On Friday, October 24, the Norris Group proudly presents its 7th annual award-winning black-tie event I Survived Real Estate. An incredible lineup of industry experts will join Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds from the event benefit Make a Wish and St. Jude Children’s Research Hospital. This event could not have been possible without the generous help of the following platinum partners: Auction.com, HousingWire, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association and President Bill Tan, InvestClub for Women and Iris Veneracion, San Jose Real Estate Investors Association and Geraldine Barry, MVT Productions, and White House Catering. For event information, visit isurvivedrealestate.com.
Bruce Norris is joined this week by Beth Peerce. Beth is this year’s vice president of the National Association of Realtors after having served as a realtor for over 35 years in Beverly Hills, California. In addition, she is also the broker/owner of Primetime Properties located in Century City, California and whose specialty is residential real estate.
Bruce asked how real estate is at the top end of the market. This is going off the assumption that we are mostly dealing with properties that would exceed any Fannie Mae loan limits. Beth said at the top end of the market it is terrific. There is no question that it is selling, moving, and prices are great. It is terrific if you are the seller, but if you are the buyer you better get in here. Our problem is once you get out of the top end of the market, things are much slower and much harder to qualify. Bruce asked how the market is for jumbo financing, or are most of the buyers cash buyers? Beth said most of the buyers at the high end of the market are cash. They don’t need a loan, even if they get one, and then the banks will be happy to make them one. It is much harder for the average buyers, though the interest rates are terrific. This is the time for the average buyer to get into this market before interest rates and prices increase.
Bruce asked how the inventory level has changed over the last year. Beth said it has gone up, which is the good news. This means there is more to buy and some choice on the market. When the good product goes on, it gets bought and gets multiple offers. Bruce asked if the participants in this price range are speculators and if we are seeing the kind of things we saw before where somebody will buy the smallest house and expand it considerably. Beth said she does not see the smallest house getting expanded in her markets. What she does see is investors buying in the lower end of the market. They are certainly buying and flipping, and this is still going on at this moment as we speak. However, they are not really participants in the higher level since most of these are occupant buyers.
Beth said she sees a lot of people who are buying in the higher range and then selling two years later for a large profit. They do not consider themselves speculators, but rather people who like to buy and redecorate. They also don’t mind the tax advantages of having lived in it. They stay the right amount of time and move on. An occupant speculator is a new thing
Bruce asked if we have much participation from foreign occupants. Beth said there is and that we are seeing lots of buyers from Asia, including Japan and China, and all over the eastern part of our world. We are told they are going all over, but we seem to see a lot of foreign investors in California. Many of them are buying their property as a second or third home, while others are buying for their children and grandchildren. Bruce did a talk up in San Jose where there were about 400 Chinese investors in the audience. After he finished, there was a Q and A and someone got up and said they had just bought a property two years ago for $1 million in San Jose. Two years later it was worth $2 million. They did not want to sell it until it was worth $7 million. Bruce thought this was a lot to expect from one house. What he did not know was that if you had owned something in Beijing, you might have had an increase in price upwards of 15 times your original purchase price.
There was a woman who had owned three properties in Beijing. Bruce did not know how long she owned them, although it was definitely less than a decade. She paid $50,000 for each of two of the properties and $100,000 for the last one. She sold all three within a few months for $3 million. When you have that type of money coming out and looking for another investment, you cannot say that the expectation is there that it will work the same way here. Unless they plan on keeping 25 years, they cannot start to think in terms of those kinds of multiples. This is not what any good realtor would say to a client that they can expect. You cannot deter this mentality, however, if it already happened. This is like a California investor going to Texas in 2005 after coming off a tripling and seeing the house prices in Texas. Everything looks like a bargain, and the assumption inside their, even if it has never happened before in the history of Texas, would be that it will go up here also. If they bought often, it did not happen. However, they had to be specific about their market.
This is really true in many places where you have hot spots where you have to see why something happened in one place and not another. Bruce wondered what is special about Austin; whether it is because they are the tech and college center or if there is another reason. Beth said if she could really explain this, she would not still be in the real estate business. You really cannot explain why it happens, although there are certain areas where you can. In New York you can say this because it is a finite amount of properties with a lot of people who want to live in them. Therefore, it will all go up in value no matter what happens in the market. You can say this about most major cities. You can say this about the coastline; you buy here and your property will go up in value. This will happen in limited areas. People say Austin, Texas is not really Texas, but if any Texans heard this they would disagree. People say it is the cultural and music capital and everything in Texas. Beth has been told by anybody who went there that she would understand too if she went there.
If you just showed up to real estate in the last five years and took a look at the Fed fund rate, you would think there was no volatility in the interest rates. We know differently than this. Beth entered the business in the late 1970s, and it has gone from 18-21% as she was in her first three years. She knows from experience that interest rates are volatile. In 1980 the Fed fund rate changed 21 times. The volatility was unnerving, and what Beth really believed was even though the Fed said they are keeping interest rates low, she does not think it is forever. If someone wants a loan, they should go out and buy something now. In general, wherever people are hearing this, people should go out and buy something if you are thinking about it and don’t sit on the fence. Don’t think to yourself that interest rates will be low next year so you can wait until then.
Bruce said he agrees with this sentiment since it is already here. It starts with a four, and there have not been many times in our adult lifetime that this has been true. You are rolling the dice for an extra half of a percent. Beth thinks people will regret it. It will be one of those famous scenarios where you are driving along, turn to your kids, and you say, “Four years ago I could have bought that house for $100,000.
Bruce asked what effect interest rate hikes would have on price. Beth said she does not think this will affect price at all. Beth’s personal opinion is that they will increase, although you would also have to ask Chief Economist Lawrence Yun. Beth does not see any reason why they will not continue to rise. The people seem to have an attitude that we are in another bubble market and will have a new problem. Beth said she cannot see it because the other problem was self-caused. We were greedy sellers and buyers, and far more greedy lenders. Beth will never say that prices won’t go down in between. In general, anybody who invested in real estate twenty years ago is not complaining today.
Bruce asked if Dodd-Frank is fully implemented or if there are still things to decide. Beth said there are still lots of things to decide. The NAR is fighting very hard for mortgage debt forgiveness. There are still a lot of homeowners who are still underwater, roughly 13% of them. If they sell their homes and lose money on it, the government still charges them taxes on it. They would still have to get this back in to get a mortgage debt forgiveness relief for the clients. Bruce thought this was renewed for this year, but it has not yet. There needs to be terrorism risk insurance; and people need to feel secure, especially in commercial real estate.
They are still talking about getting rid of second-home mortgages as deductible. She does not think this will happen, but we still have to keep our homeowners vigilant. A lot of the consumers have been willing to go and contact their Congress people and say you have to do something about it. This really helps because it cannot be only a couple people being the voice of real estate. It needs to be the person who is really being affected, which is the homeowner.
It seems the world has become such a mess in the last few months that the budget concerns are not even on the front burner anymore. It is on the backburner, and at some point when they say they have to save some money real estate looks like it is in the crosshairs of that effort. This is an easy target very frequently. We have to make sure we stay vigilant and don’t let Congress make that an easy target. It is kind of like how the municipalities at the point of fail legislation that they like to tell the NAR that everybody should have one thing they will do at the point of fail and let the seller pay for it. This is the kind of thing they see quite frequently.
One of the things that affected parts of California have price ranges that are much different from Century City. Riverside had an FHA loan limit go from 500 to 350. It definitely changed the capacity to move properties over 350. Bruce asked Beth if she has the sense that this FHA loan limit will not be left to decline further. Beth said she would hate to see it decline further, and she personally believes this was a huge mistake. She is not sure where they found any statistics to back that change. It does not make any logical sense; just ask anybody in Riverside or half of the San Fernando Valley. Beth said she does not think they will get away with brining it down any lower. She understands that that in Arkansas, $350,000 makes you sound like a millionaire. However, this is not true in a great many parts of the country. If they would only look around and open their pocketbooks, they would see that they would get a lot better results. Look at how your Congress people vote, and make sure you tell them what you want done.
Back between 2000 and 2005/2006, becoming a homeowner was the holy grail of everyone’s effort. Bruce asked what the attitude is now in Congress about programs that encourage homeownership versus staying a renter. Beth said she is not an expert on what they are thinking, but she will admit she goes into these meetings with them, and they have two sides of their mouth depending on to whom they are speaking. Locally there is a man named Brad Sherman who fights for real estate and all the things you hope to fight for, and he is consistent and understands what is happening. The fact that if someone wishes to buy a house and can afford to make the payments, then they need to be helped to buy the house. Beth thinks this is every realtors’ belief. Beth does not believe everybody needs to own since some are not ready to own or don’t want to own. However, if they want to and can afford to make the payments, then we should make it as pleasant and easy for them as possible so they can become homeowners.
Bruce asked about the famous generation called the millennials and what is holding them up since they do not seem to want to buy or hold households. Beth said they really don’t want to do any of the things her generation did. They don’t want to get married, form households, or even live together and buy it together. Bruce finds it fascinating talking to them about the reasoning of their decision. They seem to want a lot of flexibility. They don’t understand how they land on a specific spot. Beth wondered if they are willing to change the locale of where they live, and she could not believe somebody in Southern California would really want to move somewhere like Kansas or Nebraska. Spend a winter here and see if they really want to do this. She understands they want to be mobile enough to change jobs, but you would think they would understand they can sell the property again that they bought. They can buy it, fix it up to make it look good, and sell it again.
Bruce wondered if there is some hesitancy because of what they just saw happen to people who owned it. Our industry basically went through the Great Depression, and that is frightening to young people. However, if you look at the statistics for the long term, they will see that their mothers and fathers made a lot of money on their property. When Beth was selling in 1976, the houses worth $70,000 went down since the last Recession. However, they are still worth over $500,000. The question then is where else they would make that kind of money. It is the largest investment you will make in your life because this is where you will live and raise your family. Twenty-five years later, or eight years later, you are going to sell it for a profit. If you bought back in 2006 or 2007 and tried to sell it in 2009, then this is not really a good investment.
Bruce disagrees with the philosophy that there is no financial difference between the net worth of the occupant owner and the renter over time. The housing cost is very different and is a variable housing cost. In this case, you never build equity and you never pay it off. It has been shown over and over again that the person who owns the net interest is far greater. Bruce wondered if it was true that Fannie and Freddie came out with an announcement over the last week where they shortened the length of time someone has to wait after they have had a foreclosure or bankruptcy, although Beth has not heard of this. However, this would make sense since most lenders are saying three years, and Fannie and Freddie are saying 2-3 years. It may be different for a foreclosure or bankruptcy, but that was just recently decided.
It is interesting that the FHA does not have a FICO score requirement, but every lender that funds FHA loans has one. This is an overlay. Bruce asked Beth if she sees an easing of overlays by lenders to where they will become more flexible regarding to whom they lend. Beth said they have not seen this, although they may say they have it. It is still not helping our industry.
This year in California has been disappointing with volume of sales. We are down about 20% and just went through a pretty boring summer as far as volume. Bruce asked if anybody on Hill is concerned about this. Beth also said, again, nobody she has talked to, although they need to look at it since it would be nice to have that volume back, contractors in California busy, and new housing starts to change, or anything to make a difference.
Beth Peerce will be among the panel members at I Survived Real Estate 2014. The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate: Adrenaline Athletics, Coldwell Banker Town and Country, Elite Auctions, In A Day Development, Inland Valley Association of Realtors, Investor Experts, Jennifer Buys Houses, Keystone CPA, Las Brisas Escrow, LA South REIA, Leivas Associates, Pilot Limousine, Primary Residential Mortgage, Northern California Real Estate Investors Association, North San Diego Real Estate Investors, Real Wealth Network, Realty 411 Magazine, Rick and LeeAnne Rossiter, Personal Real Estate Magazine, SONOCA Corporation, Southpointe Companies, Spinnaker Loans, uDirect IRA Services, and the Council of Multiple Listing Services. See isurvivedrealestate.com for video of the live event and more on our sponsors.
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