I Survived Real Estate 2012
On October 19, 2012, The Norris Group proudly presented I Survived Real Estate 2012. An expert line-up of industry experts joined Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and the outlook for real estate in the coming year. Over $77,000 was raised to benefit Make a Wish and St. Jude Children’s Research Hospital. This event would not have been possible without the generous help of the following platinum partners: ForeclosureRadar, the San Diego Creative Real Estate Investors Associatio, the Investors Workshops, Invest Club for Women, San Jose Real Estate Investors Association, Frye Wyles, MVT Productions, and White House Catering. Lean more about the panel and how to attend at isurvivedrealestate.com.
Bruce continued his discussion on the market. When you start mimicking a year in the past, you also can match it with debt that was owed on the property values at the time, which is significant. Bruce showed another chart of debt, and if you start looking at the year 2000 on the bottom and you go straight up, you will see that when a real estate property was only worth $245 we owed $11 trillion on it. At the time in 2000 we only owed about $5 trillion, and this is a bit of a problem. You have a lot of debt you don’t know what to do with, and you wonder if you can forgive it all. Bruce does not think the system would have done so well. Now that we have a $340 price, we are starting to mimic 2003. When you look at 2003, you see that we can now deal with about $7 trillion of debt. It has equity coverage. If you notice the articles that come from CoreLogic, they say that prices went up several thousand dollars. What this did is it took so many thousands of people out from under negative equity. Bruce showed another chart that has shown the progression we have had. If you have price progression enough, you get the debt to feel less bad. This is what is starting to happen.
The next chart Bruce showed displayed the number of borrowers who are underwater. Approximately 3.6% of them are only 4% underwater. If they have a 4% price increase from, for example, $340, this is $13 grand. This means a chunk of these people are not in negative equity. This is going to begin to occur, and this is why Bruce thinks Mr.Shiller is not correct and why he thinks it is going to start having a pretty profound effect. Bruce asked the audience how you solve this debt problem from the bottom up and get prices to escalate if that is the intent. He said it would be really nice if you made the monthly payment really cheap. This is something we have already accomplished.
Being the nerds they are, Sean O’Toole and Bruce went to Washington D.C. and read data. They went to the Library of Congress and looked at old microfilm. While Sean worked on the 1800s, Bruce worked on the 1900s. Bruce has seen articles that said in the last fifty years we have not seen interest rates this low. You later find out the data source only had 50 years of interest rates. We then need to figure out if we have ever had interest rates this low in this century since 1900. The answer is no. This is an all-time record; and Bruce wanted everyone to think about what this means. In San Bernardino and the Inland Empire in general right now, rent costs $6800 more a year than your payment to own. This has never happened in years prior. If prices went up $50,000 and your interest rate was 3 ¼, if you translated this into interest you have to ask yourself if the interest is the biggest portion of your payment. If you take 3 ¼ of $50 grand and divide it by 12, your payment would not go up very much. We have never been able to say this. What we are about to have is an escalation of price because there is room, and it makes sense.
The question we need to ask is not being afraid and wondering about never having a $50 grand or $100 grand price increase. The question we need to ask is if we would willingly go from renter to owner, with all things being equal on a monthly basis. Most people would say yes to this. Bruce thinks this is what is about to happen. Other investments are volatile. Bruce asked if anyone had owned Google Stock prior to the event; and if a lot of people like him had started that night saying he had a great investment opportunity that is really volatile, this is not what we would want to hear. However, this is where a lot of money is placed. If you don’t like this, you can put it in a ten-year t-bill, which is all the way up to about $1.8 today. Real estate is starting to attract money because it is the best thing to do.
Bruce also talked about gradually reducing inventory for sale. Bruce showed a chart of unsold inventory in California over 3.2 months. He showed a specific chart that dealt specifically with Riverside. The chart showed we have gone from six months to one month of inventory for sale. Bruce asked if this was a recipe for price increase. Another aspect introduced into the mix now is several billion of a buying company that want to hold these properties as rentals. There is a whole slew of these people, one of whom is Carrington. This is added volume that we cannot deny in the business. Instead of foreclosing, we should sell the loans in bulk. FHA started selling bulk note pools, two of which Carrington won. This way, we get to talk a little bit about that. Bruce said they used to attend HUD auctions, which is not going to happen this time.
Fannie Mae just sold a pile of existing homes in bulk. One of the things the California realtor would probably appreciate is if that is actually not necessary. We probably have buyers and people who have REO infrastructure who could easily handle that. This is at least what has been going on fairly recently. Another option is to take a deed in lieu foreclosure and rent back to the people. Once again, a home that would have made it into the MLS for sale is not getting there.
Bruce asked how many people had heard the great news that building is off the matte and is accelerating at almost 15%. This was very impressive until Bruce showed them the chart that showed this really isn’t that much. If we had a 50% increase in Riverside, that would be almost nonexistent. When you start from numbers like the ones shown on the chart, it is not numerically exciting. Builders are excited about it because they create sub-divisions. That would be a stamp of approval saying they believe the market is going to accelerate. In Riverside you are typically creating 300+ subdivisions, and now you are down to a couple dozen. He does not quite buy that the builders are going to start providing lots of houses for us to see in the marketplace. By solving the debt from top down because of that $25 billion settlement, we have had some change in attitude.
Housing Wire quoted, “To provide relief more quickly, Chase executives are addressing the borrower fatigue with a letter sent to borrowers notifying them that their loan was refinanced into a new mortgage with a lower interest rate; no documentation needed.” Bruce added all you have to do is open your envelope. It gets harder if you want a principle reduction. Chase is sending different letters to other underwater borrowers. All that is required in order for a principal reduction on their loan is a signature sent back with the self-addressed stamped envelope the bank provides. Bruce got excited a couple days before the event because B of A was wiping out 150,000 credit lines to zero. It just so happened when he got home, he had a B of A letter in his mailbox. It was like Christmas to him at first until he realized he did not meet the quota for his credit line. You have to be delinquent on your first, which is part of the criteria.
In order to solve the debt from the top down, we are forgiving the debt, doing short sales, and we are even paying the former owner to do the short sale. In Moreno Valley, a person owed $250 on a 2-bedroom house. It went for $57 to one of the Norris Group’s investors, and the owner was given $25,000 to agree to the transaction. After closing costs, the lender netted $23 grand. The owner who was current on the payment had $25 grand. This owner will be able to go buy another house right away since he was just given the money. This is a very good deal.
The next slide asked if buyers in short supply or everywhere we look. When we were aggressively foreclosing on people in 2008 and 2009, we were not really thinking that they were all going to emerge three years later as able to receive an FHA loan. If that number is sufficient, that can be a wow for the marketplace. In a two-year period right at the peak, we have foreclosed in Riverside 61,588 homes. In 2011 we sold 37,000 homes. That number is consistent. We literally have 165% of the volume we did in 2011 stacked on top of 2012 as people who used to own and are now paying more rent to live in a house than it would cost them to re-own. The question is if some of them would make a decision to want to own, and the answer is yes. They do not all have to own, but Bruce said it was most likely not a small percentage. This might be why we are experiencing a lot of offers since we do not really think about this happening.
In 2010, we foreclosed on 22,000 people, which is 65% of the annual sales volume for 2011. They are going to show up in 2013 on top of demand that investors, Wall Street, and normal buyers provide. You have big piles of people on top of all this; so in conclusion Bruce said mathematically it is virtually impossible when you have one month of inventory to have a price decline when you have excessive demand. Bruce said it did not make any sense to him.
San Bernardino County is an excessive example that has 200% of the people foreclosed on in 2008 and 2009. Every county was aggressive in these years. You have more buyers coming out of the woodwork that we know what to do with. A good question to ask is where the entire inventory is going to originate. If we are down to one month of inventory locally, we are going to have a glut of REOs. However, it does not seem like this is going to be the intent. We are going to have private owners with equity sell. However, in the Inland Empire 40% or more do not have equity, so they most likely will not emerge in the quantity that is necessary.
A lot of sales are going to be short sales this year, but those do not happen overnight. Also, regarding investor flips Bruce asked if we are paying more for the property and if it makes more sense to hold them as rentals when they are not flipped. This is actually what is beginning to happen, and people who are buying at trustee sales have a different intent. Also in regards to new construction, we are a long way from that providing a lot of inventory. What used to go back to the banks is now being bought at trustee sales and not resold. These big companies who are buying rentals at the trustee sales are not fixing them and reselling them. Instead, they are keeping them as rentals. What used to go to trustee sale now gets sold in bulk or re-negotiated via loan modification. What used to go to trustee sale now gets sold via short sale. Instead of foreclosing quickly, the lender continues to be allowed all the time in the world to figure out how to solve it. Evidence of late shows home prices are going up across the board. Bruce believes we have only just started.
What also happens is a shift in the habit of people. When you start having price increases, you start having people with negative equity continue to make their payments. If they are current in 2012 after what we have just been through, the odds of them not making their payments seems rather unlikely. They will most likely make the payment.
Bruce showed a chart of the California Foreclosure Funnel. The big number is you have all these people underwater in California, approximately 2 million. However, you only have 434,000 of them delinquent and only 70,000 REOs already owned by the bank. If you talk to some of the REO agents in the crowd, you will see that they are not getting a lot of assignments and really don’t anticipate that changing. Something else that happens is prices accelerate. This adds to the number of move up buyers. Bruce gave an example of someone who bought a house back in February for $205,000. This same house has already gone up to $285,000. The house was refinanced without PMI, and they bought a car with the extra money they saved per month. This happened inside of a year in Riverside, and this adds to the interest of first-time buyers. When they tell this story to their friends who did not receive an $80 grand increase for anything and they began thinking they need to buy something, eventually prices will increase to the point of profitable construction.
Now, people who own dirt want to build something new. When you begin construction, you see that we have manufactured a comeback in reverse. We will solve the jobs by creating construction; and part of the reason for this is because we have all this inventory that we are not bringing to market. We shoved it on the sidelines and pretended for a while that it does not exist. This happened to coincide with foreclosing on a lot of people years prior who had re-emerged on top of normal demand. These two things coming together makes for a nice volatile market, especially when you have a 3 ½% mortgage rate that does not give you too big of a monthly payment jump for a big price increase.
When you start solving the construction, unemployment, financial activities, and manufacturing problems, you fix migration. When you fix migration, you fix our tax base. Bruce thinks this is all about to play out; and the only things that they later discussed at the event were the policies put in place that need to stay where they are. This is artificially being supported by a lot of things, and it kind of makes sense. If you do not want to write off $4 trillion of debt, maybe you could push prices back up where they were at least for enough time for people to refi or sell and get their mortgage at around 3%. The monthly payment then makes a whole lot more sense. This is what Bruce sees just about to happen, and when that happens to a county like Riverside, the migration changes and everything we have to put up with now get to change very quickly.
The first two guests on the panel were two economists who spoke on the economy and what is occurring. Mark Palim is the Director of Economics for Fannie Mae and is in the Strategic Research Group for Fannie Mae. His work focuses on the impact of trends in the financial services sector and economy. Eric Janszen returned for the second time this year. He is an economic and financial market analyst. He is an author and speaker with more than 28 years of executive experience in high technology start-up companies including Venture Capital Finance and Economics. He is the founder and president of iTulip, Inc, and author of The Post Catastrophe Economy.
Bruce said it was exciting for him to be the moderator because he is questioning people who are much brighter than he is. What this does is it challenges him since he does a lot of reading in order to be ready. It is fun for him to overhear the conversations at the table. Mark began by talking with Mark about the quarterly supplement that Fannie Mae puts out. He asked him how people are feeling about where the prices are headed and if the sentiment has been changing in a positive way. Mark said one of the things economists have puzzled over since the Great Depression is how to get a handle on expectations. They know expectations have a huge impact on markets. People make decisions under uncertainty. You do this all the time when you invest, buy a property, or lend.
Mark said one of the things they have done is they have started doing consumer surveys again in the last few years. What they have seen since November of last year is a real improvement in people’s expectations about house prices. They ask people how much they expect rents to go up and if they expect home prices to increase. The part that is the most encouraging is that economists have not only seen this trend month after month, but the amount by which people think prices will go up is actually reasonable in terms of it not being a bubble mentality. They are being told that on average it will be 1 ½%, and another month it may be 1 ¼ or 1. These are the kind of expectations that create solid demand.
One of the things that is helping drive increased demand from first-time buyers in particular is how much rents are increasing. You see it in the data, and you also see it in the expectations. In the same survey, people think rents are going to increase about 3½%. This is true in many markets, and it is actually cheaper now to own than to rent. Bruce also wondered if being delinquent changes the consumer’s feeling of what is next for the future. Mark said this is another thing economists look at, and delinquent borrowers have remained significantly positive. They are not quite as positive as other lenders, but there is not too much difference in their consumer attitudes regarding housing in terms of their desire to want to continue to have homeownership and their view that housing is a good investment. If you are coming at it with a pure economics background, you think they have really been burnt hard and would not be interested. However, they do remain very interested in homeownership.
Bruce wondered if Mark feels we have passed the bottom of the housing market and are now on an upswing that is sustainable. Mark said they have not called the bottom, but what they are seeing in the data and seeing pretty broadly across the country is the return of a seasonal pattern where we had a really good spring in terms of not only house prices but also days on the market. Many markets are returning back to a very healthy situation in terms of supply and demand. Mark said the reason he is a little hesitant to say we are definitely past the bottom goes with the fact that prices are currently being supported by incredibly low interest rates and the Federal government having a huge involvement in supporting credit.
To find out more, tune in next week for I Survived Real Estate 2012, part 3. The Norris Group would like to thank their gold sponsors for supporting the event: Adrenaline Athletics, California Property Solvers, Coldwell Banker Pioneer Real Estate, Elite Auctions, For Investors By Investors, In a Day Development, Inland Empire Investors Forum, Inland Valley Association of Realtors, Investor Experts, Inc., Keller Williams of Corona, Keystone CPA, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Personal Real Estate Magazine, Pilot Limo, Realty 411 Magazine, Real Wealth Network, Rick and LeaAnne Rossiter, Southwest Riverside County Association of Realtors, Jon Risinger Photography, Sonoca Corporation, Spinnaker Loans, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Westin South Coast Plaza, and Winning in Tough Times, LLC. See isurvivedrealestate.com for the video from the live event.
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