I Survived Real Estate 2012
On October 19, 2012, The Norris Group proudly presented I Survived Real Estate 2012. An expert line-up of industry experts joined Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and the outlook for real estate in the coming year. Over $77,000 was raised to benefit Make a Wish and St. Jude Children’s Research Hospital. This event would not have been possible without the generous help of the following platinum partners: ForeclosureRadar, the San Diego Creative Real Estate Investors Associatio, the Investors Workshops, Invest Club for Women, San Jose Real Estate Investors Association, Frye Wyles, MVT Productions, and White House Catering. Lean more about the panel and how to attend at isurvivedrealestate.com.
Bruce continued his discussion with Mark Palim and Eric Janszen. He asked Mark if he feels we have passed the bottom of the housing market and are now on an upswing that is sustainable. Mark said they have not called the bottom, but what they are seeing in the data and seeing pretty broadly across the country is the return of a seasonal pattern where we had a really good spring in terms of not only house prices but also days on the market. Many markets are returning back to a very healthy situation in terms of supply and demand. Mark said the reason he is a little hesitant to say we are definitely past the bottom goes with the fact that prices are currently being supported by incredibly low interest rates and the Federal government having a huge involvement in supporting credit. He can’t promise he can keep them there a while; in fact, he can’t really promise anything.
Bruce wondered what his expectations would be and if he thinks interest rates are likely to remain reasonably where they are for a while. Mark said this is his current view in forecasts for the next few years. He believes mortgage rates will stay where they are with a little bit of an uptick over time as the economy improves. The Federal Reserve has been very clear that they will keep interest rates low for as long as they think they need to. This will be backed up with immense purchases of MBS.
Bruce asked what the positives were that got us off the bottom to this point. Mark said it is a combination of things. One thing is that markets actually work after a while. Prices came down 30%, and people looked at it and said at the current prices they were going to stop renting and buy instead. Employment is also improving. It is not back to where one would want it to be, but there has been some improvement. These two things have helped immensely along with low interest rates.
Bruce asked if he felt that the improvement in the market was driven by real forces or mostly by policy decisions. We are in a period of unprecedented policy intervention, but he thinks that when individuals look at the price of a house and interest rates to take on the commitment to own a home or buy an investment property, these are real decisions.
Bruce asked about Mark’s research and if he came up with a scenario where he sees it as significant and tells it to Fannie Mae, would they sometimes implement new policies based on expectations. Is it definitely moving forward, or do we need to tell them it’s dangerous and to be careful. Who do the people listen to, and how quickly do they receive the policy? Mark said they are fortunate in the economics and strategy group, and they have a terrific management team that listens to a lot of the research they do. It is a battleship-sized organization, and their balance sheet is a $3 trillion balance sheet. The conservator is ultimately responsible for guarding taxpayer money. Things move slowly and judiciously with care; and Mark said that at least with everyone he has met in the three years he has been at Fannie Mae, they are all conscious of making data-driven decisions and trying to make the best decisions they can. Bruce jokingly asked if Mark could put a good word in for investors who bump the number of loans that are available. Mark said if you spoke to their REO operation in Dallas and the people who run it, they love individual investors. At the height, they had about 180,000 homes in inventory, and they were taking in about 14-15,000 a month. They get terrific execution from new homeowners and individual investors. Mark said in the company they very much appreciate investors.
Bruce continued the discussion with Eric Janszen from iTulip. Something he really respects about Eric is the appreciation he has for the process where he believes you must remove emotion away from the decision. In a stock market that went crazy in the 90s when he told his investors that followed him that he would exit by the end of 1999/early 2000, it was a nice thing to know. It’s like buying gold at $270 and never selling it. Bruce has a friend who owns a lot of silver, and after signing up for his friend’s website he received an email where he told everybody out of the blue that he was selling all of his silver. Bruce immediately forwarded it to another friend and told him to take this guy seriously since he has a good track record of picking tops and bottoms. His friend told him no thanks and that it was going to 100. About three days later it was around 30. However, Bruce said he appreciated the process, but what scares him about Eric’s process is he disagrees with his real estate conclusions.
This was the reason they were at I Survived Real Estate. It was not to pat Bruce on the back or predict anything. He wants to understand why really well-meaning and educated people come to different conclusions sometimes. Eric quoted, “I lay out the model for the rate and duration of decline, which I have determined to be 10-15 years from 2005 depending on the form and extent of government intervention in the market.” Eric made this statement in 2004, so Bruce wondered if the extent of government intervention has surprised Eric. He said it has, and to say that it was unprecedented government intervention is an understatement. He was surprised by very little, but QE3 was one thing that surprised him. QE3 was interesting because it was specifically focused in buying mortgage-backed securities. All the other quantitative easing before that was both treasury bonds and mortgage-backed securities. This was directed specifically at the housing industry.
Bruce asked what the effect will be for the housing industry on this particular policy. Eric said it will be positive. What Bernanke has been trying to do is re-inflate asset prices and financial assets, which you see if you look at household balance sheets. There is a document the Fed puts out every quarter called the Fed flow of funds, which measures household worth. The two things it measures are financial assets and tangible assets. Tangible assets are a small portion of it, especially with housing value that makes up about 90% of it. The other 10% are things such as your refrigerator. The financial assets are stocks, bonds, and portfolio assets. These are back to where they were before the crisis. QE in Bernanke’s view has been successful in reflating those because standard theory states that if you can increase household net worth and it has a positive wealth effect, which moves aggregate demand curve up and improves the economy. That has been successful so far in that it did what it was intended to do.
Bruce asked if he mostly agrees or disagrees with his opening remarks regarding Shiller. Eric said he does agree with everything he is saying about his market here, although he is not an expert on his original market. Eric said he is more of a macro kind of guy, so his concerns are more macroeconomic. In terms of the housing market nationally, a housing bubble or any kind of bubble is a process, not an event. A housing bubble could take a long time to unfold. In his view it started in the mid-1990s and really took off around 2002 with some extraordinary intervention. The Federal Reserve really caused it to take off until it crashed in 2006. There has been a very long period of time from 1998 until now when there has not been what he would generally consider to be a market price for real estate in the United States. It has been distorted one way or the other by government intervention. For an average person trying to figure out what the price of real estate should be, whether it’s here, in Boston or Ohio, it’s like being in a casino for two weeks and trying to figure out what time it is.
Bruce asked how important housing is to an economic recovery for the United States. Eric said since the mid-1960s we have never had a sustained recovery from a recession without a housing recovery first. This has always been the pattern. Bruce next asked how subservient real estate is in the United States to things outside of our country. If Europe ends up having a pretty nasty recession again, what would the ramifications be not only for the United States but real estate in the United States? Eric went back to saying a recession is technically a period of time when the economy is shrinking, so there is negative GDP growth. What this creates is an upward gap, which is a gap between potential GDP and the actual GDP. In all recessions in most of our lifetimes, it is always closed in a relatively short period of time, even during the very large recessions we had back in the early 1980s. It closed in one year from about 7 ½% of GDP to zero. This was a very rapid recovery.
The so-called Great Recession produced an upward gap of almost the same amount of about 7.7% of GDP, but it has not really closed at all. It is still at 7.5%, so it stayed parallel. This goes back to the question of why traditionally real estate has always been regional and how we knew we were getting a housing bubble. Eric said when he started writing about the bubble in 2002; the signature event was diversions of housing prices from regional incomes. It is logical that regional home prices should be correlated to regional incomes because you are going to buy a house within about 30 miles of your commute. You are going to pay the mortgage you can afford based on your income. This is why housing prices tend to be regional. When they diverge, then something is inflating prices beyond what normal incomes would support. Eric said when you tell him you are seeing prices going up but employment is not going up, there is some other factor besides normal market factors driving it. This raises the question of whether or not this will continue. Bruce said he has been trying to get this out of Fannie Mae, but he would not come up with it.
Mark Palim added that the other interesting phenomenon you get is large differences across the country based on the elasticity of supply. What this refers to is the ability of builders to build the moment demand picks up. If you look at the boom and the bust on the coasts and in areas where there are geographic and politically imposed limitations through zoning, the moment income starts to go up and credit loosens you see prices start to move up. If you go to Plano Texas where there is a lot of land and it is developer friendly, you just don’t get the same boom/bust cycle that you get, for example, in Manhattan or San Francisco. Mark said he does not know how the counties here would compare on how difficult it is to add supply. That is definitely going to be a factor that is affecting the differences in regional performance.
The next person on the panel was Sara Stephens. Sara is the 2012 President of the Appraisal Institute. She serves on the organization’s board of directors on its executive committee. She has been active in the Appraisal Institute and all its regions for about 24 years. Returning again this year is Gary Thomas, the President Elect for the National Association of Realtors. He has been in the business for more than 35 years and has served the industry in countless ways. Bruce also welcomed E.J. Burke, the Vice Chairman of the Mortgage Bankers Association. E.J. Burke is Executive Vice President and Group Head of Key Bank Real Estate Capital and Key Bank’s corporate bank with responsibilities for real estate capital.
Bruce told Sara he has an independent appraiser who wrote him a referral letter in the sense that he has always been impressed that the Norris Group did not do what was typical when they requested an appraisal. Part of the letter said that he had been an appraiser since 1988. In those 24 years he has done 14,000 appraisals. As an appraiser, his job is to protect the lenders’ investment. If a loan officer is involved, their job is to get a loan funded. If there is a real estate agent involved, it is their job to get that house sold. If it is a refinance, the borrower’s concern is to get the new loan. If it is a divorce situation, the owner that is buying out the other partner wants the appraisal low while the other wants it high. If it is a short sale, the realtor wants the appraisal below market. If it is a private sale, the owner wants the appraisal above market while the buyer wants it below market.
In over 99% of the 14,000 appraisals, there has been pressure from most realtors, buyers, sellers, loan officers, and attorneys to get the appraisal value at a number that is best to meet their needs. Bruce asked Sara if she finds this true and if it reflects the reality of the appraisal world. Sara said she thinks this is true. She jokingly said to somebody at her table that if she sent an appraisal to somebody and they don’t call and complain, the first thought is that it’s too high. The pressure on appraisers is enormous since they are reporting the market. It is very difficult for people to understand that they are an unbiased third party, and this is why they are here. They are here to protect the public trust, provide their expertise, and to investigate the market and report it. This is really their job and their function.
Concerning the lender side, Bruce asked E.J. if he agrees with the pressure that not only exists from the mortgage broker to the appraiser, but also from the client to the mortgage broker. E.J. said he absolutely agrees, to which Bruce asked if there was anything in place where it is common for realtors to put pressure on appraisals. It’s something where we have landed in quite a mess because some of our greed was not reined in by ourselves. The question is if there is anything in either the mortgage industry or the realtor industry that says to leave the appraiser alone. Bruce asked if this is coming from the leadership down or from somewhere else. Gary responded that the thing everyone wants in any market is fair appraisals. Bruce had alluded to the market moving up, but this is problematic for getting the appraisals right as we move out of the trough. This has been the case every time we have gone through a recession. We live with this, and we blame the appraiser because they are conservative in what they are doing. They have to be at this point in time. We understand it even if we don’t like it.
Regarding the mortgage industry, Bruce asked if there are any rules telling people what not to do. E.J. responded that for regulated institutions, the last time we had a big real estate crisis; it gave us the little brother to Dodd-Frank. Under this, we have to separate ordering the appraisal and reviewing it from the lending process. In his institution, for instance, it is ordered by the risk people and reviewed by the risk people. They are not allowed to talk to the appraiser. Bruce said it sounds like we had a mechanism in place, but it did not work. E.J. said this is not the case of a regulated institution, so the mortgage market has not always been regulated. But even the banks have made plenty of mistakes, so it just goes to show that you cannot rely simply on an appraisal to make your lending decision. There are a number of other factors that determine if someone gets paid back or not.
Bruce went on to discuss the appraisal management company’s design to provide a barrier between the appraiser and the rest of the participants, the goal being appraiser independence. Bruce asked if this had occurred already, to which Sara said it has to some degree. One of the big problems we are seeing from the amcs and their emergence into the world of the appraisals is that obviously they were set up and put together to provide that firewall between the lender and the purchaser. The idea is a good one, but unfortunately what has happened in a lot of instances the mantra of the amcs seems to be cheap and quick. What we are seeing is we are sacrificing the ability of an appraiser who is local, has local expertise, an understanding of the market, an ability to put together an appraisal that is accurate for a specific part of the market that person works in. This is all being negated by the insistence that the fee be very low and the timing be very quick. We are seeing a lot of people traveling into markets 200-400 miles and come in, make an inspection, and gather what they can quickly, go home, do the appraisal, and turn it in in 24-36 hours. For all of us, that single-family dwelling is probably the most important financial decision we will make. Having some kind of support for that financial decision is extremely important. Having a qualified, educated appraiser work on that appraisal who is local and has expertise in the market and understands what is going on is key to helping consumers make that decision and shoring up a process that is ongoing.
To find out more, tune in next week for I Survived Real Estate 2012, part 3. The Norris Group would like to thank their gold sponsors for supporting the event: Adrenaline Athletics, California Property Solvers, Coldwell Banker Pioneer Real Estate, Elite Auctions, For Investors By Investors, In a Day Development, Inland Empire Investors Forum, Inland Valley Association of Realtors, Investor Experts, Inc., Keller Williams of Corona, Keystone CPA, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Personal Real Estate Magazine, Pilot Limo, Realty 411 Magazine, Real Wealth Network, Rick and LeaAnne Rossiter, Southwest Riverside County Association of Realtors, Jon Risinger Photography, Sonoca Corporation, Spinnaker Loans, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Westin South Coast Plaza, and Winning in Tough Times, LLC. See isurvivedrealestate.com for the video from the live event.
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