Robert Kleinhenz

Chief Economist for LAEDC

(Full Bio)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

I Survived Real Estate 2011

(Full Bio)

On October 14, 2011, The Norris Group returned with its award-winning event I Survived Real Estate. An expert line-up of industry specialists joined Bruce Norris to discuss current industry regulation, head-scratching legislation, and the opportunities emerging for savvy real estate professionals. 100% of the proceeds support the Orange County Affiliate of Susan G. Komen for the Cure. This event would not have been possible without the generous help of the following platinum partners: ForeclosureRadar and Sean O’Toole, Housing Wire, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops with President Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobbie Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Real Wealth Networks, Frye Wyles, MVT Productions, and White House Catering. The event video can be found on isurvived2011.com.

Bruce continued his discussion with the panel on loans and the market. An $8,000 rebate was equivalent to a nothing-down loan most of the time on prices. It is not known how well this loan portfolio performed, but it would be interesting to know since it is in essence a nothing-down program without spending the $8 grand. It was pointed out to most of the bankers who had made loans under this program and held it in portfolio that the loan-to-value ratio they believed they had at the time they made the loan was higher after prices receded again, so they had more risk in their portfolio than they thought they did. Bruce and Doug still think it will come out very well. We’re close to the bottom, but we have probably already created a payment that was less than rent. Doug bought a house in Florida last September since they were on sale.

Eric Janszen wrote a book called The Post-Catastrophe Economy, and one of the main things Bruce underlined in the book stated, “The United States will rebuild on its ethics of hard work, education, fairness and honesty, its culture of entrepreneurial vs. risk-taking, of competition of savings and of avoidance of debts, it core competencies in technology development and original invention, its strong institution of property rights and rule of law.” It was Eric’s hope that we would have spent the last two years going forward and hopefully building infrastructure to a new set of tools, transportation, energy, communication, and infrastructure that you call Techi. However, this was not something we did. The policy we took instead was characterized by Eric as “print and pray.” There was no consorted effort or consensus on what to do beyond the emergency measures that were taken to halt the deflationary process in the recession. This is why Bruce asked the question about fiscal policy because a long-term fiscal policy would not be short-term relief or pleasing. If we really did something long-term, the results would be out there a ways. If we approached it as a return on investment and followed the idea that there is certain infrastructure that if you invest in it in a country, it increases your capacity for economic growth and not as an expense but a multiplier effect, then you would have to think very carefully about how you would do that. This takes some planning and execution. In order to pull this off, you have to have enough of a consensus within government to not get into a dysfunctional argument about whether it’s going to result in the short-term and increase in deficits.

As Doug mentioned, the American public was pretty aghast at the quality of the debate that was going on about the debt ceiling. It was not a particular constructive discussion, so most Americans are frustrated by this. There is a document that has a joint effort from Republicans and Democrats regarding the budget deficit and reducing it. You have a few people from each side pour their hearts into a year or two’s worth of work and come to a legitimate conclusion, so Bruce wondered how each of the parties have reacted to the document, whether they knew it was not everything they wanted but had to sacrifice; or did they get beaten from both sides. It’s very difficult to put anything forward since all their discussions are so ideologically charged. It’s a simple constructive plan based on a simple factual argument. You very quickly obtain a dialogue that devolves into some argument about whether we are going bankrupt tomorrow, which is not going to happen. Doug agreed with this; he thought the roots were there for a good discussion. If you take Paul Ryan’s plan and the president’s deficit commission plan, the two of those elements together could lead to a very constructive debate about how to make some long-term adjustments. You’re not going to fix it in two years; it’s something that is going to take some time. Washington did not engage with those elements as prep-starting reference points.

Eric mentioned an output gap in his book. The concept of an output gap is every year the Congressional budget office puts out what they project is what the growth rate of the economy would be if everybody who wanted to have a job had a job. All the producers and consumers are efficient actors in the market. What happens is in a recession you are operating below a theoretical growth rate, so the difference between your theoretical growth rate and where you actually are is the output gap. It’s really a measure of unemployment. In the 1970s, the policy was to try to close the upper gap by any means necessary, which is the wrong approach as we will end up with a lot of inflation. The challenge is that usual reflation measures, monetary policy, and fiscal policy for the last 30 years has been very effective at closing output gaps quickly after recessions. The problem is if we do not close the output gap before the next recession, we would have a mid-gap recession. This is another recession that opens the gap further with what was left over from the previous recession. We have not had this since 1938. Mid-gap recessions cause very significant add-on problems. It’s feasible that we could have one of these, but as Doug said it would probably be caused by an external event, probably in Europe.

The next ten years of investing will not be like the last ten. In 2001 a portfolio was created that was composed of treasury bonds and gold, which outperformed everything if you did not do anything with it. It beat the S&P, both in terms of volatility, draw-down, and batting average, everything you could think of. This is not good. Hopefully over the next ten years we get back on track where we are growing the economy by growing it in a more organic fashion, not to refinance. One of Eric’s investments happens to be connected to apartments, and one particular investment is in a company that sells into B markets of multifamily residential real estate. The theory behind it was the cost of capital was going to remain low, but the rents were going to start to rise. Cap rates were going to improve, and they were going to be profitable investments.

Eric also talks about in his book the concept of having public/private partnerships create an infrastructure. We have not done that much in this country to create this type of infrastructure successfully. Back in the early days a lot of our highways were built with European money funding private enterprises to build our highways. Most people forget that, but we took the public route after World War II, and our infrastructures were rebuilt through public finance. In Europe when they did not have any money, they used public and private partnerships to build infrastructure roads, highways, and bridges. Typically that model is adopted in times when governments are very constrained fiscally. It becomes more efficient to combine private enterprise and the risk management of government to combine together to build new infrastructure.

One of the things Eric warns about in his book is the right and wrong ways to do public and private partnerships. The wrong way is getting public money and giving it to your buddies to go build things. The right way to do it is to create a real competitive market where the partnerships actually have to compete with each other and perform to metrics, and they can’t get another job unless the last one worked really well. One of the hardest things is that there seems to be a lack of credibility to say the least when you want to tax people more or you want to have partnerships, and then you find out that the basis for that partnership was other than for a good reason. You get very suspicious about someone writing the next check or asking you to contribute more. Bruce did not understand how we get away from that. It’s no secret that most Americans are frustrated with American finance, and that is one of the first things we have to fix in this country.

In the past, there were common reasons for foreclosures. Sean O’Toole started investing in foreclosures in 2002, and one of the things he had the hardest time with was none of them made any sense. Everything had equity, so all of the folks could sell. Sean really struggled with this, especially as a son of a logic professor. It finally dawned on him, with the help of his business partner, that it was the five D’s: drugs, debt, disease, divorce, and denial. When you knocked on people’s doors, it was one of those five things. This was back in 2002-2006, so there was equity everywhere. Those five things were what he called the base rate of foreclosure, and this will always be there. If Sean had them in 2002 and 2006, he would have had them every time. The problem was not job loss because you could sell your house. It wasn’t negative equity because it just did not exist at the time. Today, your average property in California right now is $150,000 upside down by the time it hits foreclosure. It sold for $400,000, and it is now worth $250,000. It’s really an insurmountable debt, and if you look at the cost of repaying that debt over 30 years, it’s really not practical or smart for anyone trying to pay it. There are moral issues around that and what a lot of people have, but a lot of it does not make sense.

Bruce recently read an article about Fannie and Freddie not wanting to do principle reductions, and to Bruce this makes sense because you have ramifications to that that are negative. One idea Bruce had was to give somebody a principle-only payment until they break even with an appraisal. There are a lot of people who are not current, but you have more people who are current in that situation. Bruce does not want to reward the group that has not made a payment in two years and get in an article saying that it’s wonderful. However, for the people who are making the payment, there might be an eventuality where it gets to them too, especially if the people that aren’t making the payment get the goodies. However, if you just willingly said for whatever it takes, 5% a year you are going to pay principle-down, so at 25% in five years you are back to square. You would probably have a lot of people sign up for this, but Bruce did not know if this was an acceptable suggestion to lenders. Doug, the lender in the group, said there were lots of things that are going to be explored, including principle write-down. There is a lot of momentum building in Washington toward that in particular. The difficulty has always been in the foreclosure space in that there is a run rate of 1 million to 1.5 million given the level of homeownership and the number of households there are. However, the solutions have typically been one on one treatment.

When Doug was in the mortgage-servicing business at the Mortgage Bankers Association, they did a study where they took apart the servicing operation in which there were 17 elements, 14 of them having very clear economies of scale. Three of them have diseconomies of scale, and economies of scale are more expensive as they get larger. One of these is taxes of insurance, so it’s everybody else versus that because of all the local knowledge that you need about the jurisdictions. The other two are default and foreclosure. The question was if the diseconomies of scale were sufficient to override all the other efficiencies in the servicing business. Now that the experiment has been run and we know that are sufficient. The problem in solving it and why the diseconomies exist is that the treatments are a one on one kind of treatment, and you have to have quite a bit of experience in understanding the households’ situation to determine whether or not you have all the information. This could include whether or not the other people fully understand the obligation, whether they are telling you about their willingness to pay, all of the resources that they have available to pay, and their other commitments. It is very intensive.

With a program like this, you should sit down and find some households that would be very effective under that kind of household because you can determine they are willing to meet the commitment over a period of time, they have the resources that are available, and they are willing to have everything documented and make a commitment to that type of program. There are others who you could put in this type of program who would not succeed because they don’t have the criteria. The difficulty is in putting up broad based policy and applying it to everyone because this is where you find problems with the adverse selection. You would also have a bigger problem because not only would you not be selecting some, but you will also be not selecting completely the people that are current. Doug told a funny story about when TARP was voted on for the first time, his mother called him to ask him what he was doing with their money. They paid their mortgage, so when you do debt forgiveness there is a whole bunch of people who have met all their obligations, and there are going to be losses. While they were not involved in the transaction, on the tax side of things they’re going to be involved in repairing the losses. For those who own free and clear houses, they can just get a check.

Sean O’Toole said the idea that the foreclosure process is tough from servicing standpoint is a self-inflicted one. In California, there is a brilliant piece of policy which is on a purchase-money mortgage, there is no recourse. This creates a really fair balance that resolves the issue and makes it very quick and easy to deal with somebody who is not paying. Bruce and Sean jokingly said this is why it only takes 600 days to foreclose in California even though it used to only take 150 days. 150 days is a lot of time to give somebody to try to work through their problems, sell the property, and do whatever else they need to do. If they can’t, they lose the home. This is okay given that it’s no recourse. If you compare it to the rest of the world where you have significant recourse, it can pass on to your children. It’s also a fair balance of risk with the lender because the lender should take that loss. Sean does not think it is fair to let the person stay in the house when they had made a bad decision by buying their house at a certain price. They had plenty of folks giving them bad advice, a lot in the Federal government, but they were part of it. They should lose their house, and we should move forward.

The losses we are trying to prevent are multiplying. You are also creating a whole group of people that feel very entitled to still stay. When The Norris Group buys foreclosures, they have met people at the door who had not made a payment for two years, and the first sentence out of their mouth was, “Cash for Keys.” That is now the expectation. The policy coming out of Washington is increasing that expectation that they should get to live in a home for free for the rest of their lives. Imagine when the government owns all the rentals. If you want to talk about rent control problems and having no future for real estate, that is the proposal that will kill real estate in the United States forever. One of the problems is uncertainty. If some gigantic company owns 10,000 rentals, then Bruce for example would not know what to do with his because he would not know if the playing field was legit and if they are going to put 10,000 houses for sale. However, as a builder Bruce certainly would not carve up dirt waiting because that risk is out there that others could be his competitor at the drop of a hat. We should give investors a shot at taking the inventory down because it is manageable if we do not put it on the market.

Eric mentioned how he had come out of the venture capital industry, and a lot of folks in his industry put a lot of money into bad companies back in the late 90s. When there was a crash, they lost their money from bad investments.

To find out more, tune in next week for I Survived Real Estate 2011, part 4. The Norris Group would like to thank their gold sponsors for the event: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Conaway and Conaway, Delmae Properties, Elite Auctions, Inland Empire Investors Forum, Inland Valley Association of Realtors, Keller Williams of Corona, Keystone CPA, Kucan & Clark Partners, LLC, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Pacific Sunrise Mortgage, Personal Real Estate Magazine, Raven Paul and Company, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Tri-Emerald Financial Group, and Westin South Coast Plaza. Visit isurvived2011.com for more details.

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

Mike Shedlock Registered Investment Adviser Representative, Sitka Pacific Capital Management (Full Bio)

This week Bruce is joined once again by Mike Shedlock.  Mike is a registered investment advisor representative for Sitka Pacific Capital Management. 

Mike’s blog, Mish’s Global Economic Trend Analysis, was started back in 2005.  Before, he had worked in the banking industry for over 20 years as an assistant vice-president for Harris.  He then became a consultant in 1999, but the consulting  jobs dried up after Y2K and 9/11.  For this reason he was out of work for almost 3 years.  He started his blog with the intent of being discovered, which originally he thought the odds were 0, but he proved himself wrong.  He now gets a million and a half to 2 million page hits a month on his blog.  He initially started writing about the things that he was going through at the time that a lot of people are going through right now.  I could see the bubble in housing building, and people were telling him “Cash is miss, cash is trash,” but when you are out of work cash is not trash.  Now, most of the people who told him this have actually lost money on their houses.  He wonders how many of them would like to have their cash back in their pockets now that they’re unemployed.  However, very few people listened.  Bernanke tried to claim the housing bubble didn’t exist, but it was very easy for Mike to see it did indeed exist.  He called the exact top of the housing market on his blog in real time in the summer of 2005.  Some people tried to say that Case-Shiller showed the peek was in 2006, but Case-Shiller only looks at re-sales and not at new home sales.  What started happening in the summer of 2005 that didn’t reflect itself in prices was huge incentives, whether it was free garages, free trips to Europe, free cars, free swimming pools, free landscape upgrades, free granite counter tops.  It actually started with the free granite counter tops, and then it went as big as free pools.  Case-Shiller never picked up any of this.  Housing peeked in 2005, and it took another year for things to start heading down in earnings.  The same type of thing happened back in 2006 when there was an 18% commission to sell a house in Phoenix. 

One of the things that was very difficult about picking a top accurately back in 05-06 was you would have really had to understand the way real estate was being financed, and very few people understood what a mortgage-backed security or a CDO or a fault-swap until around 2007.  Part of the problem was possibly a disconnection between the ways things were really being financed and how little the lender cared if anybody really could pay.  However, it’s really hard to say what was going on in Bernanke’s mind, but he certainly did miss the housing bubble.  He didn’t think there would be a recession and said, “The housing prices were supported by fundamentals” and mentioned there possibly being some “local froth.”  Neither he nor Greenspan saw the role of the Fed’s interested rate.  It’s interesting to ask how much of what Bernanke said he really believes or if he is simply trying to absolve the Feds’ guilt.  Last week he did a very self-serving speech where he praised the Feds for doing things that caused the recovery, but ignored all the things that the Fed did that caused the bubble in the first place.  Greenspan was a veritable cheerleader for housing, preaching variable interest loans, adjustable rate mortgages.  He was praising derivatives and all the things we would look back on as silly.  One did not need to understand credit derivatives or anything like that to know housing was in a bubble.  All one needed to see was how fast home prices were rising vs. how fast wages were rising.  Home prices were 3-4 standard deviations above rental prices and 3-4 standard deviations above wage growth.  It’s simply not sustainable.  That is how out of line home prices were.  We’re closer now to being back at the trim line, but we’re still a little bit above it. 

The tendency, however, is to overshoot to the downside.  Should that happen, there is a chance for some significant declines in places like California.  Home prices look a lot cheaper in Las Vegas because the bigger the bubble the bigger the decline.  Some of the biggest bubble areas were Las Vegas, Florida, Phoenix, and a lot of places in California.  California still has not corrected to where it needs to go to where one would say the valuations are reasonable.  California also has Proposition 13, which is putting a floor on home prices.  Some cities, such as Chicago, New York, and San Diego, are always going to have a premium because these cities are where there are a lot of jobs.  However, there is a difference between premium and 300-400% and 3 standard deviations like we were above norm.  A deviation is a mathematical function of a normalized curve that shows just how insane things are.  Three times normal is an extremely low probability event, and when you get into that condition, you know that you’re in a bubble.  Australia, Vancouver, Canada, and China are in this same situation right now. You can look at all these places and see that home prices are going up faster than rents and faster than wage growth.  It’s not sustainable.  The bubble in Australia has now popped, but all the mentioned countries were in a bubble longer than expected.  When Canada’s and China’s burst, we are most likely going to see some 50% declines just like here in the United States. 

There are a lot of smart people who disagree with the direction the market is going and believe we need to protect against strong inflation.  However, before you can hear their arguments and debate you have to know what the terms mean.  Mike defines inflation as an increase in money supply and market to market credit.  A common definition people use for inflation is prices going up, and they look at consumer prices.  Unfortunately, they ignore asset prices, which is one of the mistakes Bernanke and Greenspan made.  They absolutely ignored asset prices and did not consider home prices as part of inflation.  Had you taken home prices and put them in the CPI, then interest rates in the initial stages of the bubble popping were 5-6% too low.  You put housing in the CPI; the CPI would have been about 8 or 9%.  Instead, interest rates were 4 1/2%, so there should be no wonder that speculation in homes was running rampant when interest rates are that low.  On the contrary, people today say inflation is going through the roof, but you have to ask if it really is.  If you put home prices in the CPI, we now see something different.  The CPI would be barely flat here now.  This is what happens when you ignore asset bubbles and don’t put them in the CPI.  This is what happens when you only look at prices.  It’s not even really possible to measure prices.  If you take a look at the CPI, this is a basket of goods and services, and there is not one representative basket.  Take for example someone who is on fixed income and retired.  They are going to care the most about gasoline prices, their heating bill, property taxes, rent prices, the prices of food, and medicine if they are not fully covered by Medicare.  If also, for example, you take the basket of someone with kids in high school heading for college, you see the cost of college education has doubled in the last ten years or less.  Someone can easily rack up $50,000 a year in expenses going to college.  Kids are racking up $100,000 in debt.  These are two different kinds of baskets, not one representative basket.  Therefore, the whole idea of thinking you can measure the CPI is flawed. 

Mike has a letter on his website from a lady named Stephanie who is retired.  To Stephanie, inflation meant her fixed income bought less.  She said she gets $938 from Social Security, which is what she lives on every month.  She has a cd that has $16,000 in it, which she was getting $75 a month on the cd at one time.  Short-term interest rates are now down to nothing, so she is getting nothing on $16,000.  She wrote Mike asking him for advice, and he responded saying that she was being clobbered by the policies of the Fed.  Not only did the taxpayers bail out the banks at their expense, but the Fed continues to do so.  When Bernanke holds the interest rates so low, he is hurting everyone on fixed income that has savings in cds or receives a social security check every month that buys less and less.  These are the people that Bernanke is hurting.  Norio Rabini just came out with a statement that he thought there could be quite a shaking up of bonds and yields in the next couple years.  Mike mentioned this possibility too, although it is uncertain.  He received an email recently asking this very question, and they got upset when he didn’t know.  However, the real answer is anyone who thinks they know is probably lying.  No one really knows.  We can put together our guesses and make a case why we think something is going to happen, but when someone says they know, they really don’t.  We don’t know what the Fed is going to do, or what the ECB is going to do, or what China is going to do.  Everything is intertwined.  China is having a government change in 2012, something of which not many people are aware.  It is going to be a very significant one.  The current leadership in China is focused on maintaining growth at any price.  It is highly rumored that the next regime coming into China is extremely concerned about the property bubbles.  If they slow the Chinese economy, slow the prices of commodities, drop oil, drop the CPI, and if Congress sticks to its policies of being fiscally conservative, we may still be running huge deficits, but we’re no longer adding to it.  This is a change in the direction of downward pressure on the dollar.  Last year the ECB thought Jean-Claude Trichet was going to hike prices last month, and he didn’t.  If the ECB doesn’t hike, this is going to put upward pressure on the dollar and downward pressure on the Euro.  All of these claims are being put out there, but most of the claims are lies; the people don’t really know.  However, Mike is very supportive of what Rabini said about there being a legitimate chance of a bond market revolt.  On Yahoo Finance Mike talked about this very thing.  He was on the air with Aaron Task and Henry Blodget and had mentioned it two weeks before Rabini had even mentioned it.  He said if they get another round of QE out of the Fed, there is a real risk of a bond market revolt.  However, if he doesn’t and delays off on it, if there is a stock market plunge, if Europe delays hiking, if Australia does rate cuts, China slows, and commodities come down, then we can see a flight to treasuries.  As of which one of these things will happen depends on where all the variables fit.  It depends on what China does, what the ECB does, and what the Fed does.  Only then can we have a more definitive answer. 

The Fed will attempt to inflate, but it would be better for us to bite the bullet and balance the budget.  Otherwise, there is a very big risk of what happened in Greece happening in the United States if the U.S. does not address its budget deficit.  Interest rates do shoot up, and this is a very real risk.  If we want to get back to growth policies, we need to balance the budget.  We’re already spending $750 billion on defense, and we could probably spend $100 billion and have enough defense.  We could also allow drug imports to come in from Canada, get rid of student loans, or kill the entire department of energy.  There are a lot of things we could do that would get this country back on fiscal track.  We can’t balance the budget in one year, but it is possible that someone can do it in 5 years.  There is not really a choice here.  If we continue on the current path of not tackling the deficit, then what’s going to eventually happen is something similar to what happened in Greece.  The path we’re on is unsustainable.  The sooner the Congress addresses this, the better.  The sooner they address it, the sooner housing, commercial real estate prices, and the stock market will be negatively impacted.  No one wants to see this happen; no one wants to see the short-term pain.  However, the long-term pain gets greater and greater just like what happened in Greece if we don’t address the problem. 

The U.S. has been following the path of Japan, which has had a 20-year run with their housing market.  It seems we are still on this path, and even if the Fed does manage to obtain a little bit more inflation, home prices will probably not go anywhere for a decade due to the deleveraging of consumers.  All the people out there who are thinking housing is at a bottom and better buy now should forget it.  We are not going to have hyperinflation, and home prices are going to be stagnant for a long time.  

To learn more, you can view Mike’s website at globaleconomicanalysis.blogspot.com, or type Mish in a Google search.  He talks about housing, interest rates, Europe, gold, silver, and the global economy every day of the week. 

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.

Mike Shedlock

Registered Investment Adviser Representative, Sitka Pacific Capital Management

(Full Bio)

This week Bruce is joined by Mike Shedlock.  Mike is a registered investment advisor representative for Sitka Pacific Capital Management, and he also has a fantastic blog site called Mish’s Global Economic Trend Analysis.  In his blog he talks about oil interest rates, housing, the IMF, Europe, gold and silver, and anything going on in the market.

Even though times are a little tough right now to be an investment advisor, Mike’s work is going very well as he says that they have a neutral market and a cautious stance.  Their mission at Sitka Pacific is to avoid the next decline.  They had a positive year in 2008, even though hardly anyone else did.  Even without being net short they had a positive year.  They don’t bet on the market going down, but rather they try to go to the sidelines, find some things they like better than others, and have huge cash positions.  This is where they’re at today.  For the last year the stock market has gone up, and they have more or less been on the sidelines.  NASMP was up 12-15%, while they were only up 6%.  They don’t really like the risk award setup, as they believe that the odds are good that another recession is coming.  They think the recovery is not real and is only based off of fiscal stimulus both from Congress and monetary stimulus by quantitative easing from the Fed that’s not sustainable.  Both are coming to an end, and the Republican Congress does not want to have anything to do with larger deficit.  Therefore, the fiscal stimulus is going to end unless things get extremely nasty.  Global growth is slowing everywhere.  In Europe, Australia, China, and the U.S. people need to be extremely cautious in terms of what they expect out of the stock markets.

Most of Sitka’s clients are in a capital preservation mode, as is Sitka themselves.  The few that aren’t have left, but in the downturn they actually added to their client database significantly because Sitka missed the downturn but no one else did.  They are starting to see a lot of things come together all at once.  Commodities are back into a bubble; housing still has a further ways to go down, and they have already seen housing programs established.  These include Cash for Clunkers and the various stimulus packages in housing.  As soon as the tax credits for housing ended, housing prices went back down.  To work with this, Sitka delayed things for a year expecting that home prices are going to fall to where they’re going to get anyway.  Prices are going to fall until price meets genuine demand, not artificial demand coming from Congress.  The very best thing that Congress can do for the housing market is to do nothing.  They need to let prices fall, let foreclosures happen, and let prices get to where there is genuine demand.  It’s then we can find a bottom.  The more Congress tries to delay this, the longer and further off the bottom is going to be.

According to Mike, “Things don’t get where they’re going in a straight line.”  This has a lot to do with intervention, which doesn’t change the ultimate direction but rather the timeframe in which something happens.  This is why being an investment advisor is very difficult with unknown intervention.  There are a certain set of people, for example momentum traders, who expect someone to catch every move in the market, both up and down.  This is not something Sitka can do and most likely cannot be done at all, but this does not stop people from trying to do it or wanting to do it.  The population tends to chase whatever the latest and greatest thing is right before it’s ready to plunge.  This happened with housing in 2005, and it happened with the NASDAQ in 2000.  Some people who were hesitant about NASDAQ all the way up from 1996 to 1999 decided right in 2000 that they were wrong and that the productivity miracle from the internet was real and they should get in before it was too late.  Too many people think this is what makes the top.  They think this is what made the top in 2005 in the housing market.  People believed that home prices only had one way to go.  Everyone had bought in.  Even people who couldn’t afford a house bought one anyway.  There was no one left to buy.  The pool of greater fools finally ran out.  This is one thing you have to be weary of as an investor.  The mood of a market can definitely be opposite of the future direction.  Things change very quickly.  In the aforementioned situations, it changed on a dime.  When it happened with housing in 2005, people were camping out and entering lotteries for the right to buy a condo.  This is how crazy things were.

Another topic is deleveraging, which is inherently deflationary.  Deleveraging means to pay down debt, so by definition deleveraging is deflationary.  At the same time, it also depends on your definition of deflation and inflation.  To Mike, deflation is a decrease in money supply and credit from mark to market, so according to this definition deleveraging has to be deflationary.  However, if someone looks at things in terms of prices and they ignore home prices, for example, seeing the price of crude oil and thinking there’s nothing deflationary about it at all, then they’re not seeing the whole picture.  Crude is rising because of peak oil, because of massive monetary stimulus in China, and also because of some quantitative easing by the Fed.  It’s only the last that’s inflationary.  What’s really funny is people complain about the price of a hamburger going up from $3 to $4 and look at the inflation, but they’re failing to look at what’s more important: the price of a condo falling from $200,000 to $35,000, or a hamburger going from $3 to $4.  It’s irrelevant compared to the drop in home prices.  Paying down debt is one part of deleveraging, but defaulting is also a huge part of it in real estate.  This is really where the deleveraging is happening because the lenders are not getting paid the amount they have on the books.  This is where Mike’s mark to market play comes in when he defines deflation as a decrease in money supply and credit mark to market.  For the last year, the banks have gotten away with keeping absurd valuations on the value of their assets on the books.  As long as the asset values on the books were rising, the junk bond market was going up and various things were happening that were inflationary.  Mike doesn’t think the market is going to let the banks get away with it forever.  The National Accounting Board, the Fed, and the FDIC have interfered with and delayed regulations 2 and 3 times now for the last three years on mark to market rules and valuing things on the books.  They have kept things on the books at inflated values.  As long as they were able to get away with it, we’re probably going to see another big credit scare where banks are going to have to mark some of the debt they’re holding on their books back to market.  The value is going to plunge; the ability of banks to lend as a result of that will plunge.  This is why banks are not lending right now.  Banks are capital constraint and capital impaired, and there is few worthy credit borrowers that want to borrow.  This is the deflationary backdrop; and we also have a deleveraging deflationary backdrop.  In a sense, it’s really about attitudes.  It’s the willingness and ability of banks to lend and willingness and ability of consumers and businesses to borrow.

There has not been willingness for businesses to borrow.  If businesses were expanding, we would see it in the job market and in loans increasing. Instead, what we are seeing is the value of the debts going up on the balance sheets of banks.  However, banks are not really lending and the market has temporarily suspended mark to market sanity.  Instead, we have a mark to nonsense prices that have inflated the value of the stock market.  For now, Mike believes that asset prices are going to plunge, commodity prices are going to sink, and housing prices have a further ways to decline.  Everything, including stock prices and junk bond markets, is back in a bubble.

One thing that’s also happening is consumers are becoming willing participants in deleveraging intentionally.  They have access to credit then look around and don’t want it anymore.  A lot of this has to do with people trying to refinance their homes at a lower rate.  They have to bring money to the table to get that lower rate because banks require a 20% down payment.  If they’re 35% in the hole and banks want 20% down, then they have to bring in 15%.  We’re actually seeing cash-in refinancing now rather than cash-out refinancing in homes.  This is another part of the deleveraging process that is voluntary.  People are doing it so that they can receive a lower interest rate on their house.  One of the statistics happening now in Riverside they have never had before due to never having encumbered owners is 71% of the transactions are either short-sales or lender-owned properties.  This means that 71% of the sales do not reproduce a buyer in the marketplace.  Out of 1,000 sales, we have lost 710 buyers for a period of time, buy you still have 1,000 houses to move.  This is the big challenge for California in that you have a lot of houses that should be on the market that probably can’t be placed on the market because there is not really an owner-occupant buyer.  No one’s willing to give financing to investors.  For example, Fannie Mae is not doing it, and banks are not doing it.  In some extreme cases, someone wanted to put down 60% or 80% down, and they could not get the financing as it was just not available.  It’s possible some small local bank might give financing, but the big banks are not interested.  This should tell you how capital constrained they are and how stuffed to the gills they are with mortgage debt that they actually want to get rid of but don’t know how.  We also have some new rules that say the banks have to take 5% of the mortgage and keep that at risk on their balance sheets so they can’t securitize all of it.  Banks don’t want any part of this either, so we have had an attitude change on the part of buyers and on the part of the lenders.  Lenders don’t want to lend, and people are waiting for cheaper prices because they think they’re going down.  It’s the confluence of these two attitudes and willingness and ability of banks to lend and willingness and ability of businesses and consumers to borrow.  If you were a business, you would have no reason to expand in this kind of environment.  Any business who wants to expand here should be turned away as a poor credit risk because they don’t know what they’re doing.

One thing that needs to happen is we need to get rid of Fannie Mae and Freddie Mac.  In the short-term, real estate will be affected by the cost of obtaining a mortgage being raised above a specific amount.  The amount that Fannie Mae would be willing to finance is going to go down.  Anyone who wants to buy a home above that amount is now in a jumbo loan instead of in a regular loan, and a jumbo loan has a higher interest rate assuming they can obtain it at all.  Withdrawing Fannie and Freddie from the marketplace will result in downward pressure on real estate prices, which is actually a good thing.  The sooner the prices get to where they’re going, the better off we are.  If this means that 30-year mortgages completely vanish, this is a tremendous thing.  People should not be buying houses unless they have an expectation that they can pay it off in ten years.  Obviously not many people have been able to do this and not at the prices that homes were at in the market.  Fifteen years is a more reasonable timeframe.  Instead, at the peak of the insanity, we were going into 40-year mortgages, others 50 and 100.  If you need a 100 year mortgage to make something affordable, then it’s not affordable.  Mike also feels the same way about 30-year mortgages.  There should not be any reason for there to be mortgages longer than 15 years.  If someone wants a 30-year mortgage, maybe they need to pay a lot more because there is a lot more risk.  With 30-year mortgages, people are not paying the principle back fast enough, so in any downturn that comes there is going to be less equity and more likelihood for someone to walk away from it.  Someone who had to pay the house back sale over 12 years, not counting those who bought right at the tip of the bubble, would have some equity built up.  In fact, over the course of ten years they would have had their house paid off.

In regards to accessing the equity for business purposes, Mike would tell people not to do it.  People thought there was free money available.  They thought since the home prices went up they should take the money out and invest in the stock market.  Very influential people actually advised others and wrote books telling people to take money out of their houses and invest in foreign equities because they only go up.  It’s all part of when you leverage in this way the risk goes up.  With the price destruction we have had in California, at some point the price of houses will be so far below replacement costs that there is no way to pencil in new construction.  We will probably have a double-dip in some of the inventory types because of the lack of buyers and the quantity of inventory.    Mike wrote a post three years ago titled “Structurally high unemployment for a decade,” which talked about how eventually when we get to the lowest possible price level, the job market probably will not return.  We will have consistently high unemployment for a long time.  At the height of the housing boom, we were creating about 250,000 jobs a month.  At the height of the commercial real estate boom, which lagged and kept the economy going due to the subdivisions and strip malls being built, they were only averaging about 190,000 jobs a month.  Unfortunately, the commercial real estate is not coming back as we’re not going to have another boom or another housing build out like we did originally.  It takes 125,000 jobs a month to keep up with birth rate and immigration, so even if we did keep up with it, we’re going to have an unemployment rate at 8% all the way up until 2014.  The unemployment rate right now would be 12% except for all the people who dropped out of the work force.  They dropped out a faster rate than was thought, hence why unemployment is not making new highs right now.  It’s at 9.1% right now and 10.1% at its high.  We have added hardly any jobs since then, so now oddly we are heading into another recession with no telling where it’s going to go.  We may not even lose that many more jobs.  Housing is already trailing towards the bottom, so there’s not much to lose if we head back into another recession.  However, you can still expect to see the unemployment rate shoot back to 10%.

To hear more from Mike Shedlock, you can visit his website at globaleconomicanalysis.blogspot.com.  For a quick search, type Mish in Google.

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.

S&P claims home prices fell 5.1% year over year. Freddie will allow servicers to reduce or suspend mortgage payments for up to 12 months for borrowers in disaster areas. AOL Real Estate is becoming one of the most popular real estate websites.

In The News:

CNN - “Home prices: ‘Double-dip’ confirmed” (5-31-11)

“Home prices hit another new low in the first quarter, down 5.1% from a year ago to levels not reached since 2002.”

Bloomberg - “Rising Housing Rents Risk U.S. Inflation” (5-31-11)

“For all the attention given to almost $4-a-gallon gas, the biggest threat to containing U.S. inflation may be the shift away from homeownership, which is pushing up the cost of leases across the nation’s 38 million rented residences. Shelter represents about 40 percent of the consumer price index excluding food and energy and accounted for almost one quarter of the 1.3 percentage point rise in April.”

Housing Wire – “Freddie Mac offers mortgage relief to Midwest storm victims” (5-31-11)

“For borrowers living where President Obama declares major disaster areas, Freddie will give servicers the ability to reduce or suspend mortgage payments for up to 12 months. Each case will be individually evaluated.”

Housing Wire – “Economists predict no immediate end to government debt purchases” (5-31-11)

“Economist Roger Meiners, a professor with the University of Texas at Arlington, says the day of reckoning has already come in a sense and some economists believe the government will have to continue buying debt regardless of whether or not it is referred to as quantitative easing. Several market observers say they expect a third round of government debt purchases.”

Orange County Register – “L.A./O.C. home prices down 8th straight month” (5-31-11)

“L.A./O.C. prices were down 0.29% from February to March after falling 0.96% the previous month. March’s dip was the smallest decline since September. L.A./O.C. prices were down — on a year-to-year basis – 1.66% in March. It was the fourth consecutive year-over-year drop but down from the 2.07% annual rate of decline seen in February.”

Inman - “Top 10 real estate websites in April” (5-31-11)

“After rising from 16th to eighth position to break into the Hitwise top 10 in March, AOL Real Estate continued to boost its audience in April, rising to fifth place with a 2.91 percent market share in the real estate category, Hitwise said.”

Realty Times – “10 Reasons to Sell” (5-31-11)

“Risk of Foreclosure. This is listed as number one because around one-third of all sales in today’s current market are distressed properties. Many homeowners find themselves in mortgages they cannot afford, whether due to job loss or to rising monthly payments. It is far better for their credit score to sell or short sale before they are foreclosed upon.”

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.

Sources:
March sales and price report
Southland Home Sales Still Slow, Prices Edge Down
Calif. Mortgage Defaults on the Rise
Self-Evident Truth in Market Variables: Longer Foreclosure Timelines
Fitch reports slowing subprime delinquencies, foreclosure sales
Sales up, Prices Down for Bay Area Housing Market
California March Home Sales
Jobless claims unexpectedly rise to 412,000 last week
Banks to Pay Victims of Botched Foreclosures in Settlement With Regulators
Feds announce partial settlement with ‘robo signing’ servicers
OCC Takes Enforcement Action Against Eight Servicers for Unsafe and Unsound Foreclosure Practices
2011 Enforcement Actions
Bill introduced to speed up short sales
http://www.realtor.org/press_room/news_releases/2011/04/speed_sales

Today’s News Synopsis:

Bank of America expects a 25% downturn in the mortgage origination market, and has laid off 1,500 mortgage workers. Standard & Poor predicts the new risk-retention rule will further depress the housing market.

In The News:

Daily Bulletin – “Casting a shadow: Housing market’s hidden inventory looms” (4-15-11)

“The shadow inventory is leading to the sentiment that any stability in today’s market is a false one, said Bruce Norris, president of The Norris Group, a Riverside-based real estate investment firm. Some delinquent homes will avoid foreclosure through loan modifications or short sales, but many will also go up for sale.”

Bloomberg - “Fed Policy Makers Differ Over Policy as Inflation Accelerates” (4-15-11)

“Fed Governor Elizabeth Duke said in Washington yesterday that rising commodity costs aren’t resulting from U.S. monetary policy and don’t warrant higher interest rates, while Fed Governor Daniel Tarullo said he sees no sign of inflation spreading more broadly. Richmond Fed President Jeffrey Lacker and Philadelphia’s Charles Plosser indicated they’re more concerned about prices, with Lacker saying the central bank must tighten credit before inflation gains speed.”

Housing Wire – “New Democrat Coalition unveils housing finance reform priorities” (4-15-11)

“The New Democrat Coalition wants to wind down Fannie Mae and Freddie Mac and increase private-sector involvement in the residential mortgage market, according to a new document the group released Friday. The proposal includes preserving access to affordable loans, including the 30-year, fixed-rate loan, and strengthening taxpayer protections.”

Housing Wire – “Bank of America lays off 1,500 mortgage workers” (4-15-11)

“Bank of America (BAC: 12.82 -2.36%) laid off 1,500 associates nationwide as the bank anticipates a 25% downturn in the mortgage origination market.”

Housing Wire – “Risk retention will produce higher quality mortgages, depress housing: S&P” (4-15-11)

“The new risk-retention rule will produce higher quality originations, as intended, but will also constrict lending and further depress the housing market, according to Standard & Poor’s.”

Jacksonville - “Bank gives man foreclosed Jacksonville house for free” (4-15-11)

“Perry Laspina was in the middle of foreclosure with the possibility of losing the house he owned in Jacksonville. Then the mail came one day in late January telling him that the house was his. Despite the $72,000 mortgage that he barely paid anything on, despite the foreclosure … the house was his.”

Realty Times – “Sell Your Home Now With These Tips” (4-15-11)

“That means that any and all pictures of your home should create web appeal — an instant attraction — drawing the buyer into your home for an in-person look. If your photos or videos are not properly composed with pleasant lighting and free of clutter and distractions, they won’t appeal to buyers browsing the web.”

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.

81 percent of respondents to a Pew Research Center’s survey believe housing is the best investment a person can make. California foreclosure sales increased 35.1% in March, according to ForeclosureRadar. Altos Research claims home sale inventory rose 2.97% last month. HUD is being sued over a rule requiring a property heir to pay the full mortgage balance to keep the home, even if it exceeds the value of the property.

In The News:

Mortgage Bankers Association – “Weekly Applications Survey” (4-12-11)

“Mortgage applications decreased 6.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending April 8, 2011. ”

Housing Wire – “Investors eager, but hold no great expectations for economic growth” (4-12-11)

“Investors are jumping back into the market and reducing their cash holdings even as the overall economic outlook suggests the world economy is facing ‘below-trend growth’ and ‘above trend’ inflation, according to the Bank of America Merrill Lynch (BAC: 13.525 +0.26%) Survey of Fund Managers for April.”

Housing Wire – “HUD halts foreclosures on reverse mortgage spouses” (4-12-11)

“The Department of Housing and Urban Development directed its reverse mortgage lenders and servicers to halt foreclosures on the borrower’s spouse, according to a letter sent out last week. The American Association of Retired Persons sued HUD in March on behalf of three spouses of reverse mortgage borrowers. HUD changed a previous policy from 1989, changed in 2008, that said than an heir, which includes a surviving spouse, must pay the full mortgage balance to keep the home, even if it exceeds the value of the property.”

Reuters - “Housing still best investment despite downturn: study” (4-12-11)

“The survey by the Pew Research Center’s Social and Demographic Trends project found that 81 percent of respondents see housing as the best investment a person can make, despite a slump in prices that has knocked nearly a third off home values since 2006.”

MSN - “Some real estate agents feeling spring chill” (4-12-11)

“Spring typically is the year’s busiest season for residential real estate, but this year some normally upbeat sales agents are showing signs of nervousness as they confront sluggish growth and tough lending standards.”

DSNews - “Self-Evident Truth in Market Variables: Longer Foreclosure Timelines” (4-12-11)

“in California foreclosure sales in March increased 35.1 percent on a month-over-month basis, but rose just 10.5 percent on a daily average basis. Nevada foreclosure sales, however, bounced back strongly after falling in February, rising 109.5 percent even on a daily average basis.”

Housing Wire – “Mortgage industry workforce plummets 51% since 2006″ (4-12-11)

“The number of employees in the mortgage industry declined 51% between February 2006 and February 2011, which equates to a loss of 257,000 jobs. February 2006 marked the peak of employment in this sector at 505,000 individuals.”

Housing Wire – “Fannie, Freddie lenders to submit electronic appraisals in June” (4-12-11)

“Fannie Mae and Freddie Mac notified lenders Wednesday that a new system will be available June 27 giving lenders the ability to upload appraisals electronically.”

Housing Wire – “Housing inventory rises for spring selling season: Altos” (4-12-11)

“Home sale inventory was up 2.97% in March and up 6.83% over the three months ended in March, according to the Altos Research 10-City Composite Index.”

Orange County Register - “Who has too much power in America?” (4-12-11)

“A new Gallup Poll shows Americans think that lobbyists, major corporations, banks, and the federal government have too much power, while state and local governments, the legal system, organized religion, and the military have the right amount of power or too little of it.”

Looking Back:

One year ago, distressed home sales in Orange County were selling 34 percent under the typical market place. Fiserv estimated that home prices would not return to the past peak levels until 2025.

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.

Resources:

JPMorgan: Annual homes sales must average 5.5 million to absorb liquidations

It’s Official: 2010 is Second-lowest Year on Record for Homebuilding in California 

Ten indicted in California mortgage fraud scheme 

New-home sales increase in December 

Mortgage Applications Decrease in Latest MBA Weekly Survey

Mortgage rates inch higher, Freddie Mac says

GOP introduces bill to eliminate HAMP

Today’s News Synopsis:

The Commerce Department said GDP growth increased 3.2% in the 4th quarter of 2010. Freddie Mac reports 30-year mortgage  rates averaged 4.8% this week. A representative of the Federal Reserve Bank of New York expects the foreclosure process to continue to weaken the economy for the rest of the year.

In The News:

NAHB - “Remodelers Expect Market Gains During 2011″ (1-28-11)

“The latest National Association of Home Builders’ (NAHB) Remodeling Market Index (RMI) edged up to 41.5 in the fourth quarter of 2010, compared to 40.8 in the third quarter. An RMI below 50 indicates that more remodelers say market activity is lower compared to the prior quarter than report it is higher. The RMI has been running below 50 since the final quarter of 2005.”

Housing Wire – “NY Fed official sees foreclosure procees weighing down home prices, construction” (1-28-11)

“While many economists are forecasting continued recovery in 2011, one official at the Federal Reserve Bank of New York expects the foreclosure process to remain a drag on the overall economy.”

Housing Wire – “GDP growth accelerates in 4Q” (1-28-11)

“The Commerce Department said GDP growth rose an inflation-adjusted 3.2% in the final three months of 2010, up from 2.6% growth for the third quarter. Analysts surveyed by Econoday projected fourth-quarter GDP growth of 3.5% with a range of estimates between 2.9% and 5.4%. Economists polled by MarketWatch were also expecting GDP growth of 3.5% for the quarter.”

Housing Wire - “Trepp sees correlation in CMBS payoffs, what’s owed investors” (1-28-11)

“Trepp broke down the eventual fate of the $30.2 billion in CMBS loans that were due to pay off in 2010. It found ‘a tight correlation between a loan’s debt yield and the likelihood that a loan would pay off.’ Analysts found that 28% of the loans with yields of 8% or less managed to pay off. That increased to 43% of loans with debt yields between 8% and 10%, and ballooned to 75% of loans with debt yield higher than 14%.”

Bloomberg - “Mozilo Predicted U.S. Housing Collapse as Fed Overlooked Risk” (1-28-11)

“Former Countrywide Financial Corp. Chief Executive Officer Angelo Mozilo warned as early as 2004 of a possible housing-market collapse while the Federal Reserve overlooked the threat a year later, according to documents released by the Financial Crisis Inquiry Commission.”

Realty Times – “Bond Yields Rise and So Do Mortgage Rates” (1-28-11)

“30-year fixed-rate mortgage (FRM) averaged 4.80 percent with an average 0.7 point for the week ending January 27, 2011, up from last week when it averaged 4.74 percent. Last year at this time, the 30-year FRM averaged 4.98 percent.”

Realty Times - “Property Rights of Unmarried Couples” (1-28-11)

“When a married couple gets divorced, the distribution of their marital property is governed by Domestic Relations law. But, what happens if unmarried property owners call it quits?”

Looking Back:

One year ago, the 30-year fixed-rate mortgage fell by 0.01 percent from the previous week. Research from RealtyTrac showed that California and Florida accounted for 17 of the nation’s 20 worst housing markets. The Federal Reserve declared that the U.S. economywas in recovery.

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.

I Survived Real Estate 2010 (Full Bio)

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

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

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

We are in a bond bubble. This is what concerns Thornberg the most right now. We had a recent GDP revision. Savings rates are close to where they should be. Employment is flat, but incomes are growing. The panic over a double dip this summer was ridiculous. We are on a path to recovery, but we have created so much fear that we now have a bond bubble. We have ridiculously low rates. The spreads between returns on equities and returns on bonds have never been this wide. Either equities are severely underpriced or bonds are severely overpriced. Thornberg believes the bonds are overpriced, and eventually people will figure that out. If rates shoot up quickly, then we will have a big problem.

Real estate affordability is incredible right now. If interest rates went up to normal levels then affordability would go back to normal levels as well. Interest rates could spike from inflation, fears over the federal deficit, or if a sovereign debt crisis in Europe causes risk rates to increase. The problem is that we are relying too much on low interest rates right now.

Joseph Magdziarz spoke next. Despite the problems Joseph’s industry has had with appraisal companies, his industry has experienced growth. Appraisers had some success with getting legislation passed, such as bill 4173. When October 18^th passes, AMCs will have to pay appraisers reasonable fees. Traditionally, when the AMCs have been used, they took all the money from the appraisers. Not all AMCs are bad, but some of them took advantage of people. AMCs were a risk to consumers, because consumers weren’t receiving the best appraisers.

When Joseph is asked to appear before congress, they usually have specific issues they want addressed. These issues are usually related to consumers.

Sean O’Toole was asked to give his perspective on whether or not we’ve done a good job of solving the real estate problem. The Fed has kept a balance sheet on the U.S. and it’s households. We went from $4.5 trillion of mortgage debt in the year 2,000 to $10.5 trillion at the peak. If you look at the number of new homes added, and the increases in income, we should not have gone about $6.5 trillion. That means there is $4 trillion in excess mortgage debt. Sean believes that in the best case, we have only dealt with $0.5 trillion of that excess debt. We have a long way to go before real estate is healthy again.

Sean wrote an article called Foreclosure Roulette: A Game of Extend and Pretend. Sean does not believe that the current levels of REO inventory accurately reflect the delinquency levels. We had foreclosures moving equally with delinquencies until 2008. That was when Paulson said that we shouldn’t force banks to sell these assets in distressed markets.

Currently, our REO statistics do not mean a lot. We have been bouncing around in a range that has nothing to do with delinquencies. The FDIC has loosened up on forcing lenders to get bad assets off their books. Since we changed these rules, foreclosures have stalled.

The treasury has admitted that their strategy for dealing with foreclosures was to not allow them to come out at once. They wanted to slow the process down. A new program is coming out in Fall, which will incentivize banks to write down principals on mortgages. That may have some success. Thornberg believes there will be 3 to 4 million foreclosures coming out. Sean O’Toole believes there will be more than 4 million.

Sean believes these new programs are causing problems. These programs are meant to continue the “extend and pretend” strategy. The government is telling us “hold on, we have HAMP to solve the problem”. HAMP had design flaws from the beginning, and Sean does not believe it was intended to be successful. The government then came out and said, “Hold on, we have HAFA”. HAFA also had design flaws. It was not intended to be successful. Sean will not be fooled by HAMP’s new principal balance reduction. Fannie Mae claimed it would damage people that strategically default.

The average foreclosure in California is $150,000 dollars upside down on a $250,000 house by the time it reaches the courthouse steps. The banks and the government do not want people making the right decision for themselves by walking away. This is why Fannie Mae recently encouraged banks to push through foreclosures. The banks are not actually going to push through foreclosures, but they want people to think they will, so that they won’t strategically default.

Tommy Williams does not understand how we can give principal reductions to people who were irresponsible, but give nothing to the people who were responsible. This will not work in a capitalistic society. Tommy believes that Bruce’s idea was fantastic. Right now, the average American can afford a $150,000 home. However, people are trying to sell their home for over $300,000. All the mortgages in the United States that were selling for over $300,000 equate for 5% of the market. Right now, they are still selling homes for above affordable rates, and they are building homes that are still too big.

After 1992, we built 75% of what we needed for our population growth. The biggest problem is that we’ve been building big homes in the Inland Empire, but what we really need is lower rent apartments closer to urban areas. We are going to need more housing in 2011 and 2012, but not bigger homes. If builders still to smaller town houses, then they could make a living. However, if they do that, the builders will have to deal with zoning boards, local governments who are cashed strapped who want you to fix their streets, sewers, power lines and their pensions.

In 2008, there was very little capital available for commercial properties and there was little liquidity. In 2009, some of those capital sources started coming back. We have more capital available to us today, than we have had over the last 2 years. The problem is that many properties do not qualify for financing. Some properties have leasing issues, and no one will finance those. Most of those nonperforming properties are still in the hands of the owners. The banks will not foreclose on those properties, because they do not have the ability to write those properties down. We are starting to see the banks make progress now, because the Fed is giving the banks 0% interest rates on loans. The 0% interest allows the banks to make a small profit, which allows them to then foreclose on those properties. Dealing with this extended process is going to take even longer, because no one is putting a gun to the banks’ heads.

In the 90s, the rules were different. The FDIC forced lenders to give a notice of default if someone is 100 days delinquent.

In 2012, many commercial maturities will come due. A lot of that debt is from commercial mortgage backed securities. That debt is being held by bond holders. That debt will not be refinanced. A lot of non-refinancable loans are being pushed out for 2 years. CMBS is coming back, but values are not coming back. In 2006 -2007, we made 80% loans on an inflated value. Those properties may be 60 to 70% of what it was in 2007, but it still has a loan worth 110% to value. Just because we have money available to refinance doesn’t mean we can, because we don’t have the values we need.

Thornberg believes that if the people who own this debt just “close their eyes and hold their nose” until 2014, then they will be ok. Daniel says that is just the game that these debt holders are hoping on, but it may not work.

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: Adrenaline Athletics, Benton Investment Group, Community RE-Invest Group, Delmae Properties, Elite Auctions, Entrust California, Everlast Photography, Inland Empire Investors Forum, Keystone CPA, Landwood Title, 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, Rick and LeeAnne Rossiter, San Jose Real Estate Investor Association, Starz Photography, Summit Solutions, Tony Alvarez, Wealth Point, and Westin South Coast Plaza.

The MBA’s weekly survey shows mortgage application volume decreased 0.8%. Fannie Mae’s mortgage portfolio increased 3.8% year over year. Harvey Rosenblum of the Dallas Fed predicts the recovery will be long and slow. Witten Advisors reports more people are moving to multifamily housing.

In The News:

NAHB - “Housing Tax Incentives Benefit Younger Households the Most, According to Recent NAHB Research” (9-28-10)

“New research from the National Association of Home Builders (NAHB) reveals that the benefits of housing-related tax deductions, such as the mortgage interest deduction, generally decline in value as individuals age.”

Mortgage Bankers Association – “Mortgage Refinance Applications Decrease Despite Decline in Rates in Latest MBA Weekly Survey” (9-29-10)

“The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending September 24, 2010.  The Market Composite Index, a measure of mortgage loan application volume, decreased 0.8 percent on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index decreased 1.0 percent compared with the previous week.”

Housing Wire – “It’s time: House opens the floor for testimony on future of GSEs” (9-29-10)

“Written testimony started to be released yesterday evening, with Michael Heid, Co-President of Wells Fargo Home Mortgage and Michael Farrell, CEO of Annaly Capital Management providing previews of their written testimony. Both will argue for a highly diminished role of the GSEs in the secondary markets.”

Housing Wire – “Fannie Mae mortgage portfolio continues expansion, up 3.8% in August” (9-29-10)

“While Fannie Mae issuance declined in August, the government-sponsored enterprise’s gross mortgage portfolio increased 3.8% from a year ago. The Fannie Mae gross mortgage portfolio reached $809.1 billion in August, up 3.8% from $779.4 billion a year ago. It did drop at a compound annualized rate of 4.1% in August.”

Housing Wire – “Dallas Fed: Economy still at tender stage with low inflation a concern” (9-29-10)

“‘It is going to be a long, slow recovery,’ said Harvey Rosenblum, executive vice president and director of research at the Federal Reserve Bank of Dallas. In fact, it doesn’t yet feel like the recession has ended for many because of the slow growth. Rosenblum spoke at a real estate symposium sponsored by the North Dallas Chamber of Commerce.”

Housing Wire - “US Treasury plans to sell Citi preferred stock” (9-29-10)

“The U.S. Department of the Treasury announced today intentions to sell trust preferred securities (TRUPS) it acquired from Citigroup (C: 3.92 +0.97%) during the bailout in 2009. The sale will constitute a complete net profit gain under the Asset Guarantee Program. Citi will not receive any of the proceeds.”

Housing Wire – “Witten Advisors: Multifamily sector gets boost as move-ins rise” (9-29-10)

“If there is a beneficiary in the real estate downturn, it has been the multifamily sector, according to a market firm that studies the space. Net move-ins, nationally, in the second quarter, are higher than they have been in the past 15 years when comparing on a second-quarter basis, said Ron Witten, president of Witten Advisors, a Dallas-based consultancy that serves apartment developers, investors and lenders nationally with a focus on 40 major apartment markets.”

Orange County Register – “Forecast: O.C. home prices up 2.2% in year” (9-29-10)

“Orange County home prices will rise 2.2% in the year ended September 2011, according to the latest forecast from housing tracker Veros from Santa Ana.”

Looking Back:

One year ago, C.A.R.’s sales and price report showed that single-family home sales increased 9 percent in August. The Standard & Poor’s/Case-Shiller home price index showed that prices were down 13.3 percent from 2008, but declines have slowed. Fannie Mae announced that the number of homes behind on payment or in foreclosure had increased by 4.17 percent. Also, FDIC Chairman Sheila Bair proposed that the agency should get banks to prepay three years of fees to help cover the cost of bank failures, expecting a $100-billion cleanup bill through 2013.