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185-TNG Radio – Tommy Williams 7-31-10

Friday, July 30th, 2010

Tommy Williams

2008 President of The National Auctioneers Association

Co-Founder Williams and Williams Auctions

(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 InvestorsAssociation and Bill Tan, Investors Workshops and Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobby Alexander, San Jose Real Estate Investors Association and Geraldine Barry, Claudia Buys Houses, Frye Wiles, MVT Productions, and White House Catering.

This week Bruce is joined by Tommy Williams. Tommy is the past president of the National Auctioneers Association and cofounder of Williams and Williams Auctions. He has conducted over 10,000 auctions in 48 states and Canada. He is an advisor to auctions conducted in Western Europe, South Africa and New Zealand.

The auction business extends to almost any category. The world’s largest takes place every day in New York, and we call it the New York Stock Exchange. Buyers and sellers meet there and someone is conducting the price.

There are different acceptance levels in different countries toward auctions and different industries. If Tommy was planning to sell livestock, he would sell it through auction. Auctions are the accepted method for selling livestock of any kind. Used cars and used heavy equipment are also commonly sold through auction. Rare collectible items are sold through auctions too. The problem is that people developed a negative mentality of real estate auctions after the Great Depression when foreclosure Sheriff sales were occurring. This has caused people to perceive auctioned real estate as depressed, but in reality, auctioning is one of the best way to determine market value for real estate too.

Bruce read an article about an auction for Pete Rose’s baseball bat. It sold for $156,000 and the auctioneers thought that was too little. You sometimes cannot know what something will sell for, and that is the purpose of an auction; it reveals what a buyer is willing to pay. Tommy believes we get ourselves into trouble when we try to twist the market place, and we need the natural market to determine true value. We tried twisting real estate and we got disastrous results. Bruce feels like we are in the phoniest market he has ever experienced in his life. The government is trying to artificially influence the market.

Six years ago, Tommy started selling homes in the bad areas of Detroit. Those homes were selling for $10,000 to $16,000. The sellers were angry and said that Tommy should not have sold their properties. The city officials even threatened to stop auctions. If you go back to those homes today, you will notice that they have all been bulldozed, because there was no demand to meet the supply. It is difficult for sellers to accept that their homes are no longer as valuable as they once were. If those homes were bulldozed, then that tells Bruce that the value of those homes was not even $10,000 fifteen years later, it was zero.

Tommy has many stories about investors who bought properties at a discount, and then sold through an auction for more than double what they bought those properties for just 90 days before.

Not all auctions are created equal. There is a company in California that buys homes in ballroom auctions, and then re-auctions those homes for a profit. Tommy auctions properties right in front of the house. History has proven to him that this method brings in the greatest net value. All real estate is local. The people within walking distance of your home are the biggest supporters you can have for that neighborhood. When people discover that you can walk down to a property and buy it for what you are willing to give, they become happy bidders. When you move a property to a ballroom auction, the auction may take place hundreds of miles from where the property is. This discourages local buyers, which are the best buyers, from coming.

The real estate market place changes very fast. An auction company as big as Williams and Williams is able to quickly look at trends in different states. Every month, Tommy’s company sells over 1,000 homes throughout the United States. These auctions allow him to determine when a disaster or boom is coming.

If a builder auctions a track of houses, the public will think the builder is in trouble. However, Tommy feels this is irrelevant. Auctioning might still be the best business decision they will ever make. They should go ahead with the auction, and allow their buyers to pay what they are willing to. Bruce can guarantee that in 2005-2006 builders never got full price for a house. The builders could not build fast enough, so they gave their 20 buyers a lottery number and then allowed the winner to buy for full price. If the builders had put those 20 buyers up against each other at an auction, who knows how much more those homes would have sold for. Auctions are incredibly value in an increasing market, because they allow you to see how much people think your house is worth at that moment. If you interfere, you put a sealing on your home value, which could be very low.

Tommy believes buyers often feel that auction results are manipulated. Tommy would blame the auction industry for that buyer mentality, because in the past, auctions have not been conducted in the right manner. If you are going to hire an auction company, check how long they have been in that location, and check their references. Talk to other people who used the company to sell in the past.

Online auctions are becoming more popular, and it can reduce the level of trust that a buyer will have in the auction company, especially if that auction company has a bad history.

Tommy auctions off a lot of privately owned properties. He did not start selling bank owned properties until about six years ago. His company is built around selling private property.

Too many people look at life in the short term. The auction profession has an unlimited amount of potential, and he would encourage any of his children to get into it. However, you have to enter this business with a long term plan. Before this year ends, Williams and Williams will begin to broadcast their auctions live, so anyone in the world can bid. This technology may cause some bidders to feel like they are being tricked, because they will not be able to see all the bidders making offers. Tommy is trying to obtain technology that will allow the bidders at the auction site to see the activity of the online bidders.

Bruce feels it is unfortunate that auction companies too often view each other as nothing more than competitors. Tommy believes there are many ethical auction companies out there, which he is willing to refer people to. We need to have a spirit of good will towards other people. When you are trying to tear down your competitor, you tear down yourself.

Lenders have come to the conclusion that they do not want to take a property back as an REO. These people would make a great team member with an auction company. Lenders are becoming more willing to accept the value given to them at an auction.

Tommy is now getting involved in the Assisted Sales Auction Program. This process involves a person who still owns and occupies a property, but is trying to accomplish a short sale. Bruce thinks that is a trend that makes a lot of sense. Bruce was on a panel with someone who was touting that they could get a sell done within six months through the HAFA program. This made Bruce laugh on the inside, because he wanted to say that he knew someone who could get the job done quicker.

Thank you Tommy for participating in The Norris Group’s radio show. Tommy will be on the panel for I Survived 2010.

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.

Thank you for being a Gold Sponsor for I Survived Real Estate 2010: Delmae Properties, Elite Auctions, Entrust California, Inland Empire Investors Forum, Keystone CPA, Las Brisas Escrow, Leivas Financial Services, Mike Cantu, North San Diego Real Estate Investors Association, Northern California Real Estate Investors Association, Personal Real Estate Investor Magazine, Realty 411 Magazine, San Jose Real Estate Investor Association, Starz Photography, Tony Alvarez, and Westin South Coast Plaza.

Tags: auction, auctions, bruce norris, foreclosure auciton, foreclosures, hard money, investor, national auctioneers association, podcast, Radio, real estate, real estate auctions, reo, reo auction, the norris group, Tommy Williams, williams and williams
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175-TNG Radio – Bill Shipp-Young 5-22-10

Friday, May 21st, 2010

Bill Shipp, California Real estate Investor

(Full Bio)

This week Bruce is joined by Bill Shipp. Bill has been investing in Riverside real estate for many years. Bruce thinks Bill is Riverside’s best kept secret.

Bill believes it is important to be true to your word when doing business. Bill has been working with his contractors for 10 years, and he has never had a bid on a home repair. These contractors know that if Bill hires them, they will get paid at the time he specifies. This is even more important than having people skills.

Bruce has taught many real estate investors. Some of them have great people skills, and that is what gets them business. There are also people that are trustworthy, and that is also attractive to business partners.

In the last segment, Bill said that he is willing to do his job every day, and that attitude has allowed him to accumulate a wealth of knowledge. Bill’s knowledge of his market place allows him to live in Utah while still making good investment decisions in Riverside.

Bill has never closed an escrow with a person in it, and he has never bought a house at the steps. Bill does not want to deal with those hassles. This is why he uses the MLS and agents who know what they are doing. Bill gets over 50 percent of the houses that he makes offers on, because his realtors know not to call him unless a home shows promise. Bill works regularly with two realtors, but he receives calls occasionally from other REO agents as well.

Bill has a specific skew number for the paint which he uses on all his houses. Because he uses the same paint for his houses, it is easier for him to calculate how much repairs will cost when buying a new home. This also makes it much simpler for his repair men, because they know exactly what to do for every new job.

Bill discourages investors from traveling to see their investments. Do it for the first two properties, so you can figure out how to do the job. After the second, you should know what kind of property is worth your time, and trust your contractor to do his job. Traveling to your investment homes will cost you money and time. Also, Bill suggests that investors not bring their wives. His wife always has minor problems with his investments, such as the amount of flowers in the yard.

The typical repair cost for Bill’s investment houses is $15,000 or less. However, he has had home repairs that cost $100,000. In the early 2000s, he bought older homes. The oldest home he ever bought was developed in 1828. The house was so old that the home began to dissolve when the repair man tried to pressure wash it. Bruce once bought a home in 1898. Bruce had a termite investor inspect the home, and the inspector told him that there were no termites because the wood was petrified.

Bill does not have a construction background, but he has learned some things about that trade over time. When you buy a lot of older homes, you have to be creative to find a style that people will want to buy. In the late 1980s, Bill only bought homes that were 5 to 10 years old and did not need work, but Bill now only works with fixers built before the 2000s. Bill does not like to compete with home owners. When you are flipping new homes, you are not creating value. Bill thinks that working in the trustee market requires too much work. This is what Bruce’s company does, and Bruce agrees that the trustee market is too much hassle for Bill’s business model.

When reselling a property, Bill uses the listing agent that found the home for him, and he only uses two agents to keep the process simple. Using a large number of agents makes it difficult to determine whether or not those agents are doing their jobs correctly.

When Bill is selling his properties, he tries to control the escrow, but he never controls which lender is used. Bill’s buyers are always cross checked with the lender. Bill’s agent will not tell him that he has an offer until the buyer has been cross checked, and until he can know if he will get a good offer.

Bill is constantly educating himself in real estate. He reads many books, he has attended Bruce’s seminars, and he has been trained as a certified financial planner. Bill believes that many people know how to make a lot of money, but they do not know how to spend it. People do not often plan for downturns in the market, and their lack of planning ruins their financial health.

In the early 1990s, Bill had 40 rentals. It took 8 years to get those homes sold, and it was very frustrating because the market kept going down.

Bill began investing in Texas during 1989. He bought homes for $10,000 each and he owned them free and clear, but he was receiving negative cashflow every month because of property taxes. Repairing one roof could wipe out your positive cashflow for a year. In the end, he only made money on one of those homes. Do not buy real estate in other cities and states if you do not know what you are doing.

In 1986 Bruce was asked to speak on a panel of real estate experts. There were two well known attorneys on the panel, and all of their claims regarding out-of-state property ownership contradicted Bruce’s practical experience. When Bruce asked those attorneys how they came to their conclusions, he discovered that they had no out-of-state investment experience and were relying on theoretical knowledge. When people come from other states and tell you to buy homes in their areas, be careful. Why would someone travel across the United States to encourage you to buy their property if they cannot even get the people from their own state to buy?

If there are more listings in a region than sells, you should be nervous. On the other hand, if there are more sells than listings, then you should be happy. This is all Bill looks at when predicting whether or not he should be investing. Bill does not pay much attention to economic forecasts. He only pays attention to Riverside’s market, so he does not have to worry about general market forecasts.

The best deal Bill ever had was a wholesale in Corona. The property sold in 2 weeks and he earned over $100,000. If you want to find deals, you need to be watching the market every day. You never know why a seller might want to get rid of their property quickly. An agent once called Bill and told him that the seller was offering five houses and two lots on one street. The seller was the chairman of a bank who had stock options which were about to expire. The banker needed the money for those properties quickly, so that he could buy his stock. This deal shows that you never know why and when a great deal is going to show up. Bruce once bought a house from an agent once who was getting into the plastic extrusion business. The agent needed to buy an extrusion machine for $10,000, so Bruce bought two of his homes for that amount.

Bill has been approached with bulk buying opportunities over the last few months. The people offering these bulk buy deals told Bill that they have had bulk buys in the past that sold quickly. When Bill asked for an example of one of these bulk deals, he never received a response and he still hasn’t. Bill received a bulk buy opportunity from a company in Los Angeles as well. Because the company seemed professional, Bill had his agent check out the properties. The agent discovered that all 20 of the properties for bulk sale were short sales.

Bruce will be a moderator for Fannie and Freddie in June. These companies are putting together bulk sale divisions, so perhaps bulk sale opportunities will be available in the future.

Tags: 90 day, bruce norris, California, FHA, first time buyer, flipper, foreclosures, hard money, inland empire, investing, investor, norris group, offers, option ARM, podcast, Radio, rating agencies, real estate, realtor, reos, trust deed investing, trustee sales
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174-TNG Radio – Bill Shipp-Young 5-15-10

Friday, May 14th, 2010

Bill Shipp, California Real estate Investor

(Full Bio)

This week Bruce is joined by Bill Shipp. Bill has been investing in Riverside real estate for many years. Bruce thinks Bill is Riverside’s best kept secret.

Bill began flipping homes in 1986. He did his first flip deal when he was 18 years old. He had a family member who had bought the lot but could not afford it, so Bill agreed to buy it for 2,600 dollars and he sold it a couple years later for $6,000.

Before his first real estate investment, Bill was an airforce brat. He moved around a lot which made him wish he could own a house. Prior to 1986, Bill was working a corporate job and strongly disliked it. He had a good friend who was a real estate investor in the Long Beach area. This friend encouraged Bill to learn real estate. Bill’s friend explained that Bill would most likely not become very wealthy if he continued to work in the corporate world, and he would always have to worry about his job security. If you own your own business of buying and selling real estate you can never get fired. This encouraged Bill to quit his job and begin working as a real estate agent.

Bill did learn some important lessons from the corporate world. He learned to run his real estate business the same way as if he was working a corporate job. He did not sleep in just because he owned his own business. He would begin working at 8, and he worked normal hours.

Bill’s mentor taught him how to buy homes, and how to figure out prices and fixing costs. His mentor was very regimented. If Bill was even a minute late, his mentor would leave him. Bill listened to all of his mentor’s phone calls, and he learned how he conducted business with other visitors.

Bill’s mentor never got into educating people. He simply picked a few people that he new personally to work with him. Bill thinks he was the lucky person to be picked by this mentor because he showed good discipline.

Bill has bought and sold 360 houses. He does not have make many deals in which he personally speaks to the home owners he buys from; he probably only talks about 10 percent of these home owners. He never used mailers or signs.

If Bill was beginning to invest in Riverside with all his current knowledge, he would first call his agent and show them his accomplishments. Agents hear from many people who claim to be real estate investors but are not truly serious. For this reason, Bill keeps a portfolio of every house he has bought and sold. He shows this portfolio to agents during interviews. He then tries to persuade these agents that working with him is a good idea. He interviews multiple agents until he finds a couple of agents who are willing to be trained for his specific style of work.

Bill has not tried to develop relationships with people who control the most popular sources of REOs, but his name is somewhat well known by these people because of the business he does.

A typical investor will receive a call from an agent in which the agent explains what kinds of new inventory have recently come up. This agent might tell the investor that 20 new listings showed up. The agent and the investor would then look at many of those houses and attempt to narrow down their options. The kind of calls that Bill receives from his agents is very different. Bill’s agents will tell him which one of those 20 properties he would most likely be interested in. Bill would then ask who is listing the home, and the realtor would be able to tell him whether or not he had done business with that person previously. His Realtor would also be able to tell him what kind of neighborhood it is in, and whether or not he has done business in that area before. This Realtor would also give him a description of the other houses on sale in that area, the price they are listed at, and a description of the property Bill wants to buy. He would then make an offer slightly below the typical asking price of that neighborhood, and his offer would be made within just a few hours of being listed. This is how you beat the competition. You have to be able to make offers and close deals before the competition arrives.

What really gives Bill an advantage over his competition is the ability of his realtors to identify houses within specific streets of his city. Bill’s realtors are so familiar with their areas that they can look at a specific street, compare the prices of the other properties for sale on that street, and quickly determine whether or not a specific house is a good deal.

Agents are often skeptical of whether or not there are whole sale deals on the market. Part of the problems is that they are not disciplined, they are not experienced, and they are not accustomed to doing their job every day. It takes time for agents to spot a good deal quickly. Bill can buy properties out of the MLS even when the market is going up, and people claim there is no way to find a deal. When Bill told Bruce this in 2004, Bruce was very surprised and it taught him something.

During the real estate boom, everyone was an investor; you did not need to be good at investing during that time to make money. During that time, Bill was not worried about competition because there was so much business.

Name familiarity is very important when dealing with people who control the source of inventory. People who know Bill know that he has only backed out of 1 offer in his entire real estate career. If people know you are going to go through with your offers, they will be more willing to do business with you.

Bill typically puts a $5,000 deposit on his offers regardless of the home price. Bill recently lost an offer to someone who gave an offer for 100 percent of the purchase price. This was an investor trained by Bruce Norris.

Bill usually offers a 10 day close, or the seller’s preference. He has actually lost offers in the past because the bank felt the closing time was too quick, so allowing the seller to choose the closing time is best.

When Bill discovers that he has made an offer on a property with multiple offers, he simply responds by giving them his highest and best offer. Bill doesn’t have a problem with making only $20,000 on a property which gives him an advantage when making offers. Some investors will not bother making a deal if they cannot buy it for 62 percent of the price.

Bill may be one of the biggest investors in California, but he actually lives in Utah. He has developed a business model which does not need him to make full time deals. Bill cannot think of anyone with a business model like this, and that is why he sticks to one city. Having all his properties within a very specific region allows him to easily manage all his properties. Bill does not invest at all in Utah.

Bill typically buys under the $200,000 price range. Many of his buyers are FHA buyers, and many of them are conventional. When the market gets slow, Bill does not fight it, he just quits and waits until things pick up. Bill did have some trouble getting back into the market not long ago, because many rules had changed since his last transaction. When Bill re-entered the market, the 90 day FHA rule was still in place, and Bill did not know about it. His first offer was an FHA and the appraisal came in $15,000 low. He chose to be satisfied with the $10,000 dollars he made off the property and move on. Bill encourages people to not fall in love with their properties, so they will make smart selling decisions. Bill decided to leave the market in 2007 because he was receiving multiple offers on all his homes, and the offers were too high. Things were getting too crazy. When Bill looked at the loan documents, his buyers would have a 10 percent interest rate with a 700 FICO score. Bill wanted to tell these people, “What are you thinking?”

Bill does not buy and hold rentals. Bruce thinks that is interesting because many people think that is the best way to invest. Bill believes that if you are a full time investor, flipping houses will be more profitable then renting. However, renting is a good option for passive investors. Passive investing is what Bill did when he first started investing. When he first starting buying properties, he bought 45 rentals and he eventually ended up with negative cash flow. When times get tough, people start moving which leaves you with vacant rentals.

Tags: 90 day, bruce norris, California, FHA, first time buyer, flipper, foreclosures, inland empire, investing, investor, norris group, option ARM, podcast, Radio, rating agencies, real estate, reos, riverside
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173-TNG Radio – Leslie Appleton-Young 5-8-10

Friday, May 7th, 2010

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.

Tags: Alt-a, bruce norris, California, California Association of Realtors, construction, cycles, deed-in-lieu, defaults, demographics, economics, economy, equity, fannie mae, first time buyer, foreclosures, government intervention, norris group, option ARM, podcast, Radio, rating agencies, real estate, reos, short sale
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172-TNG Radio – Leslie Appleton-Young 5-1-10

Friday, April 30th, 2010

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.

Leslie has had a tough job for the past few years, but things have changed for the better this year. Leslie can see the light at the end of the tunnel, and people’s expectations of the market have become more realistic. People are not as afraid of the downturn. However, she does not feel that this is true in all price bands. Over the next 24 months, the upper end of the market will experience many more price reductions. In the moderate to low end of the distressed market, Leslie predicts that prices will remain flat, and possibly increase slightly. The upper end of the market has seen some adjustment, but nothing like the lower end of the market. As the economic turmoil hits upper end markets, sellers will have to be more realistic about what they expect to get for their homes. In Riverside, there are some great homes with loans on them worth $1.5 million, but they cannot even sell for $700,000.

The lower price, subprime inventory has been absorbed, and that part of the market seems to be coming back. The stimulus for first time buyers and the decreased rates have had a significant influence on home purchases.

Every area in California is unique and different, but the dichotomy in today’s housing market has more to do with price than location. Part of the problem is that people are having trouble qualifying for loans. Demand for homes at the low end of the market exceeds the supply, but the opposite is true for the high end.

In the past, Bruce has found that inventory levels are pretty accurate leading statistics. When you are below a certain months level of inventory, you can often reasonably assume that things will turn around. There are a lot of lenders with properties that are not on the market. Default rates have also exploded, but the lenders will not file NODs. There is a penned up group of buyers, and there may also be a penned up group of buyers. Leslie thinks that government intervention will determine how this problem is rectified. It is difficult to predict how the government will deal with this problem.

California has benefited from the stimulus programs. We are starting to see more green shoots, and Leslie thinks that the iPad may have positively affected our economy. The state deficit has decreased over the last few months. California is an outlier. We boom harder, we sell more, and we improve quicker. However, our recovery is generally rather flat. We had a 5.9 percent GDP growth in the 4^th quarter of 2009, and 4 percent of that was inventory restocking. Leslie wonders how much of our retail sales growth is tied to all those homes that are behind on their mortgages. We are not out of this downturn yet, but we are improving. The government stimulus is going away, and that is why there is some uncertainty about the outcome of the second half of this year. We will likely see interest rates increase. They have already increased a bit, but only by a quarter point. If interest rates climbed above 6 percent, Leslie thinks that there would be a strong negative reaction in the market.

Sometimes when rates increase, people feel encouraged to buy before rates become unreasonable. It is important for people to remember that it is not clear that prices have bottomed in all categories, but it is pretty clear that rates will be higher in a year than they are now. People need to measure the tradeoff between the cost of increased rates and decreased prices.

When Bruce became an investor, he refinanced his home in 1981 at 17.5 percent. One year later, he was delighted to refinance at 12.5. Very smart people told him that rates would never go below 10 percent, but now many people would feel jipped if they bought at a rate above 6 percent even though that is a historically incredible rate.

One thing that is really different this time around is the role of equity, or the lack of it, has played in the cycle. If you don’t have equity, you are not a homeowner. The policies for home buying and selling during the boom caused many of our current problems. When you have to pony up 20 percent, and you have equity in your home, you treat home buying and selling very differently than someone who is buying without documentation and zero down. In 2006, 40 percent of Realtors working with first time home buyers said that the buyers did not put down any money.

Bruce thinks the timing of the no down program was atrocious, because the price to income level was absurd. However, Bruce actually thinks we should have a no-down program in our current market. We have to create households that are fit to own. We have just taken back hundreds of thousands of homes from people that wanted to be owners, which are now credit damaged and cannot re-enter the market. We could make a no-down payment program, but when somebody doesn’t make a payment, we could let the loan go forward to the next owner without qualifying just like how the FHA once operated. The other option is to let the opening bid for the next 5 years to consist of just the late payment. If we used this program, there would never be an REO. The nothing down program would create a lot of interest in new owners, and we might retain the current percentage of homeownership that we already have. Bruce fears that we will have a national decline in the 62 percent range, and California will have another downturn in homeownership. Bruce loves the statistics that Leslie puts out.

There is a big difference between the net dollar amount coming to the seller now in comparison to the past. It was once around $200,000, but now its only about $50,000. One-third of these sellers sold at a lost. This creates a negative perspective on real estate which discourages people from investing in a home in the future. In a recent survey, 60 percent of past homebuyers claimed to have no future interest in buying again.

California homes are very affordable right now, because of the price decrease and the low interest rates. However, we are still feeling that it is necessary to encourage potential buyers to enter the market. The tax credit was truly a present to first time buyers. First time buyers are now approximately 50 percent of the volume of current home buyers.

We now have a healthy volume of sells. For 19 consecutive months, we have had a pace of over 500,000. We never even passed the 500,000 pace until 1999. The accumulative dollars are very different now from the peak. Commissions earned by realtors are very different from 2006 and 2007. Incomes have changed the membership of CAR, but not as much as Leslie was expecting. In 2007, there were 211,000 realtors in California. This year, we will probably have around 172,000. That is a significant drop, but considering the significant drop in profit volume, that is a rather small drop. This isn’t surprising though because the economy has not left with people with many other job options. If you work hard enough, you can still be successful. This market works well for the first time agent because there are a lot of first time buyers.

Website presence is critical right now. A recent buyers’ survey asked, “Did you look in the newspaper during your home search?” The results showed that only 10 percent of people were using the paper as a reference. People are searching for homes using very different methods, but it is actually very cheap to advertise online. All of the brokerages have cut back on overhead and expenses. A realtor may not have an office, but they can still be visible online if they have a laptop.

The internet has allowed the consumer to shop around without spending the realtor’s time. However, Leslie has found that 85 percent of home buyers were shown their current home by an agent. Perhaps the internet is presenting too much information for uneducated buyers. Also, in a market where properties are selling quickly, you need to have an agent helping you to be the first potential buyer in line.

Tags: Alt-a, bruce norris, California, California Association of Realtors, cycles, defaults, economics, economy, equity, first time buyer, foreclosures, government intervention, norris group, option ARM, podcast, Radio, rating agencies, real estate, reos
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The Norris Group Vlog – Mold Featuring Julie Crittenden

Wednesday, April 7th, 2010

It’s finally here! The first Norris Group video blog featuring mold expert Julie Crittenden.

The Norris Group is dedicated to continued education through our radio show, news blog, and now the newest feature to our website, our video blog. These short segments will explore basic concepts and important topics not often understood and/or covered from the point of view of the real estate investor. We look forward to your feedback as we grow this new feature and resource. We hope you find it helpful.

Special thank you to Julie for being our first guest and Rich Durant for editing!

Tags: California, foreclosures, investing, investor, julie crittenden, mold, real estate, reos, the norris group, vlog
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167-TNG Radio – City of Riverside 3-27-10

Friday, March 26th, 2010

Deanna Lorsen, Development Director with The City of Riverside

(Full Bio)

Scott Barber, Code Enforcement
Director with The City of Riverside

(Full Bio)

This week Bruce is joined once again by Deanna Lorson and Scott Barber. Deanna is the Development Director for the city of Riverside. Her job includes redevelopment, economic development, marketing, housing and neighborhoods, arts and culture, and capital projects. Deanna previously worked for the County of Riverside as the managing director of the Development Agency. Scott Barber is the Community Development Director for the city of Riverside. His job involves building safety and code enforcement. Scott has been involved in the creation of new, innovative programs for financial systems.

You may be calling on a case file that is out in the field with the officer. During that sort of situation, Scott won’t be able to answer your questions. If a lender calls for his bill, Scott will give you the bill and suspend daily penalties for 10 days. The buyer will have to pay for the fines already there, but the city will work with the buyer on getting the house rehabilitated. As long as you are making an effort to rehabilitate the property, you won’t have trouble.

The investor’s goal is to get something fixed as quickly and as well as possible, so that he or she can sell it for a profit. The city and the investor have the same goal. The problem comes in from perception, because the investor perceives property inspection as threatening. The city must make it clear that defying the rules will not be tolerated. Recently, some people in the financial industry challenged the city’s constitutional right to fine unkempt properties, but the city won. Scott lives in Riverside, and he cares about it, so he will not allow it to deteriorate.

Riverside recently rebuilt the Fox Theatre in downtown. The city used multiple funding sources to pay for its redevelopment. The performing center itself was not paid through redevelopment funds; It was paid for by a bond issuance. Redevelopment funds must be made in redevelopment project areas for specific reasons outlined in state law. The city financial officer was responsible for the bond issuance. This issuance was done before Deanna began working for the city. This bond involved a long term, fixed rate loan for the city’s capital improvement. You could compare it to having a trust deed against the future progress of the city. The decision to take on these loans is approved by the City Council.

Riverside city has a down payment assistance program. Five years ago, there was little activity in this program because prices were so high, but now that prices have declined, this program has played a significant role in encouraging long term home ownership in Riverside. This program is funded with redevelopment funds and some Federal funds. Rental assistance is primarily given from the county. However, Riverside city did receive one Federal grant for preventing homelessness. The name of the Federal program for down payment assistance is named The Home Investment Partnership. This assistance comes in the form of a “silent second”. This means the homeowner gets the maximum fixed rate mortgage that they can afford, and then the city helps pay for the gap between their mortgage amount and the home price.

There are projects that Scott handles which get his attention more quickly, and get dealt with more quickly as well. If you are involved in a project which provides a large number of jobs to the city, or if you are in danger of causing a large loss in jobs, then you can receive a discount for your utility expenses. If your project is a new development, then you get “fast track” authorization. This gives you priority treatment through planning, building and safety, and through inspections.

Riverside is one of the leaders in the Green movement for energy conservation. The city is providing a program for investors who make certain environmentally friendly changes to their investments, and Bruce thinks that investors will respond to this. Riverside is the first city to be labeled an “Emerald City” in California.

The fact that Riverside has its own resources saves it from a lot of expenses. There are many Inland Empire areas who are serviced by Edison for energy, and MWD for water. The forefathers in Riverside secured water rights for Riverside that are unmatched. The public utility programs in Riverside make energy use much cheaper for its citizens. Riverside has had a planning committee since 1915. This city has always been fortunate to have people in charge who were thoughtful of the future.

Riverside’s community surveys show that we are still having some population growth, but Scott is uncertain how accurate that information is. However, a census should be taken soon, and that will be more informative.

In 2007, the city of Riverside took a 20-year planning ahead mentality towards growth.

The city is divided into 7 equally populated wards, which are basically districts. Each ward elects a member of city council, and those wards represent the city’s governing body. The wards that receive the most redevelopment attention are those that have the most economically damaging problems.

There was a set of apartment units in Riverside which were in bad condition, but those units got fixed and eventually won an award. If someone has damaged property, they can come to the city to receive funds for repairs. The city is required to spend 20 percent of redevelopment funds on affordable housing, and part of that money goes towards new construction. However, there are very strict rules regarding what kind of projects are eligible for funding. These projects must be for long-term affordable housing.

There are 3 significant building projects in Riverside which had to be stopped after they had already begun. One of them was near Lowes. It was a condominium program, but the FDIC completely tore it down. They are currently marketing that property for development. The problem was that it sat in a raw lumber state for too long, which caused problems for the wood structure. There are two in the west side of the city, which involves a large home development. This project will not be dealt with for a while because there are 4 different banks involved in it. This is actually fairly contained damage, but the County of Riverside probably has more trouble than the city.

Thank you Deanna Lorson and Scott Barber for being a part of the TNG Radio Show.

California’s budget problem has affected Riverside’s spending. The state has decided to use some of the city’s redevelopment budget to help with the budget gap. Riverside is currently expected to pay $17 million, by May 10^th of this year, to help California’s budget. Riverside’s total redevelopment budget is about $50 million, so that $17 million is a significant portion.

One year ago, a court case determined that the state could not use redevelopment funds to fix the state’s budget. Right now, the state has attorneys looking for a way to challenge that decision.

The entire budget for redevelopment comes from tax collection. Property taxes have declined in Riverside. Because Riverside is an older city, it did not experience a dramatic decline in redevelopment funds. Overall, the city has experienced a 10 percent decline in property tax revenue.

On vacant properties, it can be typical for power meters to be gone. The city might have it removed if it presents a safety standard, or it might be stolen. Some people regularly look for abandoned properties to steal from. Early in the code enforcement process, Scott’s staff will record a notice of pendency. This allows investors to have records of these homes. The city’s goal is to get homes rehabilitated and reoccupied, so the city will work with investors. The city may even do on-site inspections with you, if you truly need it.

Tags: abatement, broken window theory, bruce norris, California, city of riverside, code enforcement, deanna lorsen, development, development director, federal funds, foreclosures, housing stock, investing, investors, neighborhood stabilization program, nsp, real estate, reos, scott barber, short sales, the norris group
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166-TNG Radio – City of Riverside 3-20-10

Friday, March 19th, 2010

Deanna Lorsen, Development Director with The City of Riverside

(Full Bio)

Scott Barber, Code Enforcement
Director with The City of Riverside

(Full Bio)

Bruce Norris is joined this week by the Development Director for the City of Riverside, Deanna Lorsen, and the Code Enforcement Director for the City of Riverside, Scott Barber. Bruce, Deanna, and Scott discuss what their jobs look like on a daily basis, their core job functions, the state of the Neighborhood Stabilization Program (NSP), how Riverside has been dealing with the funds, how Riverside works with a private trust, the type of inventory Riverside is focusing on, and much more.

California has undergone a huge shift from a massive construction boom to becoming a foreclosure heaven. This transition has been difficult for Scott. He had to reduce his work force by 34 percent. He has moved some of his valuable employees to code enforcement from planning and building safety. These people are dealing with problems related to foreclosures and abandoned properties. His work used to be evenly spread between the areas of planning, building, and code enforcement, but now his work is mostly focused on code enforcement, and building has become a very minor part of his work schedule.

When the focus of Scott’s work shifted, he had to train many of his employees for different types of work. There are certain aspects of being a code enforcement officer, which you need to be prepared for, especially when you are inspecting abandoned properties. When you are a building inspector, you are accustomed to going to a job site where someone is waiting for you with plans and instructions, but when you got to an abandoned house, there might be someone waiting for you, but they won’t be waiting with a set of plans.

The process on foreclosed properties is very paper intensive. These jobs include a lot lender communication and follow up notices. Because of all the paper records that go into these jobs, Scott’s team never loses in court.

In 2008, the National Stabilization Program was created. Riverside city received $6.6 million and Riverside County received over $45 million. This money was used very differently between the county and the city. The city focused on existing single family foreclosures. Riverside city worked on getting these foreclosed homes rehabbed and sold. The county is more focused on partnering with large developers making track homes. The county covers 7,200 square miles, so they have a much larger focus. Riverside city has the ability to pay attention to individual neighborhoods.

Riverside’s $6.6 million was allowed to be leveraged. Riverside leveraged its money by adding in another $5 million from the redevelopment funds. Then, Riverside gained a letter of credit from a bank for $20 million.

Riverside’s focus is on houses that the market will not take care, such as homes that need substantial rehabilitation. The city of Riverside also tries to focus on areas of high foreclosure density. Scott is responsible for determining which places should receive the most attention. When neighborhoods look bad, they encourage other problems to occur, so Scott’s work makes a strong impact on neighborhoods.

Even through prices have decreased, it is still hard for Riverside to buy homes. It is not easy to find out who owns a “for sale” property, and it is not easy to get a deal from the owner. Deanna has had a lot of success when working with the National Community Stabilization Trust, which is a nonprofit group who works with banks to gain inventory. This company was made specifically to deal with foreclosed properties. The banks allow this company to know where the inventory is, and then the Trust gives the city a list of eligible properties. Some weeks Deanna might receive a dozen offers, and other weeks she may not receive any.

Not all the homes that Riverside city is offered will meet the city’s standards for purchasing. Riverside focuses on buying homes that will most likely not be bought by investors or anyone else.

Once the buying process starts on a home, an inspector goes to the home and makes plans for getting the house rehabbed. The inspector then works with the contractors on doing the inspections. Scott thinks that Riverside’s staff collaboration gives the staff a huge advantage over other jurisdictions.

The city of Riverside is not allowed to make a profit on the homes it sells. This restriction limits the city’s ability to buy certain homes, because it is not good for the city to sell a home at a value lower than the average asking price of the neighborhood. If the city sells for 15 percent lower than everyone else, then other appraisals will be affected by that sale.

25 percent of Riverside’s funds produce affordable homes for families with low income. For these people, Riverside targets small unit properties, and then works with a non profit company to make the housing affordable over the long term.

The city also looks into homes that need to be demolished. Once the land is made empty, Riverside partners with a nonprofit organization to build an affordable home there. Riverside partners with the private sector at every stage of home development. The city partners with private rehabilitators and brokers, which helps to produce jobs.

There is always money that comes out of sales. When this happens, the money is reused to buy new homes. However, after five years, any money the city has received from these home sales will go back to the Federal Government.

The money Riverside received for buying homes has provided the city with many opportunities. For one, it has provided jobs to Scott and his staff. Also, there are some properties that Deanna would never have been able to take care of without extra financing. The ability to repair severely damaged homes helps not only its buyer, but also its neighborhood’s value.

There is a domino effect for neighborhoods that see improvement or damage. A large number of foreclosures in a neighborhood will cause devaluation and more foreclosures. On the other hand, increasing a homes value does the opposite.

Riverside’s Municipal Code Section 611 states that when a house becomes vacant, you must maintain it and offer it for sale or rent. If this rule is not obeyed, daily fines will be accrued. These fines encourage banks to take care of the properties.

Bruce asks Scott how he notifies a lender about a property that has become a problem. When Section 611 became active, Scott received so many complaints about unmaintained properties that his staff was not been able to keep up with them. A regular case load for an officer is 100 to 120 active cases. When this program first started, the officers were carrying over 300 cases. All they could do is respond to the calls they received.

Scott has seen so many foreclosed homes that he can now spot a foreclosed home just by driving through a neighborhood. Foreclosed homes often have brown lawns, stuff on the front porch, and evidence of a break in. This look of foreclosure is the problem that Riverside wants to address.

The fines for unkempt properties apply to all parties involved in the foreclosure. This means that owner occupants, the investor intending to buy the property, and the bank that may eventually own the property can be fined for an unkempt home. Some of the calls Scott receives about unkempt properties come from neighbors to those properties, and some from departments of other cities.

Pools on unoccupied lands are a major concern for Scott. When someone calls Scott about their concerns for a pool on a foreclosed home, he has someone get to that home that day. Scott is concerned about someone drowning in an unoccupied pool. Unfortunately, Riverside has received a lot of rain, so Scott has been very busy with getting pools re-pumped.

Lenders can be hard to get in contact with, but Scott’s staff is typically very good at finding them. However, while the party responsible for the home is being found, Scott hires someone to board-up unkempt homes. After 180 days, the city can declare an unkempt property a public nuisance, and then the city has more options available for getting rid of such problems.

Scott has never had a case in which he could not find someone with some sort of financial involvement in a property. However, loan securitization has made it more difficult. Scott’s staff uses an online tax and title service to search for people involved in unkempt homes.

Tags: broken window theory, bruce norris, city of riverside, code enforcement, deanna lorsen, development director, federal funds, foreclosures, housing stock, investing, investors, neighborhood stabilization program, nsp, real estate, reos, scott barber, short sales, the norris group
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164-TNG Radio – Robert J. Samuelson 3-6-10

Friday, March 5th, 2010

Robert J. Samuelson

Author and Columnist

(Full Bio)

This week Bruce is joined again this week by Robert J. Samuelson. Robert is an award winning columnist and author. He has been writing a column for The Washington Post since 1977, and for Newsweek since 1984. He has recently published a book named The Great Inflation and Its Aftermath: The Past and Future of American Influence.

One of the main claims in Samuelson’s recent book is that the rise and fall of inflation was the most significant event in the past 50 years. When most people think of the fall of inflation, they think of a very short time. One of Samuelson’s key points is that there was nothing usual about the last 25 years. Samuelson thinks the fall of inflation was even more important than the rise of inflation.

In the early 80s, inflation was reaching 15 percent, mortgage rates were around 15 percent, and the prime rate for good bank customers was over 20 percent. When inflation came down, interest rates came down slowly, because no one believed that inflation would come down. Asset prices, beginning with the stock market, began to increase during this time. The Dow Jones industrial average was between 800 and 900. There was an explosion in the stock market over the next 20 years. By 2000, the Dow was over 10,000. Stock market wealth within households went from about $1 trillion in the 80s to over $11 trillion at the end of the 90s.

Later, this increase in stock values lead to an increase in real estate values. For many years, consumers spent more of their income and borrowed more. There were only 2 modest recessions during this time in 1991 and 2001. This increase in wealth made people very careless. It conditioned them to take risks which they should not have taken, because they believed the economy had entered into a state of prolonged prosperity.

If you have a feeling of preordained success about an investment, you are probably ignoring a lot of the risk factors you would normally pay attention too. People thought that risk had gone down because of lower inflation. They also felt that they understood risk better. People then began to take more risks because of these two false assumptions. Lenders began to lend money to people with high levels of debt, and they did it with silly and destructive interest rates. People assumed that stock prices would increase forever. For many years, Samuelson warned people that things would not continue to increase forever. Some of those people looked at Samuelson with pity, because he wasn’t taking part in the stock market increase.

Great gains inspire perverse behavior. There were people who owned 50 and 60 homes, who did not have a normal job, with a $30,000 negative cash flow per month. They would show you their list of properties with pride, because they were worth $4 million. They assumed they would be able to sell all their properties to people who were even dumber than they were. These kinds of people were sure that their investments couldn’t go wrong.

Before the bubble burst, people had high expectations for success, which allowed them to grumble about things not being good enough. The paradox at that time was that they could only have grumbled if they expected themselves to be heading towards paradise. The fact that things had been so good for them allowed them to criticize the actual conditions. When historians look back at this time, they will likely conclude that the times were not that good, even thought they really were; the times just weren’t as good as people thought they should be.

Roughly 2/3 of today’s population are too young in 1980. They were either not alive, or they were in their pre-adult years. They were not aware of the 70s and the high inflation, but even the people who lived during that time forgot about it.

Samuelson knows a columnist who wrote about Reagan’s leadership qualities. Samuelson does think that Reagan was a good leader, but the columnist did not address inflation at all. This history is the lost history. Professional historians and economists have engaged in an act of amnesia. This is scary because people will be more likely to make the same mistakes in the future. Samuelson thinks it is good to have the truth for the sake of truth, but also because if we don’t know the truth we will likely repeat our mistakes. There are prominent economists who are claiming that a little more inflation would be okay. Samuelson believes that if we encourage a little inflation, we will end up with a lot of it.

When society is used to good times, it can be difficult to ask for sacrifices, depending on what sacrifice you are asking for and why. Today, we have made more promises to people than we can afford to keep. Most of these promises are to retirees through social security, Medicare, and Medicaid. The cost of paying for those programs, when the baby boomers retire, will be staggering. Our children will be saddled with very high taxes, high budget deficits, or great cuts in other services. If we explain this to people, perhaps they would be willing to make some sacrifices. They may have to cut back on benefits for retirees, and raise the eligibility age for those programs. There may also be some sort of tax increase. None of our political leaders have made the case for sacrificing for our own interest. They seem to be waiting for a crisis to happen, which will force them to do things they should have done on their own.

There seems to be a popular conception that hyperinflation will likely occur in the next 20 years. However, based on our current scenario, Bruce does not see this occurring any time soon. Bruce and Samuelson are more considered with short term deflation. Samuelson doesn’t understand how you get higher inflation when you have empty shopping malls, 10 percent unemployment, and surplus factory capacity. As long as the people running economic policy in this country don’t come to the conclusion that higher inflation is better, we shouldn’t have it in the near future. When Samuelson says near future, he means 3 to 5 years.

In the long term, some people say that we will have to inflate because we have so much debt. The problem is that it is not easy to inflate your way out of debt. Forty percent of inflation turns over in a year or two. If you raise the inflation rate, you don’t really erode the debt, because you just have to refinance it at higher interest rates. In theory it seems like a practical choice, but in reality, it is not realistic.

Economists make the mistake of assuming that the economy responds in a mechanical way to credit, interest rates, government spending, and taxes. These things are significant, but Samuelson doesn’t think they are everything.

What happened in Japan was that they had an economic model, from the 50s to the middle 80s, which worked well for them. They had an export led economy, and they had an undervalued exchange rate. Their domestic economy was not very dynamic, but their exports kept growth and investment high. That model didn’t work in 80s because the exchange rate appreciated dramatically, and their exports became less competitive. This caused the Japanese to settle into a low growth mode, and they haven’t found a different economic model that works better. Contrary to what people learn in college economics, monetary and fiscal policy cannot change that kind of problem. The Japanese efforts to expand their economy through large budget deficits and loose monetary policy didn’t work. Their policy was dynamic internationally, but not domestically, and Samuelson thinks that is the problem in Japan.

If deflation became anticipated, it would be very destructive. Samuelson doesn’t think that modest price decreases would be that bad for a little while. However, if people think that prices will decrease forever, then they won’t borrow money, because their debt burdens will rise. They will postpone buying because the car they could buy today will be expected to fall even more in the future. This mentality will reduce demand, and then unemployment will increase.

Bruce asks Samuelson about what has changed in the baby boom generation’s expectation for retirement. Samuelson claims that this question is a little above his competence, because he is at the very edge of the baby boom generation. Samuelson feels that his retirement has become much less certain. He has saved a fair amount of money, but one thing he has learned is that markets don’t always increase. For example, if you have $100,000 on Thursday, six months from Thursday you may only have $100,000 minus 30 percent of its value. If you thought that money amount would be adequate to supply you through retirement, you may discover later on that it isn’t. That whole generation is probably feeling that same way about their retirement savings. Bruce thinks this mentality will cause a scenario that will not be inflationary. The economists that Samuelson talks to claim that people have short memories, so if we get into a fast growing economy for a few years, then their mentality of fear will disappear. However, Samuelson tends to agree with Bruce in his belief that these setbacks will leave people with a scarred mentality.

Samuelson wrote that the baby boom generation was the benefactor of large chunks of profit. They had the stock market increase, and then they had the real estate increase. This caused the baby boom generation to accumulate a lot of equity. Most of the GDP growth after 2002 came from equity growth and the extraction of it. Bruce wonders what is going to fuel the GDP growth going forward. This makes Bruce think, “How will we get inflation if we will have difficulty obtaining a moderate GDP growth?” Samuelson says that in an ideal world, the source of growth for the next 10 years would come from higher exports, fewer imports, and investment related to those thins. Also, more investment into our energy infrastructure might help as well. Specifically, natural gas could help us a lot now that we know we have more than we previously thought. Also, oil production can make a big difference for our potential economic growth.

After the Great Depression, a pact was made between the government and big business. Bruce asks if Samuelson sees another pact being made today. Samuelson does not see another pact being made today. The pact that occurred in the past was informal and unstable. After World War II, businesses did not want to be reviled in the same way they had been during the Great Depression. Because of this, businesses submitted to social and economic regulation in return for continued market freedom. What we should have today is a generational pact in which the baby boomers agree to reduce their benefits, so that we can take those burdens off of the young. This will allow them to start businesses, have children, and live in such a way so that a significant chunk of their income isn’t being drained to support their grandparents. Bruce completely agrees with this. There are plenty of people who can afford to pay for their own retirement, instead of having their grandchildren be taxed for it.

Robert Samuelson has created one heck of a book: The Great Inflation and Its Aftermath: The Past and Future of American Influence.

Tags: author, bruce norris, columnist, deflation, demand, economic policy, foreclosures, gdp, inflation, monetary policy, podcast, politics, real estate, retirement, robert j samuelson, robert samuelson, stagflation, stimulus, the great inflation and its aftermath, the norris group, trust deeds, unites states
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163-TNG Radio – Robert J. Samuelson 2-27-10

Friday, February 26th, 2010

Robert J. Samuelson

Author and Columnist

(Full Bio)

This week Bruce is joined by Robert J. Samuelson. He is an award winning columnist and author. He has been writing a column for The Washington Post since 1977, and for Newsweek since 1984. He has recently published a book named The Great Inflation and Its Aftermath: The Past and Future of American Influence.

In discussing the similarities between the Great Depression and the great inflation, Samuelson wrote, “What ultimately governed their decisions was the conventional wisdom at the time. The policies had been set with egos at stake. They were presumed to be correct.”

Bruce asks what the conventional wisdom in the 1960s was in regards to creating a healthy economy. The conventional wisdom in the 60s was called Keynesianism. This term was coined from John Maynard Keynes; a British economist who died in 1946. Keynesianism lead people to believe that professional economists had concurred the business cycle. Economists had figured out how to forecast the economy, and they had the tools to counteract recessions. Economists believed they could maximize economic growth, and keep unemployment at very low levels. This mentality lead people to believe that they could bring about endless prosperity.

The Philips Curve was named after the Australian economist A.W. Philips. Philips postulated that there was a fixed trade off between higher inflation and lower employment. You could pick which poison/benefit you desired to receive by raising one and lowering the other.

Walter Heller was chairman of Kennedy’s council of economic advisors. Kennedy was a person who truly listed to his advisors. Bruce asks if the economic thought of the time was played out in Kennedy’s policy. Although Kennedy was a practical politician, he was open to new ideas. His advisors argued that the policies which Eisenhower followed in the 1950s were behind the times. Heller argued that economists could prevent recessions, keep unemployment lower, and maximize economic growth. Kennedy was a skeptic at first because he had been raised to believe that the government should balance its budget, and inflation was a bad thing. Heller argued that we could use federal budget deficits to manipulate the economy, and even if a little inflation resulted, it wasn’t a terrible thing because you would have lower unemployment and people would adjust to it. Since the economy of Kennedy’s first two years did not do incredibly well, and because he was genuinely curious, he was open to the idea of inflation. The ideas that Heller sold to Kennedy were embraced by most economists.

This theory of a stable trade off between inflation and unemployment was obviously wrong. Economists could not create a fixed rate of inflation. In fact, we got an ever-accelerating rate of inflation. When Kennedy first became president, the inflation rate was between 1 and 2 percent, but by the end of the 60s, it was 6 percent, and by the end of the 70s, it was 14 percent. Having this rising inflation made the economy less stable. Between the end of the 60s and the early 80s, we had 4 recessions of increasing severity. The recession of the early 80s had a peak unemployment rate of 10.8 percent. The net result of this economic experiment was that everything turned out to be completely the opposite of what the economists had promised. It promised stable inflation, but didn’t get stable inflation. It promised fewer business cycles and recessions, but we got more business cycles and recessions. It promised lower average unemployment, but we got higher unemployment.

The general idea of inflation is starting to become popular again. The chief economist of the International Monetary Fund recently put out a paper saying, “Maybe a little bit of higher inflation is okay.” Hearing this, Samuelson thought, “Haven’t they learned anything in the last 50 years?”

We were in a desperate position in 2008, and the idea of the economic stimulus program was desirable. However, Samuelson does not think that this program was executed well. The economy was in the process of falling off the edge. The idea of people being able to manipulate the business cycle seems ultimately self defeating. We have to intervene, but we have to be more restrained in our interventions. When interventions succeed, they create conditions that strike back at us.

If Robert wanted to make a formula for creating inflation, the most important ingredient would be to not care about inflation; to not care about keeping the money supply stable. This old fashioned idea that stable money is a responsibility of the government seems to be an ancient relic of the barbarian past. Robert thinks that responsibility is extremely important. The mindset of decision of makers, and the public, is the most important thing. Also, creating too much easy credit is a precondition for most sustained inflations. You can have easy credit, an easy monetary policy, and an expansive money supply, and not get inflation if there are other things off-setting the monetary stimuli. However, if you have people in charge who don’t care about inflation then you are preconditioned to have higher inflation.

Bruce will return to this topic in the next segment.

Samuelson remarked that the learning curve of successive presidents and their advisors is remarkably flat. It amazes Bruce that we have very intelligent people running our government, yet there has been no progressive learning curve. The same mistakes were made as new presidents came into power. Bruce wonders what role politics played in swaying the economic policy of the 70s. In the 60s, economists persuaded political leaders that it was possible to have sustained economic growth, with few recessions, and low unemployment. Once those ideas were accepted by political leaders, it became a part of the fabric of the public’s expectation. When these ideas did not accomplish their purpose, other people tried to achieve the same goal using different policies. Essentially, they continued to use bad policies to prop up a structure which was already collapsing. Unfortunately, our leaders were not able to admit and act as thought they were incapable of solving our financial problems. It fell to Ronal Reagan to deliver the news that their promises could not be fulfilled.

Arthur Burns was the Federal Reserve chairman from 1970 to 1979. He was an economist from Colombia University. He was also the head of the National Bureau of Economic Research. His major mistake was that he bought into Keynesianism. Once he bought into it, he did not take the actions he needed to prevent inflation. In Samuelson’s book, he stated, “What was politically convenient, was also rationalized intellectually.” He was pressured from Nixon, and he was politically expected to fulfill the goal of constant economic growth with no business cycles. At some point, the Federal Reserve would have to stop the rising inflation, so they would tighten credit and reduce the money supply. This would cause a recession, which made the people upset, and so they would start the inflation process again. The Federal Reserve couldn’t decide how to solve the financial problem, and they ended up choosing to do nothing constructively.

Samuelson believes that if you have expectations of higher inflation, then you will get higher inflation. This kind of thinking makes businesses and workers act in such a way as to produce it. Businesses start thinking that they can pass on any price increases, and workers assume that they can get increased wages to pay for their higher cost of living. This mentality causes a wage/price spiral. Unless the government steps in and stops this mentality, it will continue.

At the end of World War II, there was a huge burst of inflation, because during the war we had wage/price controls. As soon as the artificial suppression of the wages and prices was removed, there was a huge increase in inflation. However, we did not get double digit inflation in the late 40s or the 50s. This makes Samuelson ask the question, “Why didn’t that happen?” This wasn’t because policy became oppressive; it was because people didn’t expect the wages and prices to continue to increase. People at that point in time didn’t think that the U.S. was going to have inflation for forever, so they didn’t act that way.

At the end of the 70s, people were scared by inflation. They feared that the government could not control inflation, and they didn’t understand inflation. They didn’t know whether their wages would keep up with rising prices, they didn’t know if their savings would be eroded by rising prices, and they didn’t know how high interest rates were going to go. In the early 80s, mortgage rates got up to 15 percent.

Bruce Norris refinanced his house to become a real estate investor at age 17. People didn’t know if that kind of inflation would continue. Opinion polls showed that people did not think the future would be better than the past. The fears then, and the fears now, are not that much different from each other.

Samuelson believes that the fear, anxiety, and pessimism induced by inflation were the main reasons Ronal Reagan was voted as president in 1980. The vote wasn’t about conservative vs. liberal politics. They didn’t know if Reagan could fix the problem, but they certainly knew that Carter couldn’t. This change in public perspective gave Volcker and Reagan a chance to try something new. They were the right pair to make those changes. Volcker was chairman of the Federal Reserve board at the end of the 1970s. Volcker was chosen to be chairman of the Federal Reserve, because Carter had hired the previous chairman to take the position of Treasury Secretary.

Volcker and Reagan shared the belief that the country could not prosper with double digit inflation. Volcker decided that the government was not going to pump out money and credit. After that decision, interest rates increased, inflation slowed down, and the economy went into a horrific recession. Reagan did something that no politician would have done at the time; he supported Volcker’s decision. This caused Reagan’s popularity to plummet, but he continued to give Volcker his support, because he thought Volcker was making the right decision.

What was unique about Reagan and Volcker’s policy was that all of the adverse consequences were up front. No politician likes to have the news filled with negative information related to their presidency. From Samuelson’s perspective, any other politician who had been president would have told Volcker to stop. If Volcker did not stop, then they would have created legislation to change the nature of the Federal Reserve, so that it would be more accountable to its political masters.

Bruce encourages everyone to get “The Great Inflation and Its Aftermath: The Past and Future of American Influence”. Roger will be on The Norris Group’s Radio Show during the next segment.

Tags: author, bruce norris, columnist, deflation, economic policy, foreclosures, inflation, monetary policy, politics, real estate, robert j samuelson, robert samuelson, stimulus, the great inflation and its aftermath, the norris group, trust deeds, unites states
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