The Norris Group Blog

California Real Estate Headline Roundup

Posts Tagged ‘inventory’

« Older Entries

By Bruce Norris .

Rick Solis Joins Bruce Norris on the Real Estate Radio Show #330

Friday, May 17th, 2013

Rick Solis

Appraiser and Investor

 streamitunesdownloadrss

Bruce Norris is joined this week by Rick Solis. Rick wears a lot of hats. He is an investor, an appraiser, hard money lender, a landlord, and on occasion he puts on his teacher’s hat.

Bruce asked what Rick’s least favorite thing is out of everything that was just mentioned he did. Rick answered that it was being an appraiser, which surprised Bruce. Rick said he does this to pay the bills, but when the other things give off enough cash flow he usually does not do the appraisal. Rick said he stopped doing appraisals from 2004-2008. In the next stretch after things mature, he may be able to exit the appraisal definition and possibly even the landlord definition. Rick said he probably dislikes the landlord duty even more than the appraisal. The appraisals are a challenge, and he used to enjoy them a lot more before 2006.

Bruce asked what has changed and if this change has continued into today. Rick said the main changes are that the lenders are so skittish now that they are back in their 2008/2009 mentality. The requirements for the appraisal are a lot more time-consuming, and it seems that no matter what they get they are never satisfied. Rick used to spend four hours on an appraisal report, give them 3-4 comps, and everybody was satisfied. Now he spends close to 7-8 hours on way more comparables, documentation, and photographs. Despite all this, they are still not excited about it and want more.

Bruce wondered if there was a review process that could trump his appraisal pretty easily. Rick was actually talking with an underwriter about this since he wanted to find out, and she said that on every transaction they do they get an automated appraisal done on the computer. These are similar to what Zillow does, although a little better quality. They get to double-check the appraisals, and if there is too much of a disparity between the computer-generated report and the appraisal report, then they order a review appraisal. A lot of times if the first appraisal going in is not extremely strong with 9 or 12 comps, then a lot of the time the review appraisal will come in low and squash the deal. If the review appraiser comes in low, he must be right. Rick said this is not just the case with the review appraiser, but it is also the lowest appraiser in the transaction who is right. If they have multiple appraisals and a review appraiser, the lowest person wins.

This is not the case with the AVM (automatic appraisals) since these are double-checked. However, with the AVM there are also comparables with which the underwriters will review and question them. This is a huge red flag. Bruce wondered if they are mostly concerned about the possibility of them buying back loans if they go into default. Rick actually asked his underwriter about this also; and what she said was after the loan ends up at its final destination, at various times throughout that transaction they will also pull a computerized AVM appraisal. At any point during that time if there are issues, then it does come back on the original lender and appraiser. She said this is not as big a concern for them right now because property values are increasing. This means the AVMs 2-3 months from now will be higher than the AVMs today. It is not as much of an issue now, but in 2008-2011 it was an issue.

Bruce said he would imagine prices going up is going to start affecting a lender’s relaxing standards. Rick said this was what occurred last time. Bruce said it has also happened every time he is aware of, but this time we almost have the only lenders available are Fannie, Freddie, and FHA. Bruce talked to another gentleman when he was trying to understand the ability for an FHA borrower to be qualified. He has a company that is stricter than some other companies. Even though they work with all FHA loans, they have a source where they go to where that company does loans that others won’t do. This is driven by the fear that they may have to buy back the loan, not that FHA would say no to the loan. It is all about how many of them they are going to have to hold for the duration of the loan. Enough of those buybacks will put a small company out of business. Their credit line is being used up solely on existing loans instead of collecting points.

When you have price increases, it seems like that solves most of our problems. Bruce asked Rick what he is seeing as far as price movement and if it is more uneven than normal. When he is appraising properties in a market before it is moving up, it seems like it floats most boats at the same time. Bruce wondered if this is happening or if things are skewed. Rick does not do a lot of the high-end things, but on the low side it is all moving up and moving up fairly rapidly to even 3% a month. In some areas he is even seeing huge shifts. Moreno Valley just did one, and the closed sales are at 175, and they all closed. Everything in escrow was around $10-$15 grand higher than that, and they all went into escrow relatively quickly. This makes Rick think they are going to close fairly close to the listing price. The few active listings that are available are even way higher than that at $200,000+. He is not even talking about 2,000 square feet anymore, but rather 1300-1500 square feet. The active listings are literally close to 20% higher than the ones that closed in March.

At the last bootcamp where Rick helped out, Bruce happened to pull Moreno Valley $150 and under. In, for example, the thirty-day period there was 90 closings in that price range, there were 130 pending and 12 available listings. This is less than a week’s inventory. Bruce does not know how many of these pending sales are going to close, but when you have 12 available listings then you are going to start moving to the next available price range, $175-$200, pretty easily. The 12 all seem like they are much higher than everything else, and they are just either waiting for the market to catch up to what they want or are waiting for somebody to get so desperate that they are going to pay it. The other thing strange about one done in Moreno Valley was that out of the six comparables, four of them were cash sales all at high end values. It was worth $175, and they were paying $175 in cash.

Bruce asked Rick if he happened to notice which investors were local and which were wearing a hedge fund hat. Rick said he did not, although Bruce thought there would have been some of each. However, Bruce thinks the majority of them are being bought by private people as opposed to hedge funds. Rick worked out some comparables, one in Torrance, the second an individual out of Arizona, and the third a private family out of Temple City. What is the most interesting is that these are all far away and not even local.

When Rick says he is required to have 9-12 comps, Bruce wondered if this is commonly available at this point. Rick said he is actually not required to have this many; but they are only required to have four or five. The nine comps he uses for comparables allow the appraisal goes through the transaction with no issues and nobody comes back to him. There is no review appraiser that is going to put that level of effort into smashing the appraisal or cutting the value. You can usually get by with 6, but if there is any question, it is a top of the market sale, and you are having trouble justifying the transaction, then he will put in a couple additional pending sales. He can then document the ones that went into escrow in a week, the listing prices, how close they are. He will then go the extra mile, which costs an extra hour or two with each transaction to make sure the appraisal does not have any issues down the road. If he does not do this, then there is a good chance the people will come back at him and make him spend the extra hour or two anyway.

Bruce asked Rick if he sees a lot of price movement in Moreno Valley, specifically $200,000 and under, then is this true for Moreno Valley at $400,000. Rick said no, and it seems like $200,000 is the cutoff right now. However, it probably will not be the cutoff by the end of the summer. Bruce said something interesting they run across a lot in the boot camps is that you have a 1500 square foot house selling for $200 grand and a 2200 square foot house selling for $230. All of a sudden, you end up asking how much the extra square footage is worth. It usually comes down to $20-$30 a foot. Rick said he has seen this many times, especially in all of the low income, lower-priced areas. The bigger houses usually price around $230; but if you want an even bigger house that is around 5-6,000 square feet larger, then it may go up $10-$15 grand.

The other possibility is getting the standard home where the more the market is willing to buy in that area, the less you get back. Bruce does not remember this holding true in years where you really had established bull runs. In the years 2003-2005, it seemed the square footage was bonused a lot larger. Rick said this is supposedly true in the years 2003-2005; but in going back to approximately 1989, in most of those years they were either gradually dropping or flat. During those timeframes, square footage is not worth as much. Rick said that during the boom times people are willing to pay a lot more.

Bruce thinks the next price range that will have that experience will be the bigger homes and that investors will move to some of that inventory. It would not be a bad plan to loan up on everything now while you do not have to pay a whole lot extra. You could then get a premium for it 2-3 years from now. The only drawback is that it costs a lot of refloor and repaint it every time a tenant moves out. This is the downside of the bigger properties.

It will be interesting to see what builders end up building this time. The rumor was they were going to build a scaled-down house, but he doubts it. Rick thinks there is a huge demand for things that are below 2,000 square feet from 1200-2,000. He says the land, permit fees, and everything the government adds on is so expensive that they really cannot build a 1400 square foot house and make it work. However, there is huge demand for this if they can. The profit at the end of the day is what they are going to look at and ask why they would build a 1300 square foot house when they can build a 3,000 square-foot house. The lot with all the permits and everything costs the same $150 grand for them, whether it is a large house or small. You can see that this will probably not change if they can sell it.

What it will do is delay the timeframe for them to be able to start it. You cannot pencil these homes, yet as far as construction costs you are only getting $20-$30 a foot or less. For the extra 1500 square feet it is hard to build this. This is kind of a shame since there is a huge demand, especially for the 55+ crowd, for a 1-story house or condo that is less than 1800 square feet. When that type of inventory hits in an area where a lot of that type of borrower wants to live, they go on a huge premium. This is especially true if it is a 1-story condo. This will sometimes sell for $50 grand more than a much larger two-story unit right next door. He especially sees this in Glendora, Upland, Claremont, and other areas where the retirees with no children want to live. They just do not build this anymore since this is a product with a huge demand.

Bruce wondered about the Moreno Valley inventory and where it all was a year ago. Rick said it was 30% lower, possibly even more. He also wondered what would be the equivalent price range in Corona where you are having the explosive movement, and then you top out to where the movement is not so great. Rick said Corona is doing well also, but he does not think prices are escalating as rapidly as Moreno Valley. When he did his last comparable in Corona, it seemed like they were going up closer to 2% a month. Everything in Moreno Valley looked like three. This is on everything lower-end in Corona; he is not talking about a 4-5,000 square foot mansion but rather everything below 2500 square feet.

With the square footage he just mentioned, they recently bought a property at a trustee sale they thought was $400,000 six month ago. They bought it for $325,000, but they had a difficult eviction that was going to take six months. They listed it for $500, and it went pending with two all-cash offers in one day. What’s funny is this is like what a quadrant four bonus is: it is anything that takes more time.

Rick owns a fair amount of properties in the High Desert, mostly Hesperia and some of Victorville. Bruce wondered if any of the hedge fund activity affecting his ability to collect rent as far as higher rents go. Rick said they have not been able to raise rents since they started buying in 2009. Lately in the last six months, they have had to drop them and have noticed that there is a lot less tenant selection. When something goes up for rent, instead of having fifty interested people he may have ten. The quality of this ten is pretty low since they are a lot worse than they were ten years ago. When drives through this area either to buy something or look for vacant houses on which he can write numbers, he notices a lot more rent signs than he did a year ago. Since last summer it has been a lot more challenging, and there are no rent increases coming in the immediate future. Just like Moreno Valley, prices up there have also been rapidly escalating.

Bruce asked Rick what he thinks the main cause is of all that is going on with properties. Rick said he thinks it is similar to Moreno Valley in which they have been rapidly escalating. Bruce wondered what the main cause is, to which Rick replied it is a lot of investors flooding in trying to get whatever they can. He does not think there are a lot of owner occupants up in Hesperia as well as in Moreno Valley. There are a lot of cash buyers paying retail, some even paying a little more than retail.

Bruce asked Rick if he thinks inventory levels will be radically different a year from now. He doesn’t think so since it seems like inventory fluctuations are slow. They may be a little higher than now. Once people who started buying in 2009 and 2010 realized they had enough equity to sell what they had instead of living in what they just barely qualified for in 2009, selling it, walking out with a big chunk of cash, and buying something they really want that they will start buying. This is when things are really going to start picking up and prices start going through the roof. A lot of times Bruce hears others say that when those people that are upside-down receive equity from selling, then there is going to be a block of inventory. However, in the next minute they will also become buyers. Rick was surprised that the realtors are not out in force. If he was a real estate agent he would be knocking on every door in Moreno Valley, Fontana, Rialto, of anybody who bought anything between 2008 and 2011. These people all have equity now. This may not be the exact area they wanted to end up with, but they at least ended up with starting somewhere so they can have enough money to move on elsewhere. They all have $40-$50 grand to work with and the rates are lower, so they probably get the same payment for a much nicer home in the area they want.

Rick did very few appraisals prior to last month, in fact almost none to where it was a double transaction. In this situation somebody was selling to buy something else. Prior to 2006, almost 100% of the sales he did were this exact situation. The owners have mostly been short sale along with a lot of investor resales and first-time buyers. There are not too many REOs anymore. On the hard money loan side, Bruce wondered if the private sellers are catching up to short sales. Rick said it almost seems like 1/3 REO, 1/3 short sale, and 1/3 private party.

Bruce asked if Rick saw similar price movements in LA and Orange County. Rick does not work these areas as much, but with the few he did it seemed like it was not as rapid as Moreno Valley. This is usually the case with the higher-end things. The lower-end things in Moreno Valley will just shoot up like crazy. Everything in LA County seems to be 1 ½ – 2% a month for the entry-level housing. This is still at 18-24%, which is amazing. Rick never thought he would live through another time period like this in his lifetime. Rick is really betting that Bruce is right, and he was really happy to hear his opinions. Bruce said what is important is he does not really draw conclusions and then try to prove them.

Rick bases a lot of decisions on inventory levels. When he sees that inventory is tight and everybody is scrambling to buy something, he gets very excited. Bruce wondered when the last time Rick saw these kinds of inventory levels was. He answered that it was almost never, although possibly 2006. Back then we had already spent all of our room as far as affordability. It seems we have a long way to go before we get to anywhere near the house payment of 2006. This is an interesting point he makes because it is important to realize that this is where it could be over. However, we usually take a long time to get there. It will be very interesting to see how long it takes us this time. Rick said it seems right now they are going up as rapidly as they were going down, which is amazing. They were dropping 3-4% in 2008-2009, and now it seems they are going up at that pace. What happens is you have people who build equity at very quick paces to where they can become move-up buyers. This is when things get really good for the realtors, the title companies, escrow companies, everyone. This feeds on itself when afterwards everybody goes out and starts buying things and it begins to pick up more.

For the research on the report he is writing, Bruce looked through the history of magazine covers. It always lags what is next, but in 2005 you had a picture of a guy hugging his house on the front of one of the magazines. This was exactly how we felt about real estate, and Rick is glad to see people are feeling the same way now. They just came out with the first “Real Estate is Back,” so we are not hugging it yet but it won’t take long at all before we do. This is especially true with all the social media we have and the way everyone talks with each other. They are starting to find out how difficult it is for their family and friends who are looking to find things, and we are trying to get out at the same time.

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

Tags: , , , , , , , , , , , ,
Posted in News, Radio | No Comments »

Rick Sharga, Vice President of Carrington Holding Company, LLC, Joins Bruce Norris on the Real Estate Radio Show #329

Friday, May 10th, 2013

Rick_Sharga

 

Rick Sharga

Vice President of Carrington Holding Company, LLC

(Full Bio)


 streamitunesdownloadrss

Bruce Norris is joined again this week by Rick Sharga. Rick is the vice-president of Carrington Mortgage Holdings and one of the country’s most frequently quoted sources on foreclosure, mortgage, and real estate trends. Rick has appeared on every major network and news show in the country, and he has even briefed government organizations such as the Federal Reserve and Senate Banking committee on foreclosure trends. Prior to being with Carrington, Rick was senior vice president of RealtyTrac, which is responsible for marketing and business development.

Bruce and Rick touched on the subject of low interest rates and affordability. Bruce heard Leslie Appleton-Young do a talk and mention that these interest rates are at 50-year lows. Bruce asked her where she got these statistics from, and she said it was from one of the data providers. Bruce called the provider and asked them where they got their information, and they told him that was as far back as their data went. Bruce thought this was an interesting comment since sometimes we really don’t have data that goes far back enough. He and Sean O’ Toole went to Washington D.C. to the Library of Congress and pulled up microfiche from 1850 to the present. They looked at the Sunday advertisements for real estate interest rates. No one alive has seen these interest rates.

Bruce said this was all interesting since for him this sets off an interesting scenario regarding affordability. You have had a lot of price increases, but the affordability is still very high. Even with the price increases we have seen over the last year to 18 months, we are really only back nationally to 2003 price levels. Essentially, an entire decade of home appreciation vanished. LPS and CoreLogic both put out recent reports on affordability; and the LPS study suggested that if interest rates don’t go up, with current income levels prices could go up almost 35% and still be within the normal range of home affordability levels. CoreLogic’s report was similar in that they said home prices could go up another 22% even with a marginal rise in interest rates.

It clearly is an amazing time to be able to buy in terms of affordability. The catch is how few people how few people actually qualify for the loans. This is a little bit of a Catch-22, but what is interesting is that it usually comes around as loan programs do not produce losses. Bruce said he would think that when we look back at 2011/2012, we are going to discover that was the safest batch of loans ever written. The performance we have seen on loans in the last 2-2 ½ years is better than historic averages. The delinquency states of loans after twelve months are below 2% for the last three years’ worth of loans. Normally, you have a percent of your loans in foreclosure and about 4% that are delinquent. They are performing roughly twice as good as you would expect them to perform.

Bruce said you are also given a ratio because normally the ratio is two delinquencies for every foreclosure. When you have price increases, those delinquencies very rarely result in a loss. What fed some fuel to the real estate boom back in the early part of the 2000s was that home prices were rising ridiculously fast. However, even if somebody got themselves into trouble they were able to get out by simply selling the home at a profit. It really was not until home prices flattened out that all of this became as apparent as it was. You look at your portfolio and see that everybody is qualifying with their eyes closed and we still are current.

Somebody wrote a book in California about a crash coming, and it seemed pressing at the time. You look at the numbers and realize the funny part that you wrote it and don’t even know what a collateralized debt obligation is. The funny part is there were huge financial institutions in New York that were issuing them, and they didn’t know what they were either. It turned out there was only a handful of people who actually knew how to bet against the income that was so obvious if you took time to look at it. The solution that keeps coming out of a certain group of politicians is we need more regulations and regulatory control. The regulators missed all of this, and this was really one of the reasons why the fallout was as bad as it was. It was not just the value of the homes or the mortgages issued against the collateral, but it was all of the exotic financial products that were layered on top of it that really added to the enormous losses.

Rick has been at the forefront about reporting statistics, and he has talked about shadow inventory. Whatever definition you put toward it, which has changed over time, it does not really look like it is going to have the impact that we once thought. Rick said he has been wrong a fair number of times in making predictions, but early on he said shadow inventory was not going to be the big problem that everybody thought it was going to be. It just seemed incredibly unlikely that the entire financial services industry would suddenly release hundreds of thousands, even millions, of distressed properties into the market all at once. All we would see would basically be a smoking pit of rubble where there used to be a housing market.

If you look at the number of REOs that are not listed for sale, properties in foreclosure not listed for sale, and homes where the borrower is seriously delinquent, you see those numbers go from about 6 million down to about 3 million today. The housing market is very interested in buying distressed properties. There were about 1 million short sales last year and half a million REO sales. You can see that distressed inventory being absorbed by normal demand over the next few years without really causing any major repercussions. The flip side is that as long as we have that backlogged, it does keep housing prices from accelerating even more rapidly because there is always that shadow of distressed priced properties waiting to come to market.

What relieves this better than coming onto market as a distressed inventory is a price increase that does not make it underwater. The really amazing part is how few underwater borrowers are actually delinquent. The overwhelming majority of people that are upside down on their loans are still making their payments on time. With home price appreciation, a single percentage point increase puts a whole slew of people from negative equity to positive equity, and this relieves a lot of the pressure. In California, if we had a 20% price increase, half of the upside-down people would have no more problems. This is a huge deal and completely changes the dynamic in the housing market. It also has to change the payment patterns if there are going to be somebody who was thinking of defaulting. It is encouraging to see a price increase against your loan get pretty close to breaking even. If you have already hung in there for as many years as it has been upside down, you are still going to make the payment.

History will most likely indicate that the majority of people who did default on those kinds of loans probably did so because there was a life event. It was not just because they were upside-down, but something else bad happened. From what analysis they have been able to see, this does seem to be the case in most instances.

Bruce asked Rick what he would say was the main reason we have had price increases. Rick’s answer was simply that there is no inventory. This is classic supply and demand economics if you look at what is available on the market. In some California markets, there is less than a month’s supply of homes available for sale. For those people looking to buy and those looking to take advantage of today’s low interest rates, there is a lot of competition for so little supply. This drives up prices. The other factor is that the mix is changing a little, so we are not seeing 40-50% of the sales being deeply discounted distressed properties. We are starting to see some higher-priced properties moved as well, and this changes the numbers pretty dramatically.

Bruce said he was always looking for these deeply discounted properties in the last couple years, and he still does not understand the discrepancy between what he sees in the marketplace and what seems to be a big discount when your chart shows the difference between an REO and an equity sale. Those discounts do not represent the same discount as what is showing. Rick said Bruce is a lot more precise in his calculations, and he looks at one specific house compared to another specific house that is the same model and size. If you are looking at large data pools, what you wind up doing is blending everything together. Rick knows from working on some of the reports in the past that if you simply did something like adjusting the numbers for price per square foot as opposed to flat costs, you would end up with less of a discount. A condo was measured against a mansion, so the numbers became at least something of a gauge. The discounts were either going up or down, but most people did not get 30-50% discounts on property.

Rick said there are three ways you can get inventory in the market. You can have new homes, existing homes for sale, or distressed homes for sale. Nobody has been building new homes for the last five years, so new home inventory right now is at about a 40-year low. There are simply not a lot of new homes to go around at the moment. We have been in a position for the last few years where 25% of homeowners were upside-down on their loans. They did not want to sell those properties at a huge loss, so we do not have a lot of existing inventory on the market. Partly because of things like the robo-signing scandal and legislative maneuvers, we have seen foreclosures take much longer to process and get to market. Once they get to market, they are getting sold off pretty quickly. An anomaly right now is that all three categories of housing stock are at unusually low periods.

Bruce asked Rick if he sees any of this changing in the next twelve months. Rick said he does because we have seen foreclosure starts increase over the last couple months, and we have also seen building activity and housing starts both go up in the last few months. Rick said he could see a situation where a year from now we may have a little bit too much inventory for what is available in terms of loans. However, there is not enough where we will see a huge falloff in home prices. We are seeing a softening, then acceleration, then this starting over again. Bruce wondered if when Rick says we are avoiding a huge fallout in price that he believes we will have at least a flat price. Rick said he does not think we will continue to see prices accelerate at the rate they have been both this year and last year. Certain markets will probably be outliers, but Rick looks at it as being a saw tooth recovery. We are going to see prices go up and down, and generally trend upwards. However, it is not going to be a straight shot up.

Bruce specializes in a part of the country where this could be one of the outliers. We have seen the most highly accelerated prices in the markets that had the most precipitous fall off from the peaks. If you are looking at San Bernardino, Riverside, or somewhere else in the Inland Empire where prices literally fell off a cliff, you could see sustained home price increases in those markets. It is other markets that are going to behave a little more traditionally.

Bruce looks at the inventory levels, and he sees that they are a third of what they were a year ago. Bruce wondered how you would get this tripled since this would literally be to get back to a six-month inventory. To go from two to six you have to triple, and Bruce does not see how this is possible. Rick said it probably is not, so it will take longer for that area to normalize. You are starting to see some home building getting started again, and some of these distressed properties will come to market. The other thing that will happen over time is as home prices go up, fewer and fewer borrowers will be upside down. There have to be some borrowers in those situations who would have already sold their house and, if they had a chance, re-enter the market. You will most likely not see an immediate tripling, but over time you will see all three of those categories start to fill back up again.

Bruce wondered if they will be repeat buyers who will sell and go on to another home. This has not been happening in the last few years. Those people have been doing short sales, taking a loss, and they are gone. Rick thinks we are also going to see increased household formation, which is going to provide more renters and homeowners over the next couple years as parents decide it is time to kick their kids out of the basement. What is interesting is that there is definitely the generation that is dating everything late. What is funny is Bruce has heard people speak on how this generation does not even want what the other generations want. You come to find out that at about thirty, they do the same thing as the prior generation.

Rick said he remembers in the ‘60s you could not trust anybody over 30, and now he does not trust anybody under 30. This is also tied into employment. If you looked at the recent homeownership rate report that came out; the group that had the lowest percentage of homeownership was the 35 and under group. Rick believes only about 43% of them were homeowners. This was a huge drop from the national averages. Rick thinks they are waiting longer, but this is also the group that has the highest unemployment in the country. Until they are gainfully employed and in a job they want to stick in for a while, they are probably not going to be anxious enough to sign up for a 30-year mortgage.

Bruce asked Rick if he thinks college debt is as big a deal as people are saying. Rick said what is interesting is that the only category of consumer credit spending that is going on is student loans. Rick thinks it is a mitigating factor when it comes to the length of time it takes a younger person today to buy a home since they do have to get that college debt paid down. It is a debt that will follow them forever. Bruce asked why we can’t sell them the house with nothing down in California. Then they can own it for two years and pay off their debt. Have them start a business that has to hire five people. Rick said you could have them default on the house, then pay them $20-$30,000 to leave. Then they could use that to defer the student debt.

Bruce asked Rick what he expects in price movement. Rick said if you are looking at median prices nationally, we are probably looking at somewhere in the neighborhood of a 4-5% price range increase this year over last year. California is obviously going to be higher than this, but he does not have any specific numbers on what they are expecting in California. One of the categories Rick brought up was the construction of new homes. It is like when you have an interest rate hike and someone says interest rates went up ½ a percent. You say to yourself that it is all the way up to four, but to Bruce and Rick this is laughable to have something that is under 6. When you say construction of new homes is up 25%, it may be up this amount but it is down by 90%. It is going to take a long time to come back.

Rick Sharga said at the peak of the boom they were selling 120-150,000 new homes a month across the country. We are at a 40-year low in inventory and a 30-year low in sales. Whether we are talking about home price appreciation or new and existing home sales, we have to keep this recovery in context. This is not 2005 again. Home prices are all the way up to 2003 levels. New home sales are up to a third of what they used to be. Inventory levels are a third of where they are in a healthier market, and we are still going to sell 2 million properties less this year than we did at the peak. We are off the bottom and coming back. Although it feels better, we are not yet where we need to be to really call this a successful recovery.

Bruce asked Rick what he would call a successful recovery. Rick said the obvious ones are you look at sales volume as one metric, and until you are up over 5 ½, approaching 6 million units a year, it will be hard to believe that you would be at a real recovery. The other is you look at inventory levels. Until you have a steady 6 months’ supply of inventory, it suggests you are going to have a lot of the volatility we are seeing today. Bruce said the truth is you never have a 6 month supply of inventory once you start a price increase, specifically in California. This is why Bruce looks at charts and does not really know about caring about the average, but he can say that when you have price increases in California you have a real hard time having inventory increase.

Rick talked to the Chief Economist at a conference a couple weeks ago, and they have a metric out right now where they say the housing market is 56% back to normal. Somebody asked when it was 100%, to which he laughed. He acknowledged that it is really never at 100%. Sometimes it is at 101, other times it is at 73. It is kind of a floating number. The other number he looks at is on the distressed side of things. With foreclosure activity being where it is, it feels a lot better than it did back in 2010. However, we are still running at 3-4 times normal levels, so this is another metric to watch in terms of where the market is and how much further it has to go.

Sometimes the California Association of Realtors will do a presentation showing that Riverside is still in the 45 percentile of some type of forced sale, whether it is a short sale or a foreclosure. Normal is probably 5%, so even at the improved levels we are about 5-10 times that level. This shows the very serious localization of real estate trends. We talk about national tendencies, but it really comes down to a local market and what is happening in Riverside and San Bernardino. It is very different than it is across the border in Orange County, even if you split it between the north and south counties. Rick looks at broader market trends to see if everything is going the right direction.

What is interesting is that when Rick mentions us being back to 2003 price levels is if you convert that to a payment level, that is more revealing in the sense that you look now at what percentage of income is being required to buy the median price home. Getting back to the affordability discussions, it is probably about half of what it was at the peak of the real estate boom. The affordability levels are at, if not all-time lows, they are at least as good as they have ever been.

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

Tags: , , , , , , , , ,
Posted in News, Radio | No Comments »

The Norris Group Real Estate News Roundup 3/21/13

Thursday, March 21st, 2013


Today’s News Synopsis:

The FHFA reported home prices increased by a total of 6.5% throughout 2012 and up to January.  In a big news day for mortgages, 30-year mortgage rates decreased to 3.54%, while at the same time mortgage applications also decreased 7.1% from last week.  Unemployment claims by 2,000 to 336,000 last week.

In The News:

Housing Wire- “NAR: Housing inventory growing at woefully slow pace” (3-21-13)

“After Freddie Mac predicted this spring to be the healthiest in six years, the National Association of Realtors confirmed by saying February existing-home sales and prices point towards a healthy housing spring.”

DS News – “Home Values Climb for 16th Straight Month in February: Zillow” (3-21-13)

“Home values maintained their upward trajectory in February after climbing for the 16th straight month, according to Zillow’s monthly Home Value Index.”

Bloomberg – “House Prices Rose 6.5% in Year Through January, FHFA Says” (3-21-13)

“U.S. house prices rose 6.5 percent in the year through January, the biggest jump since 2006, as values surged on the West Coast and in the area including Nevada and Arizona, the Federal Housing Finance Agency said.”

Mortgage Bankers Association - “MBA Releases 2012 Rankings of Commercial/Multifamily Mortgage Firms’ Origination Volumes” (3-21-13)

“Wells Fargo was the top commercial/multifamily mortgage originator in 2012, according to a set of commercial/multifamily real estate finance league tables prepared by the Mortgage Bankers Association (MBA).”

NAHB - “List of Improving Housing Markets Rises to 274 in March” (3-21-13)

“The list of improving U.S. housing markets expanded for a seventh consecutive month in March to include 274 metros on the National Association of Home Builders/First American Improving Markets Index (IMI), released today.”

Mortgage Bankers Association - “Mortgage Applications Decrease in Latest MBA Weekly Survey” (3-20-13)

“Mortgage applications decreased 7.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending March 15, 2013.”

DS News - “First-Time Jobless Claims Edge Up; Trend Stays Positive” (3-21-13)

“First-time claims for unemployment insurance increased 2,000 to 336,000 for the week ending March 16—the first increase in a month—the Labor Department reported Thursday.”

Bloomberg- “U.S. Mortgage Rates Decline With 30-Year Fixed at 3.54%” (3-21-13)

“U.S. mortgage rates fell as concern that Cyprus’s debt crisis might worsen drove investors to the safety of the government bonds that guide home loans.”

Hard Money Loan Closed

Hawthorne, California hard money loan closed by The Norris Group private lending. Real estate investor received loan for $225,000 on a 4 bedroom, 4.5 bathroom home appraised for $420,000.

 

The Norris Group will be holding their Distressed Property Boot Camp from March 26-28, 2013.

Bruce Norris of The Norris Group will be presenting How to Make a Million Dollars Maximizing the Next 24 Months on Saturday, April 6 in Sacramento.

Bruce Norris of The Norris Group will be presenting his newest talk Poised to Pop: Quadrant Four Has Arrived at with High Desert Real Estate on Thursday, April 11, 2013.

Looking Back:

Sales of existing homes decreased 0.9% the previous month; although year-over-year they increased over 8%.  Mortgage applications were down 7.4% from the previous week, although mortgage rates were increasing slightly to above 4%.  In addition, the number of mortgages 30 days overdue decreased 5% month-over-month and 14% year-over-year.

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

Tags: , , , , , , , , , , , , , , ,
Posted in News | No Comments »

Tony Alvarez, the REOMentor, Joins Bruce Norris on the Real Estate Radio Show #314

Friday, January 25th, 2013

Tony-Alvarez


Tony Alvarez

REOMentor and Owner of Evergreen Properties

(Full Bio)

 streamitunesdownloadrss

Bruce Norris is joined this week by Tony Alvarez. Tony is the owner of Evergreen Properties. He buys and sells, buys and holds, manages his own properties, and has become one of the most sought after speakers and trainers.

Bruce asked what part of his schedule is now taken up with training and teaching or speaking in front of clubs. Tony said he has actually not been doing a lot of this because there was a moment in time when he realized he became a bit of a distraction. He was not focusing on his core business. He took some time off and reevaluated how his time should be spent. He refocused it on his own acquisitions and revamping his own management. A lot of things go sideways when you put your attention no something else, and teaching takes a lot of your focus and attention. There is also the follow-up. You teach a class, and there are students who come back and want more. Tony is the type who does the teaching and feels obligated to stick with them and explain everything to the last minute detail. Right now about 0% of time is being dedicated to teaching and 100% to acquisition. Their acquisition shifted into high gear now.

The year 2012 was split between training and gradually getting back to buying properties. Bruce wondered what Tony’s deal source was in 2012. He said it was primarily real estate agents. Going back to when Bruce spoke and showed a diagram displaying what was happening to the deals, he showed 40% of the transactions were falling apart. In Tony’s area it was more than 50% of the deals. Tony zeroed in on this and designed a whole marketing program to go after agents. It was not so much deals, but rather agents and asking them to consider Tony’s group. That marketing campaign included detailing a specific property they had pending and reminding them it was pending. There could potentially be a pending property that would fall apart over the course of 12 months. By the end, these agents were completely frustrated, especially in Tony’s area where the commission checks were not big bucks.

Tony even added a special Christmas advertising where he tells people he can save their Christmas money. If a deal falls apart, they will close it by the end of the year. He did it with humor, so a lot of the agents were responding and are still responding. He received a call on Thursday from Sabrina, his acquisition person, who told him to check his computer. He was told to punch in an address in Google. He typed in the address, and sure enough it popped up on Google. Sabrina told him to click on the house, and he saw a house built in the 1950s that was perfectly restored. He looked at, and before he could even get the words out Sabrina told him it was owned by the city. He asked her why she told him to look at it. Typically a house that has a market value of $100,000 will be listed for $165 or $170,000. The agent called Sabrina telling her the city had been sitting on it for over a year, and someone had just broken into the back and caused damage. They were looking to sell the house that very day. Tony asked what they had to do, and she told him they were going to drop it to $65,000 and want somebody to buy it that day. Tony did not want to pay $65,000 for the house, so she said they would have the agent make an offer and asked him if he was on board with it. He said he was, and she said she had already made the offer.

This is the kind of situation they are getting a lot of today. They are getting calls from an agent where something shifts, and the next thing he will do is have someone contact the city and ask what else they have. Tony focuses his attention on getting leads from agents, specifically the deals that fall apart, and that has been enough.
Bruce wondered if the REO agent has translated their abilities to the short sale world. Tony said they have, and in particular one guy will identify himself in the office as the REO guy. All his understaff became REO specialists at one time, and now their card says “Short Sale Specialist.” Tony no longer looks at the source of whether it is an REO. He calls himself the REO Mentor, but he never really looked at it as REO. He always looked at the agent. He wants the person who understands him, understands what he is trying to accomplish, and then makes the deal happen. He wants someone who can help him accomplish that close.

Usually the agent who ends up helping Tony is a repetitive source for a long time. Tony wants them to have these niches and wants them to be the REO, short sale, or probate agent to where they always have those motivated sellers who are not after your only home in the world for a sale house. Rather they should have these niches of as-is properties that would make perfect sense to get out of in time. Tony identified long ago that there is a very small group of agents that handle all of these stress situations, and in markets such as Riverside you have agents who do mostly probate, although some of them do it all across the board depending on the time of the market. Some of them specialize in one more than the other, but they also know each other.

Oddly enough people think there is a lot of competition between them. The real pros who have been around for a long time did not experience that feeling, even when they are starving. Instead, what they do is try to cooperate more. This year Tony received calls from a couple agents who said someone recommended him, so the agent called him in case he had something to sell. These are some of the agents who are representing some of the larger equity funds. Now they are looking to bulk buy, and they are looking with tenants. Tony wasted their time as long as he could and sold them nothing.

Tony has no complaints in the acquisitions part; he still swears by his relationships with agents. Bruce was actually the one who introduced Tony to marketing at a certain point in the real estate cycle, including going after deals absent the owners. In his career, these were the most profitable deals besides commercial, and they came directly from an owner/seller. Tony said they are structuring things now; and since they are a really small office with not a lot of people, he is trying to figure out how to not bring things into his office as much. The people who work with Tony are his girlfriend Dana, who handles all the bookkeeping, and Sabrina, who manages all the properties they have. She is also learning and helping Tony with acquisitions; and when she had called Tony earlier regarding the property she had two court dates to appear.

In one court case, Tony’s group actually sued a tenant in small claims for a back-rent. Another case involved an eviction. Tony said this has been his highest eviction year in probably two decades. Half of the two evictions he had this year was a Section 8-10. They had a problem with Section 8 and were going back and forth. Section 8 was trying to drop their portion and try to get them to pay more. Since the tenant was not paying them, Tony said they were seriously holding her feet to the fire on her end of the deal.

Regarding hedge fund buyers, Bruce wondered how they have affected the rent market in Lancaster. Tony said he thinks they have an over-abundance of rentals right now. Thankfully, they do a terrible job of managing their real estate, so you see several houses for rent in which the houses are actually terrible. Tony would love to record the people who come into his office to rent from them because they tell him they love the house, even though it’s older than the house they are in currently. They have seen a lot of older homes, but the condition is unbelievably atrocious. They are not managing that said really well since they probably have so much inventory. However, this has affected their rents, especially in Orange County. He has not seen any articles about rental increases in the Antelope Valley since 2008. If anything, it has declined.

Part of it involves the pricing structure and a 3 ¼% interest rate, which would certainly make ownership a lot cheaper than rent. Tony said the typical rent that they were getting about $1195-$1200 for is now renting for about $995. Section 8 has reflected this as well, although Tony would say it has been more dicey. Less than 15% of Tony’s inventory is Section 8 rentals, but he did this because he got concerned after he saw that they were getting letters saying they were reducing rents for Section 8. This goes back about two years. Tony immediately thought that maybe their budgets are cutting back or they are looking to do some things toward the future. They then pulled themselves back to get away from this. If they are going to have to charge lower rent, he started thinking in terms of qualifying the tenants a little bit more hard. You have to be careful since you cannot discriminate when renting to different people, especially regarding their sources of income.

Bruce asked what has happened to the supply of homes as far as month’s supply. Tony said the last time he checked they were at about a month and a half. Bruce asked if this inventory has changed in type, if it has gone away from REO to short sale. Tony said it has and that REOs are the smallest piece. They probably still have ten times as many REOs as everybody else does, but you are also talking about 12 as opposed to 1200. The short sales have definitely increased and are still increasing, and this is definitely the dominant part of the market. They have seen some standard sales, but the short sales rule.

Bruce asked Tony if when he drives through neighborhoods now it is still really obvious there was a problem where you have constant vacancies and see that the neighborhood has a vacancy problem. Tony said they do see a lot of vacant homes in the area, although this is not typical in all neighborhoods specifically in the Antelope Valley. Going back about two years ago, it was the newer things that were more vacant. Nowadays it has dropped to more of the older houses. These are homes that are not for rent or sale; they are just there. Tony noticed these since he is always writing down addresses, following up, and seeing who owns them. The number of rentals is definitely a marked increase, and you see these sings everywhere.

With a month and a half supply of inventory, Bruce asked Tony if he has started noticing any price aggression. Tony said there has been price increases, but it is not consistent. It really depends on some markets, for example in the Antelope Valley, and what is going on that month. It is very inconsistent. You may have very few, if any listings; or you may have a lot of attention for these couple listings. The next month you may have the same street where the price was $105,000 for a house that would typically be priced at $100,000. A couple months before they may have been in the 90s, and now all of a sudden there are four or five houses for sale. These houses are all short sales and are all within a couple blocks of each other, and you see these prices start to constrict. Across the board we have seen some increase in pricing, although not very much, because of this situation. As soon as the house goes up for sale in the neighborhood and closes escrow, you seen an increase in listings within a month. They are not necessarily at prices they will be able to sell at, so you know things like this are silly. Tony thinks agents are out there marketing to the owners, telling them what they sold and how they can do the same for them.

Bruce asked what prototype house Tony had in 200-2006. He wondered if it was the same inventory he just rebought. He also wondered what the homes are worth at the peak of the price in 2007 compared to the peak the prior years. Tony said at the end of the last market, he was reminded by Bruce that too many people were fighting each other over inventory stuff and to keep an eye on newer tracts as well as look to the market as a source of inventory. This was difficult for Tony because he had never bought new homes. However, at the end of the market he went out and bought some 2,00o square foot brand new homes, and the developer was dying to sell them out so he could go take care of another tract. Tony did not quite understand the reasons behind it, but the developer was explaining how he needed to sell these out first before he could get the financing he needed on the other properties.

Tony ended up buying four one-story, four-bedroom, 2 bathroom homes for $237,000. He ended up selling these upside of $350,000, and the prices were just crazy. He also rented the houses out for the two-year period and made a killing on the rents. He mostly rented them to engineers. A $350K house in that neighborhood today would be about $200,000 tops, past the 50% point. Those houses did not go down in that neighborhood lower than $165-$167. However, this is really not his prototype inventory for his rental. The rental is more 3-1 or 3-2. He owns a lot of properties that were built in the 1950s, the 3-1s being less than $1100 square feet. He also owns some 4-bedroom, 2-bathroom homes that are about 1200 square feet. He also owns some properties that are from the 1980s, with tile roofs. However, this is a smaller part of his inventory.

When Tony sold his inventory it was around $250-$300,000. He can’t even believe most of the houses he sold, especially when he is buying them back. He bought some of them back that he sold for $280-$290,000 at a prices of $45-$60 grand. Now they are probably not even half of the former value. Someone just made him an offer an a 1100 square foot house for $125,000 for which he paid only $60 grand in 2008. He did not buy it from him.

Bruce asked if anyone was still building anything out here. Tony said they are not and the city is the only one that actually even tried to develop some lots that were not finished. This has been a disaster. Bruce thinks there is a really healthy price increase for most areas, but Tony’s area really has not taken off yet. When Tony and Bruce met, one of the things that was a stark difference was that Tony was about to exit his inventory while Bruce was looking at his set of charts and had not even started to build yet being 9 miles away. We are almost in that same situation where it doesn’t pencil to build, so it sure isn’t time to sell either. This is going to go aggressively up before these people start creating building lots.

Tony said he was considering selling this year. Sometimes he will wake up in the morning, and the last thing he wants to do is buy another house. He was enjoying himself at home drinking pretend coffee when the phone rings, and it’s Sabrina asking him to buy another house. How good of a negotiator does this make him that he would have to have it at 65%. She told him she was going into the city after she got out of court, and Tony told her to have at it. He couldn’t even get worked up about the thought of going down and talking to them about it, even though he is friends with them.

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

Tags: , , , , , , , , , ,
Posted in News, Radio | No Comments »

Sean O’Toole, President of ForeclosureRadar, Joins Bruce Norris on the Real Estate Radio Show #312

Friday, January 11th, 2013

Sean O'Toole


Sean O’Toole

President of ForeclosureRadar

(Full Bio)

 streamitunesdownloadrss

Bruce Norris is joined this week by Sean O’Toole. Sean is the founder and president of ForeclosureRadar.com, a website that has pretty much revolutionized the trustee sale-buying business.

Bruce wondered if there were any surprises at the end of 2012 Sean was not expecting to happen. Sean said he was expecting foreclosures to drop, which they did more dramatically. Sean was one of the few people who thought they would drop at all since there is always the big glob of something that was supposed to show up in droves that ended up never showing up at all. Sean said many have predicted foreclosure wave after foreclosure wave that have yet to come to fruition that they have still not seen happen. Sean can understand why they would predict it since it probably should happen or should have happened. It’s still not expected to happen since it is a political-driven market rather than an economics and fundamentals-driven market.

Bruce asked Sean if there was some reaction at the the end of the day when you remove foreclosures from the market. He said yes and that there is no question that some removal of so many foreclosures has left a lack of inventory throughout the state, even in areas where you would not expect a lack of inventory. Where there should be a lot of foreclosure activity, instead there is nothing to buy. It has really come about gradually and then increased. Bruce said he looked through the charts, and in the first half of the year it bounced along and was reduced by 20%. All of a sudden, six months ago it made a beeline from six months down to a month in most of the counties in Southern California. Bruce wondered what policy decisions drove this and what Sean’s policy decision for 2013 is that would reverse this trend.

Sean said there were a lot of things coming together, but the biggest thing that changed in 2012 was everyone realizing that yield, the income return from rents on real estate, was more important than price. That led banks to say that maybe they were disposing of things they should not have been or there was a better way to dispose of it or resolve it. This brought in some major new investor players, some that started in 2011 but really got underway in 2012 with large hedge funds coming in and buying up property. Those things conspired to both reduce inventory further and get the banks to question their foreclosure practices and look at other alternatives. This came with the policy decisions around the attorney general’s settlement and the Homeowner Bill of Rights.

A lot happened in 2012, there is no question about that. It seems like not one of the policies was responsible for a bulk of it. It has really been a historic disappearance of things for sale. Going forward, unless they change policies, Bruce feels pretty comfortable that we will have a hard time getting from one month to six months of inventory. However, he does not know where this will originate. Sean said for those predicting it will come from a foreclosure wave, they just have to note that it takes 6+ months for that to happen, and there is no sign of it happening now. The chances of it happening in 2013 are slim-to-none.

Regarding the potential for people still in California, Bruce wondered how many people are 90 days late or in foreclosure. He wondered what numbers of people are in trouble and why this will probably not cause a problem because the policies to be foreclosed on at all. Sean said right now the number of foreclosures is roughly 180-190,000 homes. These either have notices of default outstanding in pre-foreclosure, are scheduled for auction, or they are bank-owned. It is about equal. 60,000 are pre-foreclosure, 66,000 are scheduled for sale, and 62,000 are bank-owned. None of these are terribly scary numbers if they had to deal with them. Sean said they sell 40-50,000 homes a month in California, so even that is not that much inventory.

The bigger issue is the people who are delinquent, which is somewhere around 450,000. A lot of these folks are in the process of a short sale or a loan modification, so some of them may make it into foreclosure while others won’t. Many have been sitting for an awfully long time. The biggest number, however, is the number of people who are underwater, but they seem to be hanging in there and continuing to make their payments. Altogether, it is a quarter of homeowners in California who are either underwater or in trouble already. It’s a terrible housing market if you think about it from a commercial standpoint. Historically, it is an unprecedented number, even if it has improved a ton.

A price increase of about 23% takes care of half of the underwater people. It makes a big difference and also encourages the other half to see that they are almost there and are about to get rewarded for hanging in there. To Bruce, what is important in 2013 is the strength of a price movement really starts solving a lot of these things. Shadow inventory all of a sudden becomes half equity sellers. There is no question in Sean’s mind that Ben Bernanke and the Federal Reserve agree with Bruce and are trying to create an asset bubble to get out of this problem. This will probably ultimately lead to long-term inflation even though they have never said this. It’s the easiest way to solve the problem of too much debt when you take control of your own currency. You devalue, and the debt becomes less because you have pushed asset prices up. Sean thinks it is absolutely the goal of the administration and the Federal Reserve.

Bruce asked Sean if he thinks 2013 will be a fairly significant price movement in California. He said he read Bruce’s prediction of a 20% across-the-board increase, and his only issue with this is he does not think these dynamics are exactly the same throughout the state. This is where he takes some issue with it. Bruce said whenever they do predicting, it was always a discussion on median price, which is an inaccurate number anyways. It is a 20% price movement and will probably include more high dollar sales than 2012. There is a fudge factor there where it makes sense you will end up with more move-up buyers since people are starting to have equity. There are fewer foreclosures at the low end, and the one place they were quick to foreclose was in the lowest end properties. These seemed to be foreclosed on much more quickly than the higher end properties. Having to move up in median because of this is reasonable, and having real price appreciation in areas where payments are significantly below rents in areas such as San Bernardino and Riverside, it makes perfect sense.

It is quite possible we will see a 20% median increase. What he would hate for a listener to take away is this means that their house is going to go up 20% when they could do better or worse. Sean is in Northern California and is familiar with more pricey areas than Bruce is, who lives in the epicenter of foreclosureville. Sean lives in an area that probably has a higher dollar median price by quite a bit. Bruce wondered if he is seeing price firmness or acceleration in these areas. Sean said it is a mixed bag, especially on the peninsula. Here we have a very strong technology market that is moving beyond the social media bubble as it were. Silicon Valley continues to be very strong on the employment front. There are still quite a few winners here financially putting pressure on that area. The Bay Area is very strong, and there is a lot of investment buying when you come into the Central Valley. There is an awful lot of investment buying, and prices are still low compared to rents. However, they are catching up pretty quickly, and he does not know how much room there is here. Sean said he does not expect much appreciation in these areas, and you will have a lot of different pockets. It’s almost hard to say by city since it is almost by areas.

The difficulty in predicting something is there are so many micro markets inside of the picture. Sean feels a lot of the price has been driven by a cap rate mentality that is about to get uninteresting. If you are willing to take prices up because you are willing to take a 7% return while the current market is 8 or 9%, prices will move pretty quickly. You don’t want to get to 7%, unless there is an appetite for 6 or 5%, he does not see any indication of them continuing to move up. Bruce feels pretty strongly that even though the Bull Run has been dominated by the cash buyer, the small guy, medium-sized guy, and giant guy, there is a very big underlying owner-occupant crowd that was foreclosed on in 2008 and 2009. This is now an overwhelming number of people that will carry on the boom even if for no other reason it saves them money monthly over rent.

Sean said he certainly hopes people are smarter than they were in 2004 and 2005. They may be willing to pay a little bit more than rent to have the stability of a home, but we had in some areas returns that were down to 1-2% when you looked at price versus rent. You would be better off putting your money into treasuries. Sean said he just does not see us having the kind of boom that we saw from the end of 2000 to 2006. Sean thinks what we are doing is recovering to where our prices should be, and this is really where prices should be given these artificially low interest rates. We will probably recover to a point where it makes sense given the low interest rates, but not where it would make sense long term. This sets us up for some longer-term challenges. Bruce completely agrees with the longer-term challenges, and he would feel a lot more aggressively comfortable with it getting to that uncomfortable number just because of the unprecedented rates.

Bruce and Sean went back to Washington D.C, did a little research, and saw that the interest rate has just not been seen since the 1900s. This is an unprecedented interest rate, so the question is what unprecedented dominoes fall because of that. Sean said on the one hand the low interest rate for purchases are certainly unprecedented as far back as we could find. On the other hand, Sean’s thoughts on what a reasonable return on investment was on real estate should have been 8-10%. Everyone is up in arms about these hedge funds wanting to come in and accept 7%. Sean does not understand the business, and the people don’t understand how hard it is to rent single-family homes. As we look back to that, even as far back as the 1800s, returns on real estate in the 5-7% range, are far more the norm than 8-10%. This actually made Sean a little bullish than when they showed up in Washington.

Sean mentioned inflation, which Bruce thinks is a very likely outcome. By fixing a payment, if you are talking about a premium today of your payment versus rent, that is one thing. But you are fixing that payment for 30 years. Your renter next door is not going to have that same rental bill ten years from now. This is where the wisdom of the decision kicks in. Sean said the problem he has with this is that the average person believes the Fed when they say we are in for a period of unprecedented low inflation and that inflation is not a problem or a risk. There is not a perceived risk of inflation to push them accept a significantly higher payment. It is up to the point where there is that really truly widespread risk of inflation. This will be offset by rapidly increasing interest rates. Only a handful of folks are smart enough to realize that we have this belief that there is not going to be inflation when in fact this belief is wrong. With these low interest rates, that is a pretty sweet spot that probably will not exist for a long period of time.

Being the normal guy rather than the investor guy, Bruce said he would want to control his own environment and pay premium for it. Whatever premium it is will be whatever the lender will allow him to qualify. It seems there is still a willingness to own something if the lender will loan them the money. Here there is an interesting transformation. Sean has some great charts that showed while prices really progressed, payment was amazingly consistent because the loan programs became so aggressive that the payment did not move very much at least for the first-time guy. We went from the median price of $250 to $550, and you could have the same payment if you were a median income earner in California. You could have the same payment at $250 and $550 six years later.

In a way, you do not have a loan program that is doing that, you have an interest rate doing this. Bruce said this is why he thinks there could be price aggression since never before has a $100 grand price increase meant so little monthly. However, this interest rate has been in place now for some time and will most likely not go dramatically lower over the ne t year. There is no emphasis for it to dramatically change over the next year. Bruce said this will definitely not be the case for interest rates, and Sean thinks this is also true for price. Easier lending will definitely not be a driver behind price increases this year.

Sean said he thinks the primary driver is going to be the two things Bruce touched on earlier in terms of median price. One is the fact that we are going to have a mixed shift to higher-end homes, which does not mean prices did not change at all. It just means the homes that are selling are higher-end because the low-end foreclosures have been going away. It is not a change in price, it is a change in median because of the mix of homes being sold. Sean thinks we have certain areas in the state, possibly half the state at most, where payments are significantly below rents. Those areas will most likely go up to at least match rents if not to have payments exceed rents as they traditionally have.

Bruce said one of the things that he noticed when he looked up loan programs is we will most likely not see anytime soon stated income variety, but we have a very aggressive FHA program in the sense of its available quantity of money. In Riverside it is $500,000, while in the most expensive counties it is in the ballpark of $700,000. We have a $340,000 median price the last time on our way up from the ‘90s when we got to $340,000 at the time when the FHA loan limit was $160. Bruce thinks this is a significant change, and he doesn’t know that we need the subprime world. We have FHA, who wrote the safest book of business ever in 2011 and 2012. They might be allowed to loan to some of these other people that had a foreclosure, even though we already know they will. This is where Bruce is looking at this huge glob of people that could get a loan with a 3 ½% down payment and improve their monthly cost. Even if it is a premium to rent, Bruce thinks they make the decision. We are so far away from this on a monthly basis, and you could have price aggression. 20% of $340 is $68, and if you back this off into a monthly cost, it seems a reasonable number to Bruce.

The only thing on the other side of this is FHA is under a lot of pressure because of their drawing share of the business to tighten their credit requirements and other things to tighten up. There are definitely some in Congress who are worried about the loans that they are making and creating in other bubbles. Whether they will be allowed to this time is the question. This is definitely the big question when we talk about things that matter. If there was an announcement saying that if FHA will now have a loan balance of the median price of California, for Bruce this would be a big uh-oh. Even this month they are making changes to if you have a lower credit score since you now have to have a lower debt-to-income ratio and some other things along those lines. Regarding larger down payments, there are also new changes coming in if you have a lower credit score.

What is interesting is in the credit world, what is starting to happen is you can improve your credit faster. Whoever has changed the rules here used to take 2 ½ years and now takes 9 months. It seems like we are bound and determined that somebody is going to be able to buy a house, and if it takes too long for their credit to improve we should improve it more quickly. If we can’t change it on one end, let’s change it on the other end wherever there is the political will. If you help people fix their credit score faster, then you are helping homeowners. If, on the other hand, you tighten up credit scores you are showing prudence. Prudence does not seem to be the fiscal cliff. The stock market had a big day when we basically completely ignored the fact that we have to at some point cut back.

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

Tags: , , , , , , , , ,
Posted in News, Radio | No Comments »

John Burns of John Burns Real Estate Consulting Joins the Norris Group Real Estate Radio Show #308

Friday, December 14th, 2012

 

John-Burns


John Burns

President, John Burns Real Estate Consulting


(Full Bio)

 streamitunesdownloadrss

Bruce Norris is joined this week by John Burns. John is the CEO of John Burns Real Estate Consulting Firm, and he has put together quite a talented team of trusted advisors. They do service for banks, lenders, builders, developers, investors, and product manufacturers. It is a very well-respected business, and Bruce has been amazed at the transformation over the last five years. As the downturn has occurred, his business has grown and expanded. John said they have diversified, and if he had continued hanging out with homebuilders he might not have done quite as well. The cheese moved, and he moved right along with it. In doing so, this has really expanded his knowledge in how things work. John considers himself very fortunate and has a couple guys who are now famous for starting the subprime situation. They taught him what was happening in the mortgage market. Now he has the products guys giving him some new issues and more private equity folks. There are a lot of smart clients looking at this from different directions, and he tries to pull it all together. Bruce is also one of the smart people he listens to for advice.

One of the things that has been delaying any normal process of getting back to a good economy is that construction has been in the doldrums. Bruce wondered how important construction’s resurgence is to fixing the unemployment. John said one of the big issues in the homebuilding industry is a labor shortage. This sounds almost idiotic given that we are 70-80% off the peak and trying to grow again. He said they are just finishing up a big research project for two of their clients on this, and the homebuilders met with Bernanke last Thursday with this big issue. We are having a labor shortage, and trade labor wages are increasing. Bernanke was ecstatic about this. The trades have said they have laid off all their best people and are paying their people far less than they used to pay them. Building a home is hard work, and they are not willing to hire until they can get their rates back up again. Their best folks and the people they have known have moved on to other industries and don’t really want to come back to housing given the way they got treated and how cyclical they know the business is. We have lost 1.46 million construction jobs nationally in residential construction, and we have only gained back 40,000.

Bruce said his granddaughter was in a summer program where she was in a small town in Texas. Even while he was there picking her up there was somebody there who asked the church to put them up for a weekend because there was no place to stay. He thought there must have been a housing boom going on, and they said there was not but rather everybody who came through there thinking they would stay in construction goes to the oil fields since they pay twice as much. They could have a building boom, but they could not put it together. John heard that especially in Texas and Arizona there have been a lot of people who left for the oil industry and are not coming back. They are getting paid $100 grand to start when they don’t know anything.

Bruce wondered when construction gets going what other categories of jobs it helps along. He wondered if manufacturing is one of those benefactors. John said they definitely are; and if you look at the publically traded product manufacturers, they are reporting their U.S. sales are up 5-7%. They are scratching their heads wondering why all the public homebuilders are up 20-30% while we are only up 5-7%. That is part of this labor lag that the builders are selling all these homes but are not ordering the materials because they don’t have anybody to put in the materials. There will probably be about a 9-month lag, but they will see a benefit. The other part of this is part of a construction recovery, but the recovery we are going through is we are going to transition to more real buyers instead of investors. The real buyers go out and spend way more money on furniture or go to Crate and Barrel, Target, or Sears. You will see a lot of ancillary businesses and see their revenue grow 1-2% per year. For retailers this is a big move once we see the housing market start to come back, which is already occurring.

Bruce wondered how commercial occupancy gets helped, to which John said this is totally job growth. Architects will start hiring again, and the lawyers have fared pretty well through all this. There are a lot of service firms to the industry that will start hiring again. John knows a lot of these guys, and when he goes to their offices they are only half-full. A lot of companies will really benefit, and it will really help the economy overall. Bruce said one of the things that is interesting to him is you will see the headlines say that construction is up 20%, but then you have to look at the chart and think it’s really off of a number that almost doesn’t exist. Riverside had one of these where it was up 30%. Bruce looked at how many homes were built and realized it was a rise of 8 houses.

One of the things in which a lot of people have difficulty is seeing where we will inevitably be in a very short period of time. We have one month’s supply of inventory in Riverside, yet our lot or subdivision creation is 95% off of its peak. To Bruce, these two don’t match. John said what it means is prices are going to increase. Bruce said he would think we are going to have a price run because you have policies that took us from 6 months to 1 month of inventory. Those policies have not changed, and now we are at 1 month of inventory. He does not know how we go back to 6 months of inventory with the policies in place. The only way we could is if we had some kind of recession and everybody pulls back. What is interesting about that is you could have a recession and end up with a lower interest rate that starts with a 2. In California, you are blessed with an abundance of former owners that would save $500 a month going from renter to owner again, and FHA will let them do it. John does not think we will see prices fall for that reason.

If you saw a recession, there would be more skittishness amongst some people more than others, even if they mess up this whole fiscal cliff and debt crisis. John has one client in particular who is very well known who invests in real estate all over the world, and he thinks in a global recession the biggest safe haven would be distressed real estate in the United States. Even if that happened, you could see more foreign capital flow in here as real estate. John deals with hedge funds, and all of a sudden single-family homes have become a target for the first time. To him, this is kind of a market-maker change. They are buying enough homes to where they are affecting the prices, inventory, and also the rental market. These guys chart everything, and the chart they love points to having to invest in distressed real estate. They love it when it is below replacement cost, but you can have all kinds of arguments about what are replacement costs.

The interesting thing is that they have clearly driven prices up, particularly amongst the distressed real estate to the point where they are not really trading below replacement cost anymore. The question is if they are going to have the discipline to stop buying, or have they created a little mini bubble? It really shouldn’t be called a bubble since the affordability is so fantastic and the question is if they will ride the wave that is going to happen in home price appreciation. When you have a 3 ¼% interest rate, you have these other dominoes that play out and start thinking about what this will cost monthly.

CAR comes out with reports, and they talked about how in the Inland Empire if you were about $550 per month going from renter to owner and extrapolate this in dollar terms; then the question is how much the prices will go up before you hit that $550. The answer is $127 grand, a large number. We are sort of looking at it as the way the comeback normally works, and we are going to be surprised. Bruce and Sean O’Toole went back to Washington D.C. for three days to do research at the Library of Congress. Two nerds were looking at microfilm for three days, and it was fun for them. One of the things they wanted to do was check since they sometimes hear that interest rates are at their lowest in the last 50 years. Bruce said he can definitely confirm that the interest rates on mortgages have never been this low any time in the 1900s. This is amazing since prices are the same that they were 11-12 years ago. This is no doubt the bargain of all times.

Regarding below replacement cost, when somebody starts to think about writing a check for a piece of land, they have to count everything. In Riverside County, one of the problems is we do not have sub-division creation because you could not make a case that would pencil tomorrow. Bruce wondered how far away we are in terms of price movement before somebody would say we need 100 lots somewhere. John said there is plenty of demand in the better submarkets, such as Chino and the Dairy lands, Rancho Cucamonga, and even Lake Elsinore. If the land prices rise, things could make sense. It is when you get up to the High Desert in areas such as Victorville that there is less demand or even in areas where the landowner is not going to sell the land for the price you could make money on it.

A big part of it is that we have far fewer distressed land sellers everybody thought we would. We thought it would be the RTC all over again, and for whatever reasons the farmers and other land sellers either did not have too much debt or saved enough cash to hold onto their investments. Bruce wondered if they had sold under an option, got the option money, then people backed out. They would have a pile of money that they never thought they would have in the first place. They are then continuing to farm the land or doing whatever else they’re doing with it. They have residual money now to pay the taxes, and they are more comfortable than ever.

When a developer takes a piece of land and he ends up with a building lot, including streets and sewers, Bruce wondered what it would cost to get to this point. John said he knows but is not going to quote it since there are too many variables as well as a lot of money. Bruce also wondered if California’s permit structure cost is higher than other states. John said it is absurd. Somebody did a study a while ago on the city of Carlsbad, and it was north of $110,000 a home just in permit fees. You could build or sell a home in Texas for this amount. That is also a another big change that is going to inhibit construction; while the cost of building the home and putting it in the streets has come down dramatically because the trades have had to lower their prices, the permitting costs and the regulatory hurdles have gone through the roof. Clients have complained all the time about the changes that the Army Corp. of Engineer had and the puddle they had on it for 30 days, and it is now protected wetland. Things are getting ridiculous. It will be much harder to play catch up if we are behind, which is where Bruce thinks we are.

We do not have a lot of available building lots, and this is the number one complaint. John spoke at an event in San Diego, and he told them he thought sales would double over the next four years. Unfortunately, we just don’t have the lots. John was talking about us getting back to 2003 volumes and 2007 volumes. If we sold four a month instead of 2 ½ a month, you are 2/3 of the way there. Everyone at the event was telling him the profitable lots just do not exist. Bruce said he would think existing lots would be very good to stock up on. Even they were talking about raw land, but there is no raw land entitled for development that he can touch given today’s home prices. What is interesting about this is normally we have a cycle that is very different where you have construction improve the job picture, and then the job picture improves once we get migration all in this sequence. This time we are going to pretend we do not have anything for sale. This is almost what it is because the idea that the shadow inventory was going to show up in such quantity was going to create another downturn. Bruce said from his seat, he looks at every policy they are deciding on, none of which ends up for sale in the MLS. They have bulk sales of property and bulk sales of notes. The hedge funds that are buying properties are sending those into rentals for years. The question is where the glut of the properties is going to show up.

John said the other people were totally wrong, and we have been wrong on a lot of things. However, they were right on this in that it would play out over 4-5 years. The only great day was in Southern California where the RERC collected good foreclosure data in the 90s that you saw play out over years. They then found a few executives in the bank servicing businesses who did not understand a thing he said and mandated that they foreclose on the people and sell the homes. This was something they could not do because they have to document everything when they cannot even keep their software up to date.

Every state is changing the rules on Bank of America, so they have to rewrite their rules for California and Nevada. There is no way they could process the paperwork. What it is doing is it is telling them to sell the loan. You can sell the portfolio of loans, and even though you will make less revenue at the end of the day, you are going to lose less because it going to take you forever to take it through REO. They then sell it at a discount to where a company like Carrington can go talk to the owners and it never becomes an REO. The bank cannot cut your principal 20% because it is morally hazardous to them and they think it is ridiculous. However, they will sell the loan at $.60 on the dollar to somebody who will then cut the principal 20% since they just now made money doing it.

B of A first did a mailer to people who were behind and had credit lines. This mailer was an offer to reduce their principle, but they received a 7% response rate on the mailer. The next mailer they sent out was 150,000 credit lines that were forgiven completely. The letter said that unless we they heard from them within 30 days, it was enacted. Therefore, they did not need a response. They should thank the bank because if they needed it in January, it would possibly be taxable income. We’re all sitting here thinking they are going to make a decision, and the worst decision would probably be no decision on a lot of these things that have come up. One of them is the ability to not pay tax on forgiven debt. This would not be a good thing for California. It would end the short sale craze, which is about the only craze occurring. John wonders if the IRS would really pursue this. One of the easier things with this is you don’t have to do a bankruptcy to get rid of this, but you can do an insolvency. This is much simpler and a process Bruce is much more familiar with since he asked his tax lady what happens in this situation. If everybody knows it is going to get past, then why would you wait until December 31 to do it?

Bruce asked John what his opinion was on the fiscal cliff. It does not seem like it is going to have an early resolution, but he wonders what the resolution will ultimately be and what impacts it would have to the benefits we have assumed will continue for real estate. John said he thinks they are going to continue to play chicken with each other right up until the deadline. They will see who gives first and then it could then be extended through all these fancy shenanigans all the way until February or March. He said it would not surprise him to see us in this period also, and they will probably also do something that looks like they at least solved the problem for twelve months and will be back at it again next year.

The problems are so huge, and they are not even really tacking the major problems here. They are just trying to tackle this year’s problems. This is one big U.S. financial crisis, and the U.S. balance sheet has to collapse at some point. With 800 years of financial history and tons of companies, for every single one of them at some point the investment community has lost confidence in the government and told them they would not buy their debt anymore. Bernanke cannot control interest rates when that happens since they could go through the roof. You cannot control long-term if people’s sentiment turns against it. You can control what the banks borrow at, but the question is who is going to buy our debt when China and everybody else stops buying it. They are then going to want a 10 or 12% return to do so.

About a year ago we had a credit downgrade, and the ten-year went from basically two and a half to one and a half. Bruce was surprised by this as he thought we now have a problem. However, we are the cleanest shirt in the dirty laundry. Everyone else has a situation that is even worse than ours. John said a lot of Europe does, although he does not think the whole world does. There was a really good article in the November 30 Wall Street Journal that laid it out nicely. Mary Meeker wrote a good report called USA, Inc. that is a solidified report on the US balance sheet. There is $62 trillion in off-balance sheet liabilities for Medicare and social security. That is not even being discussed. What we are worried about is our $16 trillion debt, but we have four times this off-balance sheet. If we do the accounting right, we have about $80+ trillion that we are already committed to pay and are not going to have. We are running a trillion dollar a year deficit. They claim we are accruing about 7 trillion a year for Medicare and Social Security liabilities. If you take all the income of all the people and businesses in the United States, it is only $7 trillion. Even if you tax us at 100%, it doesn’t cover it.

One of the reports Bruce wrote forced him to take a look at the tax structure. In one of the years, we had capital gains equal to the highest personal rate. Revenue in that segment went down and has never recovered. It has never collected the same percentage of taxes that it did prior to the law change. With some of the ideas to get money from the rich, if you don’t do it correctly the rich do not have to sell something. They just say forget it, do a 1031 exchange, hire one last person, or have people work 30 hours instead of 40. Bruce has people telling him there are stores where at one he was in a line that was 15 people long, and it was the first time he had ever seen this. What happened was the store had let go about 30% of the staff, and the rest only worked 30 hours. They don’t have any full-time employees in the store, so they don’t have to pay any medical expenses. This is one way to skin the cat.

Tune in next week as Bruce continues his discussion with John Burns on part 2 of this segment of the Norris Group real estate radio show and podcast.

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

Tags: , , , , , , , ,
Posted in News, Radio | No Comments »

The Norris Group Real Estate News Roundup 11/2/12

Friday, November 2nd, 2012



Sources:
Pennsylvania Bank Failure Raises Tally to 47
September Spending Outpaces Income
Home prices continue steady rise
U.S. Housing Vacancies Fall and Ownership Flat as Rentals Rise
Completed Foreclosures Down 31% from Year Ago, but Remain High
Refinance Applications Decrease in Latest MBA Weekly Survey
Mortgage rates remain near record lows
Construction Spending in U.S. Climbs to Highest Level Since 2009
CoreLogic: Hurricane Sandy threatens damage to 284,000 homes
U.S. Real Estate Recovery Challenged by Hurricane Sandy
Disaster Relief Available for Homeowners with GSE Loans
U.S. District Court in Texas blocks MERS lawsuit
Wells Fargo mails checks to thousands with FHA-backed mortgages

Today’s News Synopsis:

This week’s video is a slideshow of the news of the week in the world of real estate.  171,000 new jobs were added in October, while at the same time unemployment increased to 7.9%.  A recent analysis by the National Association of Realtors showed the lower inventory of housing is actually helping houses sell faster.  A court in Pennsylvania ruled a county recorder will be able to bring her case against MERS despite Texas recently dropping several lawsuits against them.

In The News:

CNN Money- “October jobs report: Hiring increases, unemployment up” (11-2-12)

“Hiring was surprisingly strong in October, while the unemployment rate ticked higher, according to a report released just four days before the presidential election.”

Housing Wire- “Ally reports successful move away from mortgages” (11-2-12)

“Ally Financial Corp. ($0.00 0%) lauded its decision to move away from mortgage servicing and the home loan side of the business in its recent third-quarter earnings report, which clearly shows the financial firm more profitable when compared to year ago levels.”

DS News – “Senior Loan Officer Survey Reveals Increase in Demand for Loans” (11-2-12)

“A survey of senior loan officers released by the Federal Reserve shows lending standards were mostly unchanged, but demand for residential real estate loans was strengthened.”

Realty Times- “Low Inventory Levels Sells Homes Quick” (11-2-12)

“Low inventory levels are bringing a faster turnaround for today’s sellers. From 1987 through 2011, analysis of the NAR Profile of Home Buyers and Sellers series showed the typical time on market was 6.9 weeks, while the existing-home sales series showed an average supply of 7.0 months, just above the high end for a balanced market.”

Housing Wire- “Insurance companies remain exposed to RMBS risks” (11-2-12)

“For the most part, new issuance of private-label RMBS has been on hold since 2008. But defaults and downgrades to securities vehicles linked to residential mortgages are still somewhat of a reality, according to the most recent RMBS report from the National Association of Insurance Commissioners.”

DS News – “California Investigation into Bid Rigging Charges 26th Person” (11-2-12)

“A California real estate investor became the 26th person to plead guilty or agree to plead guilty as a result of antitrust investigations from the Justice Department into bid rigging and fraud.”

Bloomberg- “Sandy to Slow October Home Sales in the U.S. Northeast” (11-2-12)

“Existing-home sales, a market indicator followed by economists and analysts, probably will slow in the U.S. Northeast for the rest of 2012 as superstorm Sandy disrupts deals, the National Association of Realtors said.”

Housing Wire- “Pennsylvania judge allows county fee case against MERS” (11-2-12)

“A county recorder out of Pennsylvania will be able to pursue her county recording fee case against the Mortgage Electronic Registration Systems, the U.S. District Court for the Eastern District of Pennsylvania ruled this week.”

CNN Money- “Banks offer loans, credit limit hikes to Sandy victims” (11-2-12)

“In the wake of Superstorm Sandy, banks are offering short-term loans and emergency credit limit increases to many East coast residents. But before jumping on one of these offers, make sure you know what you’re getting into.”

Hard Money Loan Closed

Ontario, California hard money loan closed by The Norris Group private lending. Real estate investor received loan for $144,000 on a 4 bedroom, 2 bathroom home appraised for $240,000.

 

Bruce Norris of The Norris Group will be at the OCRE Forum at the Chinese Cultural Center in Riverside on Wednesday, November 7, 2012.

Bruce Norris of The Norris Group will be at the Investors Workshops at the Doubletree Hotel in Orange on Wednesday, November 28, 2012.

Bruce Norris of The Norris Group will be at the NSDREI Holiday Christmas Party at the El Camino Country Club in Riverside on Sunday, December 2, 2012.

Looking Back:

Homeownership rates were at  a 13 year low the previous week according to Bloomberg.  In the latest Mortgage Bankers Association survey, mortgage applications were up 0.2% from the previous week.  The latest Federal Reserve forecast was not looking good as they predicted higher unemployment and less growth.

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

Tags: , , , , , , , , ,
Posted in News, Video Blog | No Comments »

Mike Cantu, Tony Alvarez, and Rick Solis Join Bruce Norris on the Real Estate Radio Show #300

Friday, October 19th, 2012

Mike Cantu


Mike Cantu

Expert California Investor

(Full Bio)

 

Tony Alvarez


Tony Alvarez

Investor and REO Mentor

(Full Bio)

 

Rick Solis


Rick Solis

Appraiser/Investor

(Full Bio)

 streamitunesdownloadrss

On Friday, October 19, the Norris Group proudly presents its fifth annual award-winning event I Survived Real Estate. An incredible line-up of industry experts joins Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds for the event benefit Make a Wish and St. Jude’s Children’s Research Hospital. This event would not be possible without the generous help of the following platinum partners: ForeclosureRadar and Sean O’Toole, HousingWire, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops and President Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobi Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Frye Wiles, MVT Productions, and White House Catering. Learn more about the panel and how to attend at isurvivedrealestate.com.

Celebrating our 300th radio podcast, Bruce Norris is joined by three special guests. Rick Solis is a very successful investor who flies a little bit below the radar. He is an appraiser, buys trust deeds, and buys properties. Tony Alvarez, who invented the radar, is the REO Mentor and is a very successful buyer and teacher. He works with buying to hold, buying and selling, does wholesaling, and buys currently out of the MLS. Mike Cantu is a very successful property buyer. He has been a developer, landlord, and trainer. He is specialized in talking to clients on the phone and never meeting a soul who he buys houses from.

Rick Solis is currently appraising a lot of properties for loans and rentals. He also gets a bird’s eye view of the areas he is appraising, which is very helpful. He can see trends. Rick said in most of the lower end markets, most of the places he has seen since March when the buying season started have gone up about 1-2% a month. Most of the areas he looks at have less than one month of inventory. If the neighborhood is selling 20 houses a month, for example 240 a year on average, there are less than 20 active listings. He sees every neighborhood from Hesperia, Perris, San Bernardino, Ontario, Glendora, Pasadena. Every area is a month or less, which is about 1/3 of what is normal in a normal average flat market. There is very little for sale. Under a month is almost unprecedented, even in 2005 when everyone was grabbing everything. This is half of normal. In Moreno Valley, the REO agents reported three weeks of inventory. This is 300 normal sales, 200 total listings. One of the problems, for example with dominance in San Bernardino, is 40% of its REO up until now. Riverside is very similar in percentage, only they are not replenishing that inventory. What is representing 40% of your sales is not even going to be a player six months from now.

Bruce also wondered about what he saw in Palmdale and Lancaster. These would have been a dominant REO market just like Riverside was. Tony Alvarez said the inventory has tightened up just as much as everyone else’s. He draws, organizes, and reviews his statistics on a weekly basis, and what he has seen is the differences between what someone was willing to pay at the trustee sales in comparison and what they would pay in the market. If you look at the graph, you see the two lines, and all of a sudden the one from the trustee sale shoots all the way up. It really has been justified. He does not chase deals, but he still spends most of his time creating and nurturing relationships. He lets the guys who get paid to chase deals chase the deals and then call him. This is where they are still getting everything.

Tony said Bruce did something that changed his direction a little. He brought him a statistic that Tony locked in, loaded on, and took it home. From there he changed his direction based on that statistic, which had to do with the percentage of fallouts. Bruce had done it at his crash presentation over a year ago. The fallouts were at 40%, and he went to show the reasons why. Tony said that made his life because all of his attention went from looking at new things, new MLS listings, to scratching this and looking at pending deals. Their margin has taken hits, but still 40-50% of everything that goes into escrow falls out from 1-3 times. They are doing just fine; he does not pay attention to how many listings are coming out but rather keeps focusing on the pending deals. The other benefit is they have those conversations with agents, form relationships, and gain listings they are just about to list that come from all different angles. This could be a short sale or some other problem, and they benefit by being first in line.

They have also been selling. He has had other investors approach him who were willing to buy a vacant house he had for sale for $100 grand. He said he had one that already had a tenant that he kept on keeping for ten years that was already rehabbed. They would be saving themselves a lot of trouble and may pay about $105 for the house. He has been selling some properties that came with a tenant already. He has a hard time doing this sometimes because he really does not want to sell his things, but he has had a couple good offers from the big guns who came into town and wanted to buy everything.

Mike Cantu’s area is more of a stable area than Victorville or Palmdale, although there has been a big change. In the first quarter of this year he did his usual, worked the REOs, short sales, and multiple listings. He has always been a fan of fishing for multiple pawns and has always wanted multiple deal sources in case one of the pawns dried up. Longevity has always been a goal in this business, and this is his 31st year as full-time investor. He wants to have multiple sources of deals and put a big effort in the first quarter of this year with a lot of first A listings and staying in contact with REO agents. The end result was he bought one house, and it was a standard sale probate. He looked at a lot of things, and as he was following up to see what it was actually closing at, he was absolutely amazed. There were a few big hedge funds that came into his market place that really started buying the things that were being publically offered. His deal count this year was right where it normally was, and he had been dealing in the private party arena. This was by far his preferred choice of business because it required a totally different skill set than the things that were publically offered. The publically offered things are a reactive business, not pro-active. A listing comes out, you jump in your truck, you go look at it, do the math on it, and you have to know what it is worth and what the real fix-up on it is.

With all the competition out there, that is a tight market with no room for error. Some of the private party deals he put together this year have been absolutely fantastic. If they had been offered publicly in the multiple listing, there would be an absolute feeding frenzy. With some of the other things he bought, he could not even imagine what it would have ultimately gone for, so there has been a big change. However, as far as months of inventory, every time he is up in an airplane and looks down, he says there are not months of inventory but rather multiple lifetimes of inventory out there. As long as people own houses, there are deals to be made since time and circumstances change all sellers. The private party arena will always be there. Mike has probably done mailers where the mailer will get a call a year later, and you have almost forgotten you did the mailer to that area. You ask yourself when they got it, and sure enough it has been on somebody’s refrigerator for fourteen months. On one property that was in escrow, the letter the person received was four years old. Mike was asked if he was still a buyer, and he told them he would always be a buyer. Mike had mailed another mailer to her at a point between the four years. They had saved one, but Mike kept on proving that he was still active, which is important. There was a deal earlier this year where a man had called Mike’s daughter and secretary and told her Mike had been mailing to him for seventeen years. He had a big stack of letters from him and probably had enough to wallpaper his garage. He said if Mike was still a buyer, then he was finally a seller and to have Mike give him a call. Mike has eliminated the competition because as a trust factor he has been in the same business for a long time, which makes a statement. It is important that there is some longevity to this.

This situation is very similar with some REO agents. The same set of REO agents was in this run as was in the 90s. It is much easier because Mike was already there with them. The agents were calling Bruce just like they were calling Mike asking him if he was still in. They wanted to know that they did not have to reinvent the wheel but rather do it again.

Rick is doing some mailers too, but he does not want to buy 30-40 houses a month. If he buys 1-2 good deals a quarter, he is happy. He jokingly said he was sure the rest of them wanted 30 deals a month, but he does not want that headache. He is only doing it because he sees prices going up. If prices were not going up, he would probably just sit on the sidelines. He is pretty excited that prices are going up.

Bruce wondered what the attitude is of the person receiving the mailer since he has not done a mailer since the downturn. When you mailed in 2000-2005, it was always a happier story. Prices went up, and Bruce said he sometimes does not even know what they had. When you tell the other party you can pay them more than you thought, than you’re happy and they’re happy. Bruce said he would not have wanted to do the mailer in 2008 or 2009 because somebody would have had such a recent pleasant memory of a value, and it is much better now because at least they have gotten four years of negative news about real estate because they probably think they have the worst stick in the world rather than the best. Bruce wondered what the reaction is when the number is what it is and if this is comfortable now. Mike said it all depends. For a lot of people 2008 was a terrible year to mail. Everybody was in denial, but enough years have gone by to where most people are fairly realistic. He had a conversation last Friday with a seller who responded to a mail piece, and Mike asked what the seller’s ballpark opinion was of what the property might be worth. He said he had it in escrow five years prior at $500,000, and it almost closed. Mike made a comment about how he probably wished it had closed and if he had a ballpark opinion of what he thought the place might be worth. His answer was at least half of the $500 grand, to which Mike said that is the most optimistic comment he had heard all year. Bruce said he and Mike both would have handled this with humor; Bruce would have asked if it was worth about $100 now. The fact that he at least acknowledged that it was worth half of that was a good running start for somebody who is at least going to be realistic.

Mike said he had done a little bit of preliminary homework because his client had left a message, and as he called him back he was armed with comps. There was not one single comp that started with a 2. There were some that were less than $100,000, so they went from the high 80s and 90s up to about 200, but they did not quite make it there. He truly was a bubbling optimist at that point. It’s amazing how we have lived through the Great Depression of California real estate and survived. Bruce is not sure when the large buyers started showing up, but he does know that it has been the majority of this year. This was when they started making in roads and plans, and there seems to be new funds. These are staggering numbers. Tony Alvarez said he was asked going back almost two years now if he wanted to participate in putting together a fund. Tony was involved in a hedge fund with the guy who had the largest return, 1200%, in a year named Andrew Lotti. They had discussions, and Tony spoke to an attorney they had. They told him they would like him to get involved and be at the forefront and be their mouthpiece. They wanted Tony to be involved in the acquisitions part of it. He decided to back away from this because he felt for them to succeed, everything had to go perfectly for the returns to really be recognized.  A lot of it went back to what they were willing to promise as far as a return. They were extremely optimistic.

Bruce said what is interesting is the returns they were promising then probably no longer have to be promised. Even the returns they are promising are probably optimistic on the same level. In one article two different men were interviewed who were running different hedge funds. One of them said regarding the hedge funds that they are just not overly optimistic, they’re just idiotic. It is not a realistic return. When you are promising to get a 20% return to someone, those funds have high overheads. There is no other way around it; and in addition they try to save money on everything. Tony said he knows some of the inspectors they have hired, and they are just barely knowledgeable about what they are doing. What is interesting is that having been involved in the city of Riverside and in some of the meetings about the foreclosure task force, Bruce said seeing some company coming in and managing it from one location and dealing with all these cities that have their own opinion about how well they are taking care of the property is going to cause some issues.

Tony has sat down and interviewed with some of the people, and they all tend to have proprietary software. They say this is what is going to give them the edge, which is nonsense. What is built into these software packs is the ability to get someone in the field to send the information. However, the ability to transfer information from one point to another when it is inaccurate is worthless. You have proprietary software that can communicate rapidly among people, but you are coming to the wrong conclusions. Something else interesting is how people are having a hard time finding anything to buy. He said he noticed the big hedge funds coming into town way over paying for the inventory out there. He thought to himself they should turn this into lemonade. He has always had the attitude that if you cannot beat them, join them. He had conversations with several agents who represented the hedge funds, and he wanted to find out what their buying criteria was. He went in thinking he was going to sell them items and take a fee out of it. He always wanted to be a small-time operator and only have the income so he can do this life on his terms. He never wanted to be a big hedge fund, so he found out what they did not want. He needed to find out the inventory they were not touching and figure out how he could make it into a niche and exploit it. This was real easy because that was one of the techniques that he used throughout the 90s.

Bruce said he thinks it was really smart at trustee sales when they started becoming the dominant buyers there. This was what his son Greg did. He literally looked at everything they bought for months and came to conclusions. You have to understand the animal before you know how to deal with it. Tony said he really took a great interest in them and did not see them as a problem as much as he tried to figure out how they were going to be an asset to him in his market. They had bought everything that he would never touch. It was not so much that he would have to refocus his attention since it was already where it should have been. If you had described Mike’s ideal rental, these guys were buying the antithesis of this. They were buying the replacement house; they think that in the future somebody is going to build a 3500 square foot house in Palmdale and Lancaster, and we’re going to buy it for less than cost. One of the pieces of criteria that they use in their paperwork is they use the value at the peak of the market and say this is what it is. They are thinking it’s a deal because it is less than cost replacement, but they are not exactly buying the 1400 square foot single-story house. Whether it is 3500 or 2500 square feet, it is just nuts.

When regarding Mike creating his own activity, when he is relying on the MLS it is a problem. You have to fish for multiple pawns, and as long as it is being dominated by the big companies, it is a waste of time. Bruce said their loan business started to reflect things like this. They are still getting short sales because they fall out, but the REO is not getting replaced. Bruce talked to the biggest REO agents, who literally were saying they were not even sure they were going to have the doors open three months from now. They had been told that they were just not going to get it. The new REOs they are mostly seeing are the ones that have taken long evictions. These were not new assignments. Somebody who had 500 listings has five now. This is apparently not in the future. There may be another way to look at the companies. For the things that Mike bought, he does not want to hold it. He wants to exit as soon as possible. Those companies are stimulating demand and increasing property values, and he could care less if they don’t know what they’re doing. He is excited that they are coming in and sucking everything up since he wants to sell his things to them. Once it gets to the magic number, he’s out.

Bruce just wrote a newsletter about price increases that have to be inevitable. You cannot have a month’s supply of inventory with all the other factors going on and without this kicking off. One of the things they have done as sellers since they are usually in escrow with 25 properties is they put them in the MLS. The appraisal is no longer going to determine sale price, but rather it will determine your loan. If you agree to a sale price, then be prepared to bring in the rest, especially when there are 30 buyers lined up to buy. This is a statement of market value, not some appraiser who is under the gun. It is not the appraiser; it is the bank lending the money and making the rules. Their definition of market value is three closed sales. This eliminates any possibility of upside. They have literally had people bring in $25,000 on top of it, and that is a comp. They did not overpay on it. The second it closes, that is the value of the whole neighborhood. Tony said he can rent the house out and make it happen, and this is why he uses two exit strategies. He has to be able to rent it out. He had this on an FHA loan. He said he did not care; either you pony up or move.

One of the things they are doing is when they have people do applications for buying, they take a look at people who have reserved cash since they know this is what is going to happen. Tony said he does not find anything wrong with the hedge funds. If someone can write a big enough check then they can have whatever he has. The one caution he tries to look at is when you look at what they are forecasting for rents, it is right out of the Section 8 website. They are forecasting the highest allowable rent for properties, which out in his area is not reality. If you have a senior citizen sticking his money in one of these hedge funds thinking he is going to get a 20% return on his money, he is going to losing the same thing that made him his money. If the mutual fund salesman guys were out there selling these hedge funds to knowledgeable people and get into something like this, then that is their fault.

Bruce said one problem he does have is if they end up getting special access to inventory that they do not get. He does not want somebody saying they are only going to sell $100 million of notes, which FHA is actually about to do. They are about to sell a big pile of notes every quarter to a very few participants. If it hits the MLS and they want to compete with everybody else, that’s great. However, if they start being able to buy 2500 homes here, $100 million of notes, and it never passes through, then how is this good for employment. These REO agents had staff they had to let go, and it’s just crazy. One of the speakers said he received an email about three weeks ago that said they had 162 vacant houses they were trying to rent out, and the rent prices were top dollar plus about 15%. Maybe we could buy the houses from them eventually. He was sweating five vacants, so it was a little comforting seeing 62 vacants. Hopefully they won’t stub their toes too soon and it instead takes them a year or two to figure things out.

Bruce wondered if you were a land developer and you all of a sudden had a problem with how many of the hedge funds that had $100 million to $1 billion. They all said it would only be about 2-3 years, and that was 6-8 months ago. This is way too early, and they are going to have to change that dynamic. This will change their yield, and we may have some pretty strong price increases. A lot of it will come down to what they are selling to their investors, and a lot of the people who are selling it will be long gone 2-3 years from now and living a different life. They will most likely find a new toy to play with. We might as well create a hedge fund and buy everything from them. They will probably find the single-family needs some more expertise and is not the high-flyer they have advertised it to be. It is kind of a challenging time for people because if they just got in the business in the last four or five years, they do not really have the skill set to talk to people directly. This is a very different skill set.

The Norris Group would like to thank its Gold Sponsors for supporting I Survived Real Estate: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Elite Auctions, FIBI, Inland Empire Investors Forum, Inland Valley Association of Realtors, Investor Experts Incorporated, Keller Williams of Corona, Keystone CPA, Las Brisas Escrow, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Personal Real Estate Magazine, Realty 411 Magazine, Rick and LeAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Westin South Coast Plaza. See isurvivedrealestate.com for more on the event and all of the I Survived Real Estate sponsors.

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

Tags: , , , , , , , , , , , , ,
Posted in News, Radio | No Comments »

The Norris Group Real Estate News Roundup 9/18/12

Tuesday, September 18th, 2012

Today’s News Synopsis:

Builder confidence increased for the fifth month in a row to 40 according to the National Association of Home Builders.  According to recent data from both Standard & Poor’s and Experien, for eight months straight now fewer people are defaulting on their mortgages.  Housing inventory decreased 18.68% from last year, leading to a stabilization in several housing markets.


In The News:

NAHB – “Builder Confidence Continues to Gain Momentum in September” (9-18-12)

Builder confidence in the market for newly built, single-family homes rose for a fifth consecutive month in September to a level of 40 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today.  This latest three-point gain brings the index to its highest reading since June of 2006.”

Housing Wire – “Housing in most markets stable or in recovery: Realtors” (9-18-12)

“Most U.S. housing markets are stable or in recovery with a few industrial areas still battling high unemployment and a weak real estate market, the National Association of Realtors said Tuesday.”

Inman – “Shrinking inventory bolstering many housing markets” (9-18-12)

“The number of homes for sale nationwide fell 18.68 percent from a year ago in August, to 1.84 million, Realtor.com reported today, continuing a trend that’s manifested itself every month so far this year.”

Realty Times – “California Revises Broker Requirements” (9-18-12)

“Just a few weeks ago California Governor, Jerry Brown, signed into law a piece of legislation that will make it more difficult for some people to obtain a real estate broker license.”

CNN Money – “Bankers nabbed in bid-rigging scandal” (9-18-12)

“A federal crackdown is proceeding quietly against bankers accused of systematically defrauding states, local governments and non-profits.”

Bloomberg – “Fannie Mae Audit Finds BofA Wasn’t Overpaid for Servicing Rights” (9-18-12)

“Fannie Mae didn’t give Bank of America Corp. special consideration in agreeing to pay more than $500 million to transfer servicing of 384,000 mortgages to firms more likely to prevent foreclosures, a U.S. auditor said.”

Realty Trac – “Is the REO Boom Over?” (9-18-12)

“For five years, foreclosures and bank-owned REOs, have dominated the real estate landscape nationwide.”

DS News – “Fannie Mae Projects ‘Sluggish’ Economic Growth for 2012″ (9-18-12)

“Economic growth isn’t looking good for the rest of the year, according to Fannie Mae’s Economic & Strategic Research Group.”

Bloomberg – “NAR calls for easier mortgage lending” (9-18-12)

“While home values increased in July from a year earlier in 42 states, New Jersey prices fell 0.8 percent, according to CoreLogic (CLGX), a real estate services company based in Santa Ana, California.”

Housing Wire – “Mortgage defaults keep declining” (9-18-12)

“Fewer borrowers defaulted on their first mortgage than for the eighth straight month, according to consumer credit data from Standard & Poor’s and Experian, keeping the trend alive for all of 2012.”

Hard Money Loan Closed

Glendora, California hard money loan closed by The Norris Group private lending. Real estate investor received loan for $250,000 on a 4 bedroom, 2 bathroom home appraised for $400,000.

 

Bruce Norris of The Norris Group will be at the InvestClub for Women in Los Angeles today, September 18, 2012.

Bruce Norris of The Norris Group will be at the InvestClub for Women in Orange County Wednesday, September 19, 2012.

Bruce Norris of The Norris Group will be at the Real Wealth Game Changers Expo in Costa Mesa Friday-Sunday, September 28-30, 2012

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

Tags: , , , , , , , , , , , , , , , , ,
Posted in News | No Comments »

Lance Martin, Mike Novak-Smith, and Steve Silva Join Bruce Norris on the Real Estate Radio Show #289

Friday, August 3rd, 2012

Lance Martin


Lance Martin

Owner of Pioneer Real Estate

(Full Bio)

 

Steve Manos


Mike Novak-Smith

REO Agent

REMAX

(Full Bio)

 

Steve Silva


Steve Silva

REO Agent, Market Point Realty Services

(Full Bio)

 streamitunesdownloadrss

On Friday, October 19, the Norris Group proudly presents its fifth annual award-winning event I Survived Real Estate. An incredible line-up of industry experts joins Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds for the event benefit Make a Wish and St. Jude’s Children’s Research Hospital. This event would not be possible without the generous help of the following platinum partners: ForeclosureRadar and Sean O’Toole, HousingWire, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops and President Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobi Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Fry Wiles, MVT Productions, and White House Catering. Learn more about the panel and how to attend at isurvivedrealestate.com.

Today on the show are three special guests. Lance Martin has been in the real estate business for 24 years as broker/owner of Coldwell Banker Pioneer Real Estate, which serves the Inland Empire. Lance is an expert in residential REO foreclosure sales and owns offices in several Southern California counties. Mike Novak-Smith is not only one of the largest REO agents in the Inland Empire but also the nation. Mike is in the top 1% of all real estate agents nationwide and is experienced in REO short sales, bankruptcies, asset management, and negotiating. He also specializes in the Inland Empire as well. Steve Silva owns several businesses including Market Point Realty and Las Brisas Escrow. Steve is an expert in residential REO sales as wells as being a real estate investor. Bruce goes back with all of them back to the ‘90s.

Since they were all involved as early as the ‘90s, Bruce wanted to compare the 2007-2012 experience with the 90s as far as what has been similar and what has been different. Lance said regarding the volume of REOs he dealt with that it was different. The volume he dealt with in the Inland Empire from 1993-2000 was relatively light. At the time it seemed there was a lot and they felt busy. However, there was nobody like Lance Martin or Mike Novak doing the type of volume and business that they did back in the 90s. As they started into the new cycle around 2006, the volume ramped up very quickly to places they had never seen. It has progressively been slowing down literally to a stop over the last four years. Today’s volume is pretty much nonexistent as there pretty much is no volume of REO inventory coming into the markets. Since January of this year the numbers have been so small. The main distinction between the 90s and today is there is a certain sense of predictability. You could look at some data in the 90s and see what was going to come out the other end of the cycle. Today, Lance said he does not know what you can look at and make any kind of educated idea of what is going to come out the other end. There are large numbers that do not seem to be moving into the marketplace.

Bruce wondered when foreclosures peaked for Mike, to which he said about early 2009. This was when he had the most amount of unsold inventory. From then they were fairly consistent in 2010 and 2011. This year it has gone way down and they are at about half of what they had last year at this time. Mike said he probably gets about one REO a week, which is not really enough to sustain any staff or overhead, especially when you are used to dealing with hundreds of them. As Lance said, in the old days they felt really busy but they did not have the technology such as emails and web-based systems. Today you can do a lot more in a day with the tools we can use. One of the things that happened in the 2007-2008 cycle was the prices dropped off a cliff, and this was very different than what happened in the 90s. Bruce and Steve Silva accidentally entered into a transaction because Steve was a listing agent, and some others decided to auction the property off. It was one of those things where he had tried to get them to be realistic on the price out of the gate, and they refused as it was two months behind the price it should have been. When it went to sale, Steve had offers that they had rejected. Bruce bought the property at an auction at 40% less, and they accepted it.

Since the price had gone down so fast, Bruce wondered if it was really hard for the lenders to understand they were about to take that kind of beating and this was why they dragged their feet. Steve said this was indeed the case, and he remembered back in 1989 when the whole thing first started. Back then they knew exactly what was going to happen and when it was going to happen. He was calling Fannie Mae and Freddie Mac and was talking to somebody in Pasadena who told him there was no way. Steve told him he was seeing these notices of default, and then the Executive VP from Pasadena called and told him and told him he had thirty properties for him and thanked him for calling him. This was all how Steve got started. Back in the day, there was a process; and this is something we cannot find today. We have no clue what is going to happen. Lance said there is a complete disconnect as it relates to the numbers that you can actually look at. This includes the hard data such as the notices of default and the notices of sales.

Lance was not in the REO business until about 1993, and he came into it with a whole different story. Although he could not share it, he experienced that exact same story in 2005 that Steve experienced in 1989. He was looking at that data, and it was similar to Steve calling back in 1989 and said things were changing while the Pasadena VP kept saying the market was strong and there was nothing coming. Literally, only about 3-6 months later, the data was starting to reflect what Steve, Mike, and he had been looking at. That disconnect of what appears to be very accessible data for people to get at did not seem to be quite hitting home with some of the larger players, who you thought would have been looking at the same data and drawing the same conclusions. Now, at least back in 2006 you could draw some conclusions since there was still a system in place. Now the system is so broken that Lance said he does not know what you can look at today and literally say “This is what is going to happen in 3-6 months.” It is really difficult to map out a business plan, but that is the difficulty that we are going to be going into the next 6-12 months.

Bruce wondered if it matters that the lenders changed from the 90s to who they are dealing with in 2006 and beyond. Bruce wondered if mortgage-backed securities have become a bigger problem, whether to get correct answers or a willingness to foreclose. Mike said the difference was in the 90s they generally dealt with who owned the house. They had their own REO department, and you were dealing with the people who could make the decisions. Now most of it is outsourced to third party companies, and it slows the process down because they have to go ask who really makes the decisions. Bruce wondered if it is hard to know who makes the decisions and if there is a conflict of interest with the people who have an interest in a mortgage-backed security, such as whether it is in some people’s best interest to foreclose while somebody else may have a junior tronch that is not going to work out so well. Lance said this may be the case, but he does not think this is really the problem. If you look at the contrast between the 90s down cycle and what we have experienced in the past 5-6 years is the shear amount of depreciation we have seen.

In the 90s, as bad as it felt, we only saw a 25% drop in property values. This was somewhat manageable as you had, for example, a $200,000 house that was selling for $150,000. As bad as that felt for those people who were $50,000 upside down, it did not encompass the entire marketplace. Now you look at where we are at today, and for the most part Southern California peaked in the summer of 2006. Some markets have come down 70% from the peak, and it has affected so many people. Everyone was using their houses as ATMs, and the values were just ridiculous. He does not know if the problem is with the type of financing or with the mortgage-backed securities portion of it. Lance believes the values came down so fast and so much that the magnitude of the problem is much larger than the system can bear. Bruce said from an investors point of view, whenever you have a new round of foreclosures, whether in the 90s or 2007, the lenders usually are slow to react to take an early loss. They are usually hanging on to get a number that is not realistic. In this particular case, they started losing 3-4% a month in the Inland Empire. There was probably even an absence of comps, and there were no buyers and had to go down to a level where it found somebody who was going to write a check.

Mike said at one point he had 300 active listings, and they only closed about 15 deals that month. This was because 90% of them were way over-priced, so it takes a while for reality to set in. The prices are going up now, and the appraisers are coming in low. It takes a while for it all to match. Sometimes the data is lagging. An appraiser can look at somebody willing to buy something and does not show evidence that anyone else has agreed to that same number. One of the things that is involved in the appraisal world is the concept of substitution. You buy one thing that seems to be at a high price, but when you try to substitute it for the same dollar amount, you can’t do this. That is how we are starting to have this escalation.

Bruce wondered if any of the alphabet soup loan mod programs have been successful. Lance said he is not sure. There is one possible exception that is too early to tell at this point, which is that HARP 2 will be successful. The HARP 2 refis that are going on and the program itself seems to be making more sense. The numbers that Lance has heard show that the volume of HARP 2 refinancing that is in the pipeline is increasing. This means the lending industry can do refis since we are not doing resales. Prior to HARP 2, they have been able to do HARPs for outside companies. Prior to that, every other company such as Hope for Homeowners and HAFA were a dismal failure and did more harm than good. HARP 2 is basically a program where you can refi a home that is over encumbered up to an unlimited percentage. There was confusion that the cap to loan value had to be 125-150%, but with certain guidelines you fill in you can refi that property under the HARP 2 program without the loan to value issue.

Bruce wondered when all of them noticed REOs started declining and when they realized it was not what they had anticipated. Lance said for him it was January 1, 2012. He said you could go back to September 2008 when you could see REOs going through the system when things were very busy with new assignments coming in and buyers engaged. Property values were dropping, but nonetheless the inventory was being moved. In September 2008, SB 1137 was passed by California and was the first foreclosure moratorium followed by the alphabet soup of modifications and Fannie/Freddie moratoriums. You can literally look at inventory levels and REO assignments coming through the system; track it to four years ago, and you can see that they have progressively shrank ever since. As of January of this year, they have practically stopped.

Bruce said what is interesting about the peak they experienced with REO listings is that they came off of a delinquency rate of 4.3%, and we got to 11.2%. The inventory should have doubled 2 ½ times, but instead it went the other way. Despite there being a lot of properties that were turning in the background, it is now not uncommon to have people two years behind them. During the decline, Mike, Steve, and Lance were meeting with all different people who had control of the inventory. Bruce wondered if they were in a position to actually know what was going to occur. Is there somebody in the know, or are they being told to tell you these things. Steve said they did not think anything was intentional, but they could not know. They finally had to ask the other people, “Do you know, or do you not know?” This question was asked to regional managers for the Western United States, and they said they had no idea. They did not even know if they were going to have a job the following month. These kinds of are being made at a level far above the people who at least Lance is talking with. The people he talks with at the banks where he does business do not know where and when this inventory is coming.

Bruce wondered what their last conversation was where they were given hope that the volume was going to go up instead of down. Lance said there was two things for him. Two years ago in August prior to the robo-signing scandal, one of the larger banks started gathering up a lot of agents to begin training. They never said to gear up and that there was going to be inventory, but it was obvious since they were in a room with 800 other REO brokers in Southern California. Everybody in that room left thinking they were going to have some inventory. Two months later, the robo-signing scandal kicked in and was occurring at the tail end of 2010 and all of 2011. The robo-signing scandal seemed to come to an end about 6 months ago in the first quarter of 2012. He was expecting to see some inventory happen then, but nothing happened. When Mike was at conferences in March, he was at five where they all said they expected there to be more inventory. Both he and Lance agree that the people they talk to just aren’t in the know and not really at the level where they get to be in on the decision-making and what is really going to happen.

Bruce wondered what the reaction will be when you have a listing that is an REO tomorrow and you put it in the MLS at full price. The answer is there are 5 to 10 offers within the first several hours. Most of the banks don’t want to see offers within 72 hours of the time it is listed. They want to give everybody an opportunity within 72 hours if it is anywhere close to a semi-desirable property. They will then have between 30 and 50 offers on it. The demand is ridiculous and part of this frustration because the buying side of the transaction is engaged and they want to buy. Investors want to buy and are willing to pay above retail.

The unemployment rate in the Inland Empire is above 12% right now. There are enough regular consumers in the Inland Empire who have enough confidence in their current employment situation and income that they want to buy. They love the prices, and they love the interest rates. The selling side of the equation is broken. The inventory is broken; we could sell 4-6, maybe even 10 times as many properties as we are selling currently. That is one of the frustrating things, which is it cannot come from the normal source, which is the private owner since they are upside down. The only exception would be if it is in the form of a short sale, which takes some time. Right now Moreno Valley has 300 properties currently in escrow. Approximately 300 properties a month have been sold forever. You could go back and look at 20 years worth of data, and you will see that the city has been able to absorb 300 closed transactions per month for 20 years. There are 200 properties for sale in the entire city today.

Back in 2008 Bruce did a search in the MLS where he would pull $100 grand and below. In the MLS when you pull a certain percentage that has too many properties over 500, it messes with the data. He had to back it down to $90,000. There were 500 properties listed in Moreno Valley under $90 grand in 2008. Now, there is only 200 total in the entire city. Back in 2006 at another boot camp Bruce was teaching at, he searched for properties under $300 grand in Moreno Valley. There were 3; and they were all 2 bedroom houses that were 800 and 900 square feet. If you search over $300 grand in Moreno Valley now, there is probably not 15 listings that are all 4,000 square feet. It is just a ridiculous time where you do not have enough inventory.

Bruce wondered if there is any band of inventory that might still take a price hit. Lance said he believers there is, specifically the ultra-inflated high end. The financing is difficult and it is still hard to get jumbo loans. In the Inland Empire that is a narrower bandwidth. The high-end marketplace is absolutely in tune for some more paying. The bottom-end entry level things will most likely see significant price increases, especially in the entry-level property. It is hard to find a $100,000 property in the Inland Empire now let alone a $210-$130,000 property. With all the jumbo price ranges, it is almost impossible to find a buyer that qualifies. There are also a lot of people who occupy a property who can no longer buy it, and the replacement buyer is not really waiting in the wings. In the lending world it is very difficult as well.

There was a transaction where somebody had an 800 FICO score, $1 million in the bank, and a sufficient income. Right at the end they were turned down for the loan and had to end up getting a $1,000,050 purchase down to $600 grand in order to receive a conventional loan. This then puts pressure on the upper-end market. It is also the one area that might still have pressure as well as in Orange County. In this city they thing the are immune, which is not true. Bruce said if he was in escrow at any time with 25 properties, 20 out of 25 of them would have some kind of appraisal issue. Steve said he has appraisal issues every day with the things he is selling. They will put it in the MLS for $200,000, it will be bidded up to $230,000, and it will only appraise for $200-$210,000. This is brutal for the FHA and lowdown payment conventional buyers since they are almost pretty much locked out.

Part of the definition of market value is to be what a willing buyer was willing to pay. This was the statement of something they needed to pay close attention to, especially if they had 25 offers. You would think this would be a statement that market value is changing. Interest rates are creating a payment that is usually saving a buyer $6 grand a year in housing costs. Appraisers are always a sensitive issue, and their hands are going to be tied. Appraisals are going to be driven up by cash buyers.

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

Tags: , , , , , , , , , , , , ,
Posted in News, Radio | No Comments »

« Older Entries