Leslie Appleton-Young, Chief Economist of the California Association of Realtors (Full Bio)

This week Bruce is joined by Chief Econ0mist for the California Association of Realtors, Leslie Appleton-Young.

The peak of the median home price in May 2007 was almost $600,000. Bruce believes there were indications that we were no longer in the peak in May 2007 despite the fact that median prices reached that level. Transactions slowed in the 4^th quarter of 2005. In Sacramento, there was a lot of new construction, affordable housing, and subprime borrowing. In areas like Sacramento, homes were purchased in 2003 and 2004, but they began adjusting in 2006. These properties started faltering for a full year before they showed up in the data. Sales at the moderate and low end shrunk, but sales at the high end were doing fine, so the median home price became skewed. Prices went down in 2007 and 2008, but at the same time, sales were increasing by over 25 percent.

We have never experienced a price decline like this recent one. However, the San Fernando Valleys had a significant drop in 1990’s when there were fires, floods and riots. At that time, the median went from $225,000 to $165,000 in that area.

There are many owners who put down 20 percent on their home, but now owe more than their house is worth. There were people with good jobs and good mortgages, but got in trouble once prices decreased. In the future, we need to be more aware of cash-out refis. People who had equity would use it for vacations and toys rather than investment. We had such a long run –up in price that people began to think that real estate could not hurt them. They thought that pulling out equity now would be replaced by more equity later, and that was not true.

There are many people who are defaulting strategically presently, because they don’t want to pay for a property which won’t return to its previous value in many years. However, you have to weigh this benefit against the damage done to your credit. Strategic defaults are becoming more prevalent, and it is becoming more socially acceptable. It was once considered bad to choose to stop paying on a mortgage, but now people find it acceptable. Fannie Mae just came out with a statement which allows people to get financing within 2 years if you will give a deed-in-lieu of foreclosure. This new rules will come into affect July 1^st. The new mortgage you get in 2 years will likely require 20 percent down.

Distressed sales have never been this high. ForeclosureRadar.com provides a tremendous educational opportunity for those interested in learning about the distressed sales market. In areas like Riverside, distressed sales represent nearly 80 percent of all sales. Short sales are also beginning to increase.

Distressed sales have been more common in the lower end of the market. However, now that the downturn has been going on for so long, foreclosures are becoming more common in the upper end of the market.

In Riverside County, there are approximately 3,000 homes with over 3,000 square feet which are pending for sale. Bruce doubts that we have buyers for all those homes, and the loan balance for many of those homes is probably over $1 million. Bruce thinks that we are going to have a price hit and glut of inventory in the upper end of the market.

Leslie thinks that first time buyers are in good shape with the stimulus package, but the trade-up buyers are having trouble. When you have a median price of $600,000 and the government programs are specifically designed to help people that owe less than the Fannie Mae maximum loan balance, then you are probably missing 35 percent of the market. People who owe $1 million dollars have no encouragement to buy again. Bruce thinks that having a home above 3,500 sq. feet will be less meaningful in appraisal values than ever before.

The spread in the jumbo loan market has come down to 1 percent. Many of these borrowers are putting down 30 to 40 percent down for jumbo loans. To get those loans, you need to have a large down payment and a strong FICO score. Many loans are being held in portfolio by the lender, because they want to have a cushion going forward.

People have different reasons for buying now than they did in 2006. People are not buying homes expecting to get rich off of their homes. They thought they could sell their homes once the interest adjusts or refinance, and when the adjustment time came, neither of those options were available. Now people realize that they are not going to get rich over night just because they own a house, and they are looking for a place to raise a family.

There is a strong disconnect in the mind of a person in congress between the word investor and speculator. In this market, the speculator has gone home, but investors are working to fix up houses and they are needed. Banks do not have the resources to rehab and get homes onto the market in a timely fashion.

Bruce will be a moderator on an interestingly panel coming up in June for Fannie Mae and Freddie Mac. These two companies are starting bulk divisions. Bruce wonders what size of bulk deals they are planning for, and whether or not there will be restrictions on detaining those properties. Bruce is not sure when Fannie and Freddie will finalize their decision on this subject. Bruce is also trying to get Sean O’toole from ForeclosureRadar.com to be a moderator as well. REO agents can benefit from listing homes ten at a time, rather than 1 at a time. There is a huge chunk of negative equity properties that need to get through the process, and anything that speeds that process up in a reasonable manner is a good thing.

There are many people in California who are showing tremendous character by paying for an upside down property. The best way to reward these people is to show them that there is hope for equity replacement in the near future.

60 percent of people are not buying homes, yet very few are renters. Leslie thinks many of these people are moving in with their parents and children. The housing downturn has affected very aspect of the economy, so people need to save.

There is a statistic showing that 200,000 homes are built every year. Builders are looking at this statistic and thinking they need to build more houses, but you have to be more realistic than that. The reason why builders aren’t building homes is because nobody is willing to buy. However, all these people that have moved in with their families to save money will someday want to move out. We are artificially skewing our building to the low side right now. There will be a day when builders will be behind the curve, and demand will accelerate far faster than the inventory.

Many jobs have been lost in the California construction industry, but these jobs are starting to return. Leslie thinks that this industry will make a comeback in a few years. We need to make jobs from new products and services. We usually expect construction to provide jobs at the end of a downturn, but that will probably not happen this time. Consumer confidence increased in March, but it is still only half of what it was one year ago. The opportunity for builders lies in creating multigenerational housing.

A report was just made on the demographics of California through 2050. The numbers show that we are very different from the other states, and that we will probably grow. Our growth will cause more demand for housing, but it will not happen over the next few years because of the problems we’ve had.

In Riverside, unemployment is close to 15 percent, but that probably translates to around 20 percent because many people have stopped looking for jobs. Riverside County used to be the leading county in California in regards to employment growth. People will always migrate to places with more jobs. California is currently losing people to other states with better employment. Uhaul recently came up with a report on moving destinations, and one of the top destinations was Sacramento. People are moving there because housing is more affordable and they have been able to find some sort of employment. It will take time to work through California’s negative equity position, but we will improve eventually.

Unemployment is usually an instigator of foreclosure, but this time unemployment has lagged from foreclosure yet is increasing the problem. There are areas that were not subprime focused that are being dragged into the overall problem because prices have gone down.

Harry Dent Author and Economist (Full Bio)

This week Bruce Norris is joined once again by Harry Dent. Harry is the president of the H.S. Dent Foundation, which publishes the H.S. Dent forecast. His mission is to help people understand change. He is the author of many books, which include The Great Boom Ahead 1992 and The Roaring 2000s and The Great Depression Ahead.

The title The Great Depression Ahead is gutsy. This book came out in 2009. Harry finished writing the book in the first half of 2008. However, we had some significant events occur at the end of 2008. The only thing that really surprised Harry was the stock market rally. He assumed that the economy would get worse, and as it got worse, the government would stimulate it. Harry predicted the stock market would bounce to 9800 and maybe even 11,800. We are right in the middle of that zone right now. Short term indicators predict that we might go even higher in the near future. However, he thought this stock bounce would begin and end earlier. Harry does not believe the recovery will last, because the baby boomers will go from spending to saving.

Harry defines a depression as an extended downturn in which you also see a deflation in prices. The reason why prices go down is because banks and loans are failing. This destroys credit and money. The deleveraging of credit causes deflation. In a depression, everything goes down. In an inflationary downturn like the 1970s, real estate goes up. Real estate does well during inflation. The failure of the banking system is the biggest shock an economic system can have. Harry believes that later this year and in 2011 we will go into a depression.

Alan Greenspan once said, “I watched my whole intellectual education fall apart in 2008”. That took a lot of guts to say, and it was astonishing to think that someone like Greenspan had studied economics for 50 years but still estimated incorrectly. Economists can look at a chart and come to two completely different conclusions.

Anyone who has studied business cycles throughout history knows that human greed takes over every time. Anytime you have low regulation, low interest rates, and bubbles building, people go nuts. People start thinking that the market will never go down, and the banks will lend to anyone. If bubbles go on for long enough, anyone will buy into a bubble. Its not a matter of intelligence, it’s a matter of understanding human nature, and that is where economists fall short. All economists look at is statistics.

There are no exceptions to the cycle of economics. The economy always goes from summer to fall, from inflation to disinflation. In the fall season is when you get bubbles, and when you get bubbles, the government always claims it can fix the problem, but they cannot and they have proven this over and over again. Bubbles have to deflate. We don’t want real estate to be so expensive that young people cannot afford it.

The bigger the boom the bigger the bust. Fortunately, we have a tool that tells you how long a boom will last approximately, and when it will wind down. Harry predicted how the economy would change by looking at the birth index. Booms always lead to excesses, and excessive lending and business expansion.

Japan had a real estate bubble similar to ours. They had excessive lending and unaffordable real estate prices. They had a demographic boom peak before the rest of the world, because they were the only major country who did not have a baby boom after WWII. Japan went through their downturn while the rest of the world was in the greatest boom of history. They didn’t have as much deflation as we will have, and their export industries can still be working at 120 percent. Japan also entered their crisis as a net creditor to the world. Almost all their debt was financed by their own citizens, so they had more capacity to stimulate and keep stimulating.

The U.S. is entering this downturn, and the whole country is going down with it. Baby boom demographics are down around the world. The world has also had a banking crisis and real estate bubble. We’re dragging people down with us, but they would have gone down anyways. The U.S. is the biggest net debtor in the world. We owe trillions of dollars to other countries. 50 percent of our debt is financed by foreign investors. This is contributing to the world downturn.

In 2011, Harry believes debt will overwhelm the banking system. This will cause the deficit to reach about $22 trillion. Harry thinks the debt will encourage our government to borrow even more, and we will pay for it. Japan tried to do this, and they will be sorry for it. Their debt to GDP ratio is 2.5 times what ours is. The only reason why they are surviving is because they are still paying interest rates on that debt at less than 2 percent. In the next decade, they will have to pay market rates like the rest of the world. Japan never truly deflated their bubble. They deflated their businesses, but they didn’t deflate their financial institutions. They have no way to easily get themselves out of this trouble.

Harry believes that Europe is going to start having debt trouble as well. When this happens, France and Germany will have to pick up the tab, but they won’t want to have any part in that. They will demand that the other countries cut their spending and raise taxes to cover their own debt.

In the United States, healthcare and social security expenses are already at costs above what we can afford, and we are now looking to expand that. Company and government pensions are unrealistically generous. Once we get to the point where we have to cut those pensions, people are going to go nuts. There may be riots. Bruce agrees with Harry on this issue. $46 trillion in unfunded medicare, Medicaid, and social security liabilities have already been promised to people. That is 4 times as much as the current government debt. We can’t afford the healthcare we have, and now they are trying to pass another healthcare bill.

The government will have to confess its inability to pay the baby boom generation its social benefits around 2012 or 2013 when the crisis will be at its worst. We will not get out of the mortgage and housing crisis until 2012. Harry believes that Obama will not be reelected, because he became president at a bad time.

We are going to have an enormous amount of debt in the next couple years, which is part of the reason why Harry does not support the new health reform bill. We will not be able to sustain the cost of this new program, and Bruce doubts that Congress has fully read through this health care bill.

When you have deflation, it exaggerates the current debt level. Harry believes that this will cause the government to scale back on age limits for social security and health care. Private debt will scale down substantially. All the debt ratios will get worse. Many businesses will go under or merge with other businesses. Banks will have to write off trillions in loans. Deflation works to restructure debt, rather than pay it off. If we had to pay all that debt off with deflated dollars, it would be much more difficult. At the end of this deflation period, we will be much stronger. Stronger companies will take over weak companies, costs get cut, and real estate goes down.

There are very few properties for sale in California right now, and it is easy to resale. The default rate has doubled in the last 12 months, but the foreclosure numbers have been cut in half. Banks are not foreclosing on people, because they do not know what to do with so many properties. Despite the 6 percent GDP, which Harry does not believe will last, defaults will continue to increase and foreclosures will continue to hit the market. This will suppress real estate prices. Banks will eventually have to write off a lot of those loans and foreclose. This is what will kill the recovery. Once the banks realize that real estate won’t recover, we will see the next banking crisis.

There is a psychology attached to exaggerated events like booms. When booms occur, people rationalize their decisions and the same thing happens in a down cycle. When things go down, people develop a pessimistic attitude towards the future. Baby boomers have not yet had a major downturn in both the real estate and stock market at the same time. This crash is going to cause retirements to disappear for baby boomers, and this loss will cause them to save even more. They will have to work longer but they may not be able to get jobs, because older people cost more in benefits. Harry is forecasting 15 percent unemployment.

Harry believes interest rates will increase this year. However, the bond market will eventually notice that the economy is slowing and then interest rates will decrease. This is what happened in 1931 when the crisis was building. We had a great boom market in bonds from 1932 to 1940 when interest rates were falling. In the next decade we will see deflation. If you want to buy long term bonds, Harry encourages people to wait until later this year or early next year. If you want to refinance, you may want to wait until interest rates come back down. This downturn in interest rates will happen between 2011 and 2013.

Bruce never thought he would see interest rates go down this low. Bruce began his real estate career in 1981 when he refinanced his house at 17.5 percent. Now we are at sub five percent rates, and we may see rates go even lower. Harry agrees and claims we may see rates go down to 3 to 4 percent.

Harry Dent Author and Economist (Full Bio)

This week Bruce Norris is joined by Harry Dent. Harry is the president of the H.S. Dent Foundation, which publishes the H.S. Dent forecast. His mission is to help people understand change. He is the author of many books, which include The Great Boom Ahead 1992 and The Roaring 2000s and The Great Depression Ahead.

Before he wrote his books, Harry was working towards a degree in Economics, but then changed to Finance and Accounting. He felt that economics did not teach much, and that most economists were not able to predict anything. He eventually went to Harvard Business School and studied business strategy and marketing. This is probably why he comes to different conclusions than many economists.

Harry has been studying demographics in his consulting work. In 1998, he was sitting in front of the S&P 500 and the Birth Index for Baby Boomers. He looked at those 2 charts and he noticed that they looked a lot alike. Harry knew that the peak in spending was between 45 and 49 for the average economy, and this knowledge led him to conclude that he could predict the economy 50 years in advance with just one indicator. A boom typically starts when a generation is young, and ends when they begin hitting their 40s. Not too long after, he discovered that there were many correlations between different economic factors.

Harry’s business of predictions has been an ongoing learning process. He has extended his studies to real estate and different pieces of the economy. Recently, he had to revise his book The Great Depression, because he got new information about merging markets between countries like Europe and Australia. Emerging countries do not have the same kind of spending habits as that of developed countries. This is why he makes different predictive calculations for merging countries.

Attempting to accurately predict the future can be exhausting, because every time you think you’ve accounted for all the factors, you discover there is something missing. Harry has to account for political cycles, commodity cycles, urbanization and other factors which affect the merging of countries. Bruce feels that Harry’s non-arrogant mentality lends credibility to Harry’s work. The fact that Harry is open to new information, and to the idea of revising his own theories, is why Bruce pays attention to him.

Harry’s first book was named The Power to Predict. This book is about indicators like “the spending wave”, “the 46 year lag,” and “the inflation indicator.” This book also contained the “S-curve,” which describes the 4-stage business and economic cycle. Harry predicted that DOW would hit 10,000 by the early 2000s, and that the boom would end by about 2007. This book accounted for new technologies like the internet and new car models. When new technologies develop, they cause bubbles.

Japan was mentioned in this first book as well. Harry claimed that Japan was going to slow, and that the United States and Europe would improve. People thought he was crazy for making that claim, because at that time, Japan was booming with growth. In 1992, people thought the U.S. had seen its best days, but Harry claimed that there would be a boom around the year of 1998 to 2000, which would result in a government surplus. Harry also predicted at that time that inflation and interest rates would decrease around that time.

Bruce feels that the legitimacy of Harry’s predictions is confirmed by his ability to predict both bad times and good times. Also, Harry uses very specific terms when describing the future of economics. Harry doesn’t use moderate language in his predictions. He has noticed that economies tend to either be bullish or bearish. The good times don’t last forever, and he thinks that people who make predictions about never-ending prosperity are foolish. When markets go up, they tend to increase for 25 to 27 years. When markets go down, the downturn typically lasts 12 to 14 years. Harry currently believes that we will have a period of demographic weakness from 2008 to 2023.

Every 40 years we get a major downturn and the government tries to fix it, but they cannot do this because they cannot fight demographics. When you’re in a demographic boom, the government can stimulate because you have a generation that needs to spend and borrow a larger amount of money. Harry is claiming that the current government stimulus program will fail, because it is simply causing the younger generation to buy earlier when they would have bought a home in the future. Also, Harry does not believe the baby boom generation will be affected by the stimulus, because they are done with the home buying part of their lives.

Most people only study one theme of economics. This means that if they are bullish, then they will selectively read bullish material. These people have already come to a conclusion before studying the evidence.

In the early 70s, Bruce read a book from Howard Ruff named The Coming Bad Year. At that time, Bruce did not have much knowledge of economics, so he read this book as if it came from God. One of the suggestions that Howard made in this book was to buy 200 pounds of wheat. At that time, Bruce had two kids and he didn’t want to run out, so he bought 1000 pounds. This experience taught Bruce that you cannot believe everything you read from proclaimed experts.

Economists don’t have tools to project 50 years in advance, but Harry believes that demographics can do this. Harry predicts that the value of gold will decrease in value during the downturn, because this is a deflation season not an inflation season. This is contrary to the opinions of many people, but Bruce actually tends to lean in favor of Harry’s opinion on this matter.

The more popular you are as an economic writer, the more people respect your opinions, and the more likely they are to plan their lives according to your predictions. This is something that Harry thinks about frequently. Harry actually encourages people to read other authors who think contrary to his opinions, so they can have a fully educated opinion.

A long-term boom prediction is bound to have some down cycles mixed in. Bruce asks how one can know the difference between an anomaly downturn and a downturn which leads to a depression. If demographic trends are still up when downturns occur, then the market will eventually recover. Baby boomers are moving into their 50s and 60s. During this time, they will be saving more and spending less. This tells Harry that the government stimulus will not work.

It is easier to predict long trends than it is to predict precise downturn points. For example, during the past crash, our indicators led us to believe that the DOW wouldn’t go past 7200, but it actually went down to 6440.

Harry claims there is an 80-year new economic cycle. This 80-year cycle is described as the 4 seasons model. There are always 4 seasons that occur in economics just like summer, spring, winter, and fall. We had the spring boom during the 1940s to 1960s. From 68 to 82 we had the summer downturn in which we experienced inflation and low spending. From 1980 to we went through the fall boom in which the baby boom generation began to spend a lot. We are going from high inflation to low inflation, which causes lower interest rates. The stock market does well when interest rates are low and this causes a bubble. Now we are up against the winter season, in which all our bubbles will decrease and cause deflation.

This 80-year cycle occurs over two generation booms which last around 38 to 40 years each. This cycle is repetitive going backwards, but there is an exception. If you go back into the 1800s, we still had a similar cycle system, but the two generation cycles only lasted about 28 to 30 years. This is because we were more of a farming society at that time. We did not have so many powerful middle class consumers. Right now, the commodity cycle is less important to our countries cycle. Commodities only represent about 10 percent of our economy.

Bruce asks if Harry has a process to determine whether or not false predictions are based on something unforeseen. Harry assumes that when bad predictions are made, that something was missed. Most people assume that the markets just aren’t getting something, and those people will be vindicated. The automobile industry correlated with a technology bubble from 1912 to 1919, and then a big crash occurred in the 1920s. We assumed another bubble would happen in 2006, but we did not see this. Harry tried to find an explanation for this by searching through history. He found a commodity cycle and a geopolitical cycle. During the boom of 2006, we had oil prices dramatically increasing which affected our ability to accurately predict the effect of the boom. Also, we had war problems which affected Harry’s predictions.

Harry Dent’s website is www.hsdent.com

You can find his books there and other activities which his company is involved with.  Join us for part two with harry Dent next week.

To register for the seminar, visit our event portion of the website http://www.thenorrisgroup.com/training/tip-of-the-iceberg

Who should attend: investors, Realtors, mortgage professionals, and market timing nerds (you know who you are).