVT Productions, and White House Catering.

This week Bruce is joined by Christopher Thornberg. Christopher is the founding principle of Beacon Economics, and is 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 was one of the earliest and most adamant predictors of the housing crash and the recession that followed. In 2008, he was appointed chief economist for the California State Controller as well as the Controller’s Council of Economic Advisors. He serves on the advisor board of Paulson & Company Inc., one of Wall Street’s most successful hedge funds. Dr. Thornberg holds a PhD in business economics from the Anderson school of UCLA, and a BS in business administration from the state university of New York at Buffalo.

Public sentiment tends to wander between optimistic and pessimistic. No one wants to believe that this recovery might be too slow. Instead, people either hope for a rapid recovery, or they panic over a double dip. Earlier in the year, people were far too optimistic about a rapid recovery, and now they are in a state of unwarranted pessimism. Thornberg does not believe that either of those beliefs are true. He believes that slow growth is most likely going to occur.

Expectations can have an economic impact. Forecasters tend to think that the stock market is a leading indicator of the economy. Paul Samuelson once said “The stock market has predicted 9 out of the last 5 recessions.” We must remember that when we see market swings, it has a material impact on the economy. When the market dumps 15 percent, you are literally talking about a couple trillion dollars in wealth disappearing from the U.S. economy. That does have an influence on spending, particularly at the top end of the income scale. From that perspective, unwarranted worries can create a self fulfilling prophecy and slow the economy.

Over the last 20 years, we have seen unprecedented volatility in the equity markets. We would help ourselves by putting in some rules to dampen that volatility. Thornberg describes the problem as “the tail controlling the economic dog”.

GDP growth in the 90s was caused by stocks. In 2000, it was from real estate equity withdrawal and profits. Currently, our limited growth seems to come from stimulus money. Thornberg does not believe there will be any sort of big driver, and that is part of the reason we will have a slow recovery.

In the mid 70s, there was a consumer let down with the oil shock. Consumers responded to the loss of jobs, high energy prices, and the overall pessimism by cutting back on spending, and that caused a down turn. At the back end of that down turn, consumers who were under-spending started to ramp up their income. They then bought the car they would have bought during the down turn plus another one. That caused a huge surge in consumer spending growth.

Similarly, in the 2001 down turn, we saw a cycle in business spending. Business spending was very high, and then it collapsed. When business spending came back in 2002, we pulled out of the down turn and we got back to normal growth in 2003.

This time, there is no single great source that will cause us to bounce back. The economy was vastly overheated in 2008, and the pain of the down turn was severe, because the pull back occurred in multiple markets at one time. The government got massively involved in both monetary and fiscal policy. In their attempt to stabilize things, they prevented our imbalances from returning to a steady state.

Consumer spending should represent about 80 percent of income, and the other 20 percent should go to savings, taxes and a couple other things. In the midst of the asset bubble, we went from 80 to 84 percent. That extra 4 percent represents approximately half a trillion dollars in excess spending. Savings rates have popped back up in the midst of the crisis, which is good, but the pain of that decline in consumer spending was profound on the economy. As a result, part of the stimulus package was a huge cut in taxes. Right now, Americans are the lowest tax rate in 65 years. This has steadied consumer spending at 82 percent of income. The government is running a deficit of $1.4 trillion per year. At some point, the government will have to raise taxes. When they raise taxes, consumers are going to have to cut back on spending, and that will slow the economy.

We have a lot of deleveraging going on. 23 percent of Riverside is not making a house payment. Because so many people aren’t making their house payments, Bruce believes that people will have plenty of money to spend. Thornberg disagrees, because he does not feel that the money saved from not paying mortgages will amount to that much. Mortgage payments in the U.S. amount to 15 percent of income. Thornberg believes the non-payment of mortgages only adds up to .5 percent of personal income. That is a much smaller number than what happens to personal income as a result of the rise and fall of the unemployment rate.

Bruce explains that in California, a house payment typically represents 40% of someone’s gross. When they don’t make mortgage payments, that saves money, and that fuels GDP. Thornberg understands this, but 1/3 of homeowners in California homeowners own their house free and clear. Of the 2/3rds that are left, the majority are still making their payments. You only have 10 percent of the people in the state that aren’t making their payments. Thornberg does believe that this will make a small difference in the economy, but it is not as significant as people make it out to be.

Bruce asks, “What does seeing a 2.6 10-year T-build tell you?” Thornberg laughs and exclaims that the t-builds are in a bubble. You got to call it as you see it. Sometimes that works and sometimes it doesn’t. A few years ago, Thornberg claimed the housing market was going to crash, and he was right. One of the worst forecasts Thornberg ever made happened 3 months ago when he claimed that interest rates would never go lower. Thornberg has seen some crazy things happen lately. He never could have forecasted this. He believes these things have been driven by worries about sovereign debt in Europe, and a potential for a double dip. This is why Bruce asked his question about Thornberg’s expectations for the t-build, because people’s fears have skewed a lot of categories.

The raw ratio of prices to income will show you that we have not seen a level of retraction that brings us back to the levels we were at in 2000. Prices are still high in comparison to income, but once you adjust for interest rates, affordability levels have never been this great. We have never seen such an affordable housing market when considering current interest rates. Thornberg does not believe that the current interest rates will be maintained. They are going to rise, but he wonders when they will rise and how fast they will rise. If we are on the path to recovery, we could have problems if the credit bubble pops rapidly. If interest rates increase 4.5% to 6.5% in 6 months, then it will severely damage the housing market.

Fannie Mae is planning to hire 1,000 REO agents in Southern California. This tells Bruce that Fannie intends to release inventory; perhaps as soon as the 4^th quarter. FHA has 73,000 REOs and 555,000 people that are 90 days late. There are a lot of properties that the bank has not released, but we also have to be concerned about the properties that the banks are not foreclosing on yet. There are probably 4 to 5 million homeowners that are behind on their payments.

Because affordability is so good right now, there will probably be some demand for the shadow inventory. One thing that distinguishes California from states live Nevada, Florida and Arizona is the fact that we did not over build. Nevada and Florida have years of home supply.

Rental vacancies typically stay high after a recession, but vacancies are actually starting to drop quite quickly, especially in California. Thornberg does not believe there will be enough inventory in California, so when the shadow inventory gets released, it will probably be easily picked up. Thornberg believes we will have a stronger housing market over the next couple years because of the inventory levels in relation to the population. It surprised Bruce to hear Thornberg speak so positively about the housing market.

Bruce and Thornberg do not believe we have pent-up demand, but Thornberg does believe that we have a lack of overall supply. When you look at permits over the past 20 years, the numbers show that we have not built enough housing relative to the population growth since 1995. Even in the midst of the bubble, Thornberg believes we were only building an amount that was appropriate for our population growth.

The builders do not have many vacant unsold homes right now, but their competition, which is an REO, is going to be much to competitive. This competition will force them to build smaller houses. Going forward, Bruce believes that vacant homes are going to increase a tremendous amount. Thornberg does not believe prices will come back a lot.

The kind of building going on right now is on the basis of already finished lots. The inventory of finished but unused lots is disappearing rapidly. In the peak of the housing bubble, local economies ramped up fees. Given what people were willing to pay, there were enormous profits to be made in the sale of a new home. Now that the bubble is gone, cities need to reduce their fees, but they probably won’t. Right now, local governments have a lot of pressure placed on them because of the down turn in revenues. Thornberg believes we will have crowded housing, because many people will not be able to purchase new property due to the excessive fees.

In a down turn, people tend to start living together rather than moving out. This is actually starting to change, which is part of the reason why apartment vacancies are going down. We are not in a strong recovery, but it has been a year since the recession ended. Things have stabilized, and fears are beginning to lift.

Overall, jobs are down right now, but that is mainly due to losses in the public sector. Construction jobs actually bounced a decent amount from June to July. Thornberg does not believe the construction industry will come roaring back to what is was like 5 or 6 years ago, but we are seeing more stability in that sector.

Here are the pros and cons of our current situation: On the con side, we still have problems in the housing market. Many people are not making payments and many are underwater. California has some of the worst unemployment rates, which means we have more to recover from. On the pro side, prior to this down turn, this state was driven by internal demand. This means that our demand was coming from consumers with excessive amounts of false housing equity. At the same time, our external sources of growth were getting hammered. The dollar was over-valued and housing was too expensive, which made it hard to run a business here. Those internal sources of demand will not come back. On the other hand, with a weaker U.S. dollar and cheaper housing, other things will begin to improve. Despite our high unemployment rate, people are beginning to migrate back to California.

The percentage of homeownership is probably headed down. Thornberg does not believe that this is a real concern. He does not believe there are any particular benefits for owning vs renting.

Tags: affordability, apartments, Beacon economics, beacon econommics, bruce norris, builder, builders, California, Christopher Thornberg, construction, consumer spending, demand, economics, economy, foreclosure, gdp, hard money, house hold, housing, income, public sentiment, real estate, realtor, reo, stock market, supply, the norris group, trust deed investing, vacancy
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The Norris Group Real Estate News Roundup 6/9/10

Wednesday, June 9th, 2010

Today’s News Synopsis:

According to the MBA, mortgage loan application volumed decreased by 12.2 percent from last week. Economist Dr. Christopher Thornberg believes that government intervention is simply delaying inevitable declines in the housing market. Interthinx reports fraud risk in the national mortgage industry rose 4% in Q110.

In The News:

Mortgage Bankers Association – “Mortgage Applications Decrease in Latest MBA Weekly Survey” (6-9-10)

“The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending June 4, 2010. The Market Composite Index, a measure of mortgage loan application volume, decreased 12.2 percent on a seasonally adjusted basis from one week earlier. This week’s results include an adjustment to account for the Memorial Day holiday. On an unadjusted basis, the Index decreased 21.1 percent compared with the previous week.”

Bloomberg - “Bank of America May Lead Banks in Home-Equity Losses” (6-9-10)

“Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. may lead 20 publicly traded U.S. banks that charge off as much as $40.9 billion on home-equity investments this year, Fitch Ratings said. In the worst-case scenario considered by Fitch, the three banks may write off a combined $31.2 billion as loans from the height of the housing market sour, analysts John Mackerey and Ken Ritz wrote in a report today. The 20 banks on the list, which includes only lenders with above-average exposure to the business, may charge off a total of as much as $76.7 billion in the two years through 2011, the New York-based rating company estimated.”

Housing Wire – “Christopher Thornberg: Short-Term Recovery Comes at Long-Term Cost” (6-9-10)

“While government intervention is boosting the US economy, including the housing market, it’s only delaying inevitable future declines in growth, Christopher Thornberg, an economist and the founding principal of San Rafael, Calif.-based Beacon Economics, said during a keynote address at REO Expo, currently underway in Dallas.”

Housing Wire – “RealtyTrac: 3.8m Homes to Receive Foreclosure Filing in 2010″ (6-9-10)

“An estimated 3.8m households will receive a foreclosure filing in 2010, said Rick Sharga, senior vice president at the online foreclosure marketplace RealtyTrac, in a speech at REO Expo.”

Housing Wire – “Bank of America Puts Short Sales Ahead of REO” (6-9-10)

“Bank of America, one of the largest lenders in the U.S., has instituted a policy of liquidating as many assets saddled with defaulted loans as possible before repossession, said Matt Vernon, the short sale and REO executive at BofA. Vernon took the position at BofA in February. He has since announced plans to add 1,000 employees to the short sale staff. BofA currently holds more than 477,000 loans eligible for the Home Affordable Modification Program (HAMP), and has provided more than 600,000 modifications through HAMP and its own programs.”

Housing Wire – “Mortgage Fraud Risk Up 11% in Interthinx Yearly Index” (6-9-10)

“Fraud risk in the national mortgage industry rose 4% in Q110 from Q409, and 11% from the year-ago period, according to the latest report from mortgage software developer Interthinx.”

Realty Times – “Managing HOA Construction” (6-9-10)

“Your homeowner association may be faced with a large siding, dryrot or structural repair. These projects often involve a number of disciplines like carpentry, electrical, plumbing and engineering that must be properly integrated for a satisfactory end result. When it comes to accomplishing complex renovation projects, it makes sense to use the services of a professional Construction Manager (CM).”

Looking Back:

One year ago, The U.S. Department of Housing and Urban Development (HUD) announced on May 29 that the Federal Housing Administration (FHA) will allow state housing finance agencies to provide second mortgages ‘monetizing’ the tax credit. Real Estate Econometrics estimated that rates on commercial mortgages would reach 4.1 percent by the end of 2009. 10 banks won U.S. Treasury approval to buy back $68 billion of government shares.

Tags: bank, Bank of America, bruce norris, Chase, Christopher Thornberg, construction, economy, fitch ratings, foreclosure, fraud, government, hamp, Interthinx, John Mackerey, JP Morgan, Ken Ritz, MBA, mortgage, real estate, RealtyTrac, reo, REO Expo, Rick Sharga, short sale, Wells Fargo
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162-TNG Radio – Christopher Thornberg 2-20-10

Friday, February 19th, 2010

Christopher Thornberg

Principal at Beacon Economics

(Full Bio)

This week Bruce is joined by Dr. Christopher Thornberg. Dr. Thornberg is the founder of Beacon Economics, and he is one of California’s leading economic forecasters. He is one of the only economists who accurately predicted the crash and the recession that followed.

During the last show, Christopher discusses the proposal to allow a bankruptcy judge to determine what they should owe on their home. Bruce mentions that banks are not foreclosing on homes because if they did then their losses would be incredible. Thornberg says the proposal for bankruptcy judges was being pushed for a while, but it came to an end because the right side of Congress was strongly against it. Thornberg thinks that most homeowners, whether they were in trouble with their home or not, would not have been supportive of that proposal. A large number of the people in financial trouble today are in trouble, not because they bought homes at the peak, but because they refinanced at the peak. People took money out of their home to buy toys, like cars and televisions. If you walked into a bankruptcy court, and showed the judge everything you’ve done with your finances, he would allow you to keep your home, but you would lose everything else. Also, a lot of people committed fraud on their mortgage applications, so they would certainly lose their home. Realistically, people should be happy that we still have non-recourse loans, because they can take your house but they can’t take everything else.

Christopher says there are no smart economists claiming that the U.S. has potential for deflation. The deflation in Japan is being caused because of their tight monetary policy. The potential for inflation is driven by the money supply. The government pursues a tight money policy, which means they don’t expand the money policy very much. Japan had problems with inflation in the 60s, and that scarred their national psyche. They have become so scared of inflation that they have allowed deflation to occur. If Japan wanted to get rid of deflation, all they need to do is start printing money.

Japan has huge national debt, but they don’t want to inflate because that would make their cost of borrowing increase dramatically. If the United States started to inflate, and that inflation coincided with a $20 trillion federal debt, we would be in trouble. However, our existing debt would become much cheaper, because the interest rates are fixed.

In 2009, banks changed the way they deal with distressed debt. They don’t need to be aggressive about how they value loans, even though many of their loans are under water. As long as the bank can keep the loan current, they don’t have to acknowledge the potential loss in that loan. If we forced a mark-to-market mentality on banks today, we would probably collapse the banking system. There would probably be at least 6,000 banks going out of business if we forced banks to comply with their actual Tier 1 capital needs. We do not have the man power or the money necessary to bail out all the depositors in those institutions.

This is similar to what Japan allowed to happen in their bank system, but it is not the same. Japan created what Christopher calls “zombie banks”, and they made it difficult for anyone to raise debt. Our banks do not have to worry about that problem as much.

One of the nice things about the American economy in comparison to Japan, is that we still have a competitive market. Christopher has some friends who have become employees of different companies due to bank buyouts. Eventually, they quit and decided to start their own bank. These people are becoming new entrepreneurs who pick up the slack for banks who will not lend. Christopher thinks that these kinds of people will be our saviors.

A little inflation goes a long way. The U.S. could easily inflate the economy, which would pick up the asset values, and that would take a tremendous amount of pressure off of our banking systems. The Federal Reserve has made the stance that they are anti-inflation. Christopher believes that Bernanke needs to think more realistically, because a little inflation would be a huge relief for our financial system.

When we have inflation, we usually have an increase in wages. However, wage increases do not usually occur quickly.

In 1982, Bruce refinanced his house to be an investor at 17.5%. That is the long run consequence of that kind of activity.

Bruce asks Thornberg if he foresees the United States having positive GDP growth over 1 percent. Thornberg feels very confident that this will happen. The U.S. economy still has a lot of problems to deal with. However, if the government backs off the stimulus and allows the economy to re-grow and if we have less consumer spending, and more exports, then we will have a great opportunity to grow as a country.

When we talk about GDP, we are talking about the fundamental ability for an economy to produce goods. Our ability to produce goods and services increases by about 3 percent per year, and we’ve been maintaining this growth for decades. The question is, “What are we losing that productive output for?” Thornberg thinks we’ve been using that output poorly. We have been using our output to supply consumer spending and to bring in imports. Also, we have lost our focus on exports and business spending.

We have had a demand shift from less consumer spending to more exports. It takes a while for supply mechanisms to restructure themselves to meet those new demands. It is incorrect to say that demand creates supply. The question is, “How is the supply being altered by the basis of demand?”

The U.S. GDP growth was supported by a lot of equity extraction. Now many people must to save for their retirement. Bruce wonders how much that hurts that which represents 70 percent of GDP engine. This is the point that Christopher has been trying to make. If we hadn’t had the big equity bubble, and if we hadn’t seen an extreme increase in consumer spending, then our ability to supply would have shifted to exporting and business spending.

California has a $1.9 trillion economy, and a $20 billion deficit. Our problems are political and not economic. Christopher thinks we simply need our leadership to make some basic decisions on how California will finance the ending of our debt problem. We don’t have a government that spends a lot of our money. The problem is that we spend it in the wrong places. At the same time, we are not a high tax state. We put high taxes on small bases, which makes us an unfriendly tax place for specific constituencies. Christopher thinks that we simply do not have the political will to get rid of our debt problem.

Christopher thinks that Prop 13 is a fiscal injustice. It amazes him that Prop 13 was even allowed to exist. Prop 13 under the fairness clause, which states that if you are receiving similar services then you should be paying similar dues. Prop 13 should have been rejected in the California Supreme Court. Thornberg thinks we need to get people to vote against this proposition, but we probably won’t make this happen.

Christopher does not currently know, for sure, if we have positive or negative migration in California. However, based on some of the recent reports he has read, California is seeing negative migration. This is largely due to the weak state of the labor markets. The good new is that once we get out of our mess, we will have a weak dollar and lower home prices. Christopher is optimistic that once we are done with this mess, California will show outstanding growth.

The United states has becomes the world’s largest debtor nation. The good news is that the dollar has to go down at some point in time. China, India, Russia and Brazil have made an explicit policy to keep the U.S. dollar strong. They do this by taxing their citizens in order to buy U.S. treasuries. This is a strategy that will someday end, and this will cause the U.S. dollar to fall. This means that they will buy a U.S. treasury, but they will probably lose at least 15 percent of the value in their investment, because of the decline of our value. They are taxing Chinese peasants to subsidize American consumption. They could stop investing like this if they wanted to, but that would immediately severely damage their currency. People keep saying that China is overcoming us, but that just isn’t true. If you owe the bank $10,000, the bank owns you. If you owe the bank $1,000,000, you own the bank. This is exactly what is going on with China. We own them, not the other way around.

Bruce asks what privileges we have as the world reserved currency status. Thornberg says that we get what is called “seniorage”. This means that we can print money, and other people will want to hang onto that money. As a result, we get a subsidy kick out of it. In reality, this is not that important of a status.

We’ve left our worries of private bank debt behind. The new worry in the financial markets is sovereign debt. A lot of nations have increased their spending to levels that aren’t sustainable. People are worried that we will see similar losses in sovereign debt as we saw in banking debt. As a result of this, more people are investing in the U.S. dollar, which is causing the U.S. dollar to improve. Unfortunately, Christopher does not believe this will help us recover.

Tags: Beacon economics, bruce norris, California, Christopher Thornberg, forecast, foreclosure, investing, investor, market, podcast, Radio, real estate, the norris group, update
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161-TNG Radio – Christopher Thornberg 2-13-10

Friday, February 12th, 2010

Christopher Thornberg

Principal at Beacon Economics

(Full Bio)

This week Bruce is joined by Christopher Thornberg. Christopher is an expert in the study of regional economies, real estate dynamics, and business forecasting. In 2006, he co-founded Beacon Economics which is an economic research and consulting firm that specializes in real estate markets, local economic development, and public and private policy issues. Christopher has also been part of the Norris Group’s award-winning fundraising series, I Survived Real Estate.

Christopher and Bruce discuss the current state of the market and whether the market is truly experiencing a comeback or is it completely manufactured. Christopher goes into detail about Bernanke and his current handling of the market. Government actions has delayed the inevitable and Christopher and Bruce discuss what the different strategies have been and how effective they have been and how much longer we should expect to see these manipulations.

Bruce and Christopher talk about Fannie Mae and FHA and the growing issues with FHA’s portfolio. The Mortgage Bankers Association estimates 20% of the their loan portfolio is in trouble.

A complete transcription of the show coming soon.

Tags: Beacon economics, bruce norris, California, CALIFORNIA FORECLOSURES, california real estate, Christopher Thornberg, deflation, fannie mae, FHA, forecast, foreclosure, inflation, investing, investor, loan portfolio, market, podcast, Radio, real estate, real estate investing, real estate investor, the norris group, update
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The Norris Group Real Estate News Roundup 1/15/10

Friday, January 15th, 2010

Today’s News Synopsis:

Statistics from 10 primary U.S. cities show that home prices declined by 1 percent. ABA expects economic growth to increase at 3.1 percent through 2010. The U.S. Treasury Department reports that 66,465 permanent modifications were made in December. Chris Thornberg forecasts that home prices will dip again in 2011.

In The News:

Housing Wire – “JP Morgan Says Sell Mortgage Bonds as Fed Snaps Up Record MBS” (1-15-10)

“The spread of mortgage-backed securities (MBS) bonds yields to Treasuries is tight and likely to remain tight in the near-term, but swap spreads are currently 5-10 bps too narrow to greatly entice private investors, according to a JP Morgan Securities conference call on MBS and asset-backed securities (ABS).While private investors largely hold on the buy side, the government continues to buy up agency MBS as part of its $1.25trn agency MBS-purchase program.”

Housing Wire – “House List Prices Down 1% in December: Altos” (1-15-10)

“Altos Research’s listing price index declined 1% in December and 1.4% during Q409, but for the year, the 10-city composite price index was up 5.2%, the company said, adding it projects asking prices to continue to decline during the winter 2010 months.”

Housing Wire – “ABA Expects Economic Recovery Will Fuel Job Growth in 2010″ (1-15-10)

“High unemployment and constrained consumer spending will keep the speed of recovery in check, but ABA economists indicated real gross domestic product (GDP) will grow at an annualized rate of 3.1% throughout 2010. It’s half the historic rate of GDP growth seen after previous deep recessions, leaving the unemployment rate fairly high – but below 10% – at year-end.”

Housing Wire – “HAMP Servicers Permanently Modify More Than 66,000 Mortgages” (1-15-10)

“Servicers participating in the Home Affordable Modification Program (HAMP) completed 66,465 permanent modifications through December, according to a report from the US Treasury Department. It’s more than double the 31,382 permanent modifications reported through the month of November. More than 40,000 more active modifications need only the borrowers signature to become permanent, totaling 112,521 permanent modifications approved by the servicers.”

Housing Wire – “JP Morgan Posts Q4 Profit Despite Mortgage Losses” (1-15-10)

“JP Morgan said it made approximately 600,000 mortgage modification offers to homeowners and approved 120,000 modifications during 2009.”

Housing Wire – “Treasury Raises Cap on HAMP to $35.5bn” (1-15-10)

“The US Treasury Department raised the total amount of potential capped incentive payments for the Home Affordable Modification Program (HAMP) from $27.7bn to $35.5bn, according to the latest Troubled Asset Relief Program (TARP) report.”

Bloomberg - “U.S. REITs Poised to Boost Dividends After Raising $33 Billion” (1-15-10)

“A dozen U.S. real estate investment trusts, part of an industry that raised $33 billion last year, likely will increase their next quarterly dividends. Public Storage, Annaly Capital Management Inc., and Inland Real Estate Corp. are among those that may boost payouts, data compiled by Bloomberg show. Vornado Realty Trust said this week it would resume paying its dividend fully in cash after a year of issuing it partially in stock. ”

Inman - “RPR courting MLSs” (1-15-10)

“By promising not to compete with MLSs — and allowing them an opportunity to make a quick exit from RPR if they aren’t satisfied with the results — company executives say they are out to sign up half the nation’s roughly 900 MLSs by the end of the year.”

Orange County Register – “Home sales, prices seen falling in 2011″ (1-15-10)

“Orange County-based homebuilders were told Thursday that the recession may be over, but the future for the economy and the housing industry remains uncertain. As if to underscore that point, economist Chris Thornberg released a forecast projecting that after modest gains this year, home sales and prices will dip again in 2011 because of rising foreclosures and interest rates.”

Looking Back:

One year ago, the NAR announced that sales on homes priced above $750,000 had decreased by nearly 50 percent. The rate for 30-year fixed mortgages dropped below 5 percent. The CBIA claimed that new home sales in California were “glacially slow”. Statistics from the Federal Reserve showed that jobless claims were rising.

Tags: ABA, abs, Altos Research, bruce norris, chris thornberg, Christopher Thornberg, economic, employment, hamp, JP Morgan, MBS, MLS, modification, real estate, REIT, RPR, treasury
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148-TNG Radio – I Survived Real Estate 2009 11-14-09

Friday, November 13th, 2009

I Survived Real Estate 2009

Fundraiser for the Orange County Affiliate for Susan G. Komen for the Cure

(Full Bio)

This week The Norris Group Real Estate Radio Show and Podcast presents Part 9 of I Survived Real Estate 2009. This is the final installation of the audio for this event.

This week The Norris Group Real Estate Radio Show presents Bruce Norris segment of I Survived Real Estate 2009.

Bruce begins by discussing the declining housing inventory. A declining inventory typically means that the market is doing well, because you have multiple offers being placed on homes. We currently have the highest affordability rates in the history of California. The volume of sales has gone up to normal, but we have high unemployment.

Delinquencies have exploded. From July 08 to July 09, we have gone from 5.3 percent to 9.7 percent delinquencies. The inventory of REOs has gone down, because banks have not taken back as many as they should. Some people have not made payments in 14 months. Trustee sales have also declined during this same time period. We had 28,795 trustee sales in July 08 and then we progressed to the 9.7 percent delinquency rate. We are currently 306,000 trustee sales short of where we should be. That averages 25,000 homes going out per month in the future. We have not peaked at delinquencies, and according to reports, we will soon be at 13 percent delinquencies. At 13 percent, we will be releasing 70,000 homes per month. Bruce does not believe that we can have a positive market if these statistics are true.

FHA is going to have a large number of defaults next year. They once had a 203K loan for investors in which investors could buy a property and include the repair bill in the loan. A lot of people would use this kind of loan and they would buy up to 7 homes and use them as rentals. Bruce thinks this would help clear up a lot of inventory.

Bruce thinks that Fannie and Freddie programs should be expanded so that qualified buyers can get unlimited loans. We are currently stuck at 10, and many investors are capped out because they exchanged their homes out of California and moved their investments to another state. Those investors cannot sell their property and come back to California.

We are currently giving away homes for 8,000 dollars. That money is coming from tax payers. Bruce thinks that we should just let people take these homes for no down payment. We will have people walk away, but the next buyer will be able to easily take it. Under this kind of proposed program, it would not matter if the buyer qualified or not because this loan can be continually passed down. These houses could go to investors with a 5 percent interest rate. This program would not have foreclosure, because the problems would be solved by the next buyer. The people who have recently foreclosed on their homes will not be able to qualify for homes, which may keep them out of the market for the next few years. We could just reintroduce these people as buyers if they did not have to qualify. This is not a program that we have never seen before. We are trying to solve this problem by selling the next house to the owner occupant who was shoved into home buying by the nonsense financing of 05 and 06.

We are already doing zero down deals. When Bruce sells a property, he usually pays part of the closing cost. The person getting 3.5 percent down on a 100 grand purchase is getting an 8,000 dollar check; that is better than nothing down. If you just had nothing down and these people qualified, we would get rid of a lot of homes.

Bruce and many other investors believe that we need to get rid of the FHA 90 day flip rule. When an investor fixes a property, which may only take 3 to 4 weeks, and they sell it within 90 days, the investor is believed to be guilty of fraud. The lender has to pay the cost for this, because the investor will subtract the amount that he or she must pay the lender for the property. We need to start looking at investors as people who can help this problem. At some point, we must either choose to not foreclose, or we must pay catch-up in a painful market.

Bruce asks Christopher Thornberg if he expects the dollar to lose value, and how the value of the dollar impacts interest rates. As the trade deficit gets wider, the dollar goes up. Now the trade deficit is going to close, so the dollar will get weaker. There is very little doubt that the dollar will weaken. Interest rates are undoubtedly going to go up. The federal reserve has increased the money substantially and that money is going to cause inflation. The Federal Reserve is either going to let inflation happen, which will raise interest rates, or they will fight inflation by selling the long range securities they bought, which will also raise interest rates. One way or another, interest rates are going to go up. In the shorter run, it will be faster to allow inflation to occur, because that would bail out the asset markets. In 1982, the mortgage rate was 18 percent, because of the fear of inflation.

Bruce thinks that we can absorb a higher interest rate and still have a good real estate market, because the combination with the cheap price could absorb a double digit interest rate, just like in the 70s. Thornberg says that a 1 percent increase in the mortgage rate means a 10 percent decline in prices. Bruce disagrees with this, because between 1974 and 1980 we had a tripling in real estate prices and interest rates doubled. Thornberg tells Bruce that he is talking about the real mortgage rate, which is the mortgage rate minus the rate of inflation.

Bruce asks Thornberg what the statement Unemployment is a lagging indicator means. Thornberg says that means that the labor markets are the last to go into the toilet and the last to dry off. Bruce asks if that means when labor improves, every other category of real estate should have already started to improve. Thornberg says that residential real estate leads commercial. Now, we keep waiting to hear about the collapse in the commercial market, but we are not seeing this at all. Thornberg says that this sort of lead and lag mentality can be exaggerated.

This is why Bruce brought this up, because in the last cycle, employment improved in California from 1994-96 but we did not have a price increase until 1997. If we do not have price increases, builders will not build anything. Bruce asks if you can have an improved labor market if builders do not have any work to do. Thornberg says that these two factors do kind of work together. The prices started to go up after the labor increases from 1994-96. Thornberg reminds Bruce that in the early 90s we lost zero space, defense, and migration. In that market, the real estate was hampered by the excess supply. Thornberg takes issue with the idea that we should subsidize the building of new homes, because he believes that we have too many homes. Thornberg believes it would be a bad idea to subsidize the construction of homes when there is already too much inventory. Bruce says that some builders have been fixing existing inventory, and Thornberg believes that is all the builders can really do.

Robert Toll made 700 million dollars between 2000 and 2007 because he was selling too many houses at too high of a price, and now he wants tax payers to bail him out.

Bruce Norris asks Rick Sharga if people foreclosed for different reasons in 2008 versus 2009. Rick says that the reasons are not as different as the press would lead you to believe. The media has jumped ahead to the next wave of foreclosures. We are looking at a 3 wave foreclosure tsunami. The first wave began in the first quarter of 2006, because of the subprime meltdown and ARMs. The MBA numbers suggest that 33 percent of the new foreclosures are unemployment. That means that 2/3 of the foreclosure activity is not employment related.

What we are really seeing is increasing levels of foreclosure activity from the first wave, which is being made worse from the second wave. The second wave is about to pick up steam. If unemployment peaks around the first quarter of next year, we will see the foreclosures related to that peak around the 3rd or 4th quarter next year. That will be just in time for them to be augmented by the next wave. This next wave will be caused by the option ARMs. Many loans are going to reset, and people will owe more on their reset loans than their original loans.

Strategic defaults are going to be a problem. In the past American culture, people honored their contracts and chose to make their payments. Now people are realizing that the house they bought is worth half of what they owe, and they are wondering if it is in their familys best interest to keep paying. If someone is only 10 percent upside-down on a loan then they will probably stick with the loan, but if they are upside-down by 50 percent then they will probably default.

Thornberg asks people if their credit or their equity will hear quicker. Thornberg says that most of these people will have their credit heal faster. Sharga responded to Thornberg with a story about a Coldwell Bankerk agent that was fired. This agent counseled her customers to default on their current loan after qualifying and buying a second house. Bruce feels that there is still a lot of character being shown in California; a state with a 9.7 default rate that has had a 50 percent value drop.

An economist from the building industry claimed that California needed to build 230,000 homes, but John was only able to build 70 homes this year. Economists who say things like this ruin the credibility of the people in their industry. Bruce feels that people owe more to their industry than they give.

Bruce thinks that now is a good time to buy property even though he thinks property values will go down. There is a combination of good interest rates and prices that make paying for properties an easy thing to do. Bruce thinks that the price declines that are coming will mostly affect the “as is” inventory, because loans will not be available to homes without kitchens.

Right now, investors are not being rewarded for the $35,000 they spend on repairs. The appraisal business is using a broken model which does not allow for proper adjustments on repaired properties. Every sale we have is an anomaly. The neighborhoods that Bruce is buying and selling in contain homes that are worth $60,000, but buyers want Bruce’s property at $130,000 because it has a kitchen and financing. If investors are going to make these improvements in the real estate market then they need to be rewarded for their efforts. The appraisal model being used right now is telling buyers that their decision to buy a repaired property is unwise. This hurts the market because fixed homes make neighborhoods more valuable. If these homes are left unfixed then more foreclosures will occur.

Joseph agrees with Bruce’s opinion that the appraisal process is broken. There is no magic number in appraising that makes it impossible to make a line item adjustment impossible. If an appraiser is going to make an adjustment worth more than 10 percent of the sales price, then they need to give an explanation for that. When there are multiple offers on a property, then an appraiser should consider those offers in their property evaluation. Unfortunately, the underwriters are not allowing these adjustments to take place.

For the final segment of the show, Bruce asks each speaker what they feel the biggest problem in real estate is.

Joseph believes that real estate’s biggest problem is appraisal management companies that hire incompetent people who are not qualified and do not have enough experience. Those people make bad decisions and they ruin deals.

Patt says that it is hard to tell what the biggest problem is. The biggest problem for Patt and many other realtors is getting inventory out of the market place. There are too many short sales that no one knows how to sell. When someone performs a search on the MLS and finds that 75 percent of the properties are being labeled as “subject to short sale”, you have a problem. 90 percent of the time, those sales will not close. The foreclosed homes are easy to get rid of, because a bank owns them, and they have answers for someone who wants the property.

Tommy thinks that the biggest problem is the tremendous volume of deteriorating, empty homes. These homes need to be put into the hands of investors or home owners as quickly as possible, and Tommy thinks that auctions do that very well.

John Young agrees that we need to get through this inventory as quickly as possible. Previously in the show, Bruce proposed multiple solutions to the inventory problem such as zero down deals. He believes that this problem will not be solved by just one helping factor.

David Kittle believes that the biggest problem in real estate is the people who are making laws who do not understand the business, and have never run a business.

Rick Sharga believes that the entire real estate “ecosystem” is imbalanced. Valuations are imbalanced because we have less professional and competent appraisers who are under valuing properties. There is a freeze in the capital market, because lenders are afraid to risk lending money on homes that may not have proper valuations. Hundreds of thousands of homeowners are under water on their loans, and there is too much inventory for the market to buy. He does not believe that there is one central problem that has caused this real estate mess.

Real estate is a boom-bust phenomenon. When times are good, it is very good, but when times are bad, it is very bad. 2001 to 2006 was a phenomenal time for people in the industry, but because of that boom, they are suffering from a terrible crash. From a long run perspective, we are dealing with a mess of rules, regulations, subsidies and taxes. Local governments are constantly pushing all sorts of taxes on builders. Those taxes drive up prices on homes, and as a result, a constituency cannot afford those homes. Then they try to subsidize the price of a home by having an FHA mortgage. You do not want a loan on a house to be a normal loan, so you make it a no recourse loan, but then third party appraisers are more important than what someone is trying to buy a home for. We keep creating problems by trying to fix problems. Christopher believes that we need a massive deregulation of the market. We need to clear these regulations so the market can work efficiently.

Bruce hopes that the investor will have the chance to influence congress. Right now, investors are a very important solution to this problem, but they are currently having trouble. If investors are able to get financing, they will be able to fix homes and prevent them from returning as “for sale” inventory. If investors cannot get financing, then they must either leave these homes alone or they must pay for these homes with cash. Unfortunately, investors have a limited amount of cash to spend.

The video of the live event is not being aired online HERE.

You can visit isurvived2009.com to learn more about our sponsors and speakers.

Here are the speakers involved in the event:

Bruce Norris

President

The Norris Group

David Kittle

2009 Chairman

Mortgage Bankers Association

Pat Vredevoogd Combs

2007 President

National Association of Realtors

Tommy Williams

2008 President

National Auctioneers Association

Christopher Thornberg

Principal

Beacon Economics

John Young

Vice President

California Builders Industry Association

Joseph Magdziarz

Vice President

Appraisal Institute

Rick Sharga

Senior Vice President

RealtyTrac

To Benefit:

I Survived Real Estate 2009 Sponsors

A huge thank you to all of our sponsors who made this event possible.

Platinum Sponsors

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		$Women\'s Council of Realtors - Inland Valley Chapter$
Tony Alvarez – The REO Mentor		Mike Cantu
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	National Association of Real Estate Investors