Dave Cogdill with the California Building industry Association #403

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 Dave Cogdill. Dave is a former senator who is now president and CEO of the California Building Industry Association, a position he has served in since 2013. Prior to serving on this board, Dave was the county assessor for Stanislaus from 2011-2013. He also served as a commissioner on the California Water Commission. He was also the chairman for the Maddy Institute at Fresno State University after departing from Legislature. During his years in office, Dave worked a lot with leaders to resolve issue relating to rural, healthcare, and education. For his service he has received several awards including the Prestigious Profiles and Courage Award from the John F. Kennedy Library Foundation.

Dave has a very diverse background, one thing being that he is very familiar with water. Bruce asked him how the drought has affected the building industry and if they are concerned going forward. Dave said most definitely and that they have to have a dedicated source of water in order to receive the approvals necessary in order to build. In this state, that has been the law now for some time. A reliable water supply is as important to their industry as any other, maybe even more so. He is very pleased to say they will be moving forward with the water bond on the November ballot. They hope the people of the state will support it since it is rather historic in nature and it has been a while since people have had the opportunity to weigh in relating to the issue of water supply reliability. This bond will provide about $7 ½ million that can be leveraged three or four times in order to provide much needed infrastructure and hopefully substantially improve water supply reliability in the state.

Bruce said if for some reason this did not pass and we did not get more rain, Bruce wondered how serious this is. Building contractors have projects that last for years, so they spend a lot of money on upfront costs. Now they start building, and all of a sudden the lack of water could have stoppage of something that is already under way and approved due to lack of water. At times like this you certainly hear of concerns relating to possible moratoriums. This chatter increases as the drought becomes more and more severe. The realities are relating to new housing stock and currently existing housing stock. They create a very efficient product nowadays if you compare with homes built prior to 1980.

One of the frustrations as an industry that they have with the legislation earlier this year was to provide almost $750 million worth of drought relief, but there is very little in that bill that could actually provide folks with the incentives necessary to swap out their high-flow toilets and shower heads, and it is a relatively cheap fix. You are looking at somewhere between $1,000 and $1500 on the typical home to make those improvements. They would like to see some of this money used to incentivize some of those efforts that would save close to 300 million acre feet a year. It is a substantial improvement just by making sure that they are more water efficient in the existing housing stock.

Bruce asked if, in this same vein, builders are able to incorporate green improvements in their new construction. Dave said they are and do quite a bit of this. There are some programs relating to silver energy as well as some pretty substantial rebates as tax credits offered by the Federal government as a result of brining California’s requirements in line with the Federal requirements that are making that more feasible. What they can market for those products is growing in many cases is still relatively limited. People like the idea of it, but they do not seem to be quite as enthusiastic about paying the increased price that might be associated with that type of construction.

Bruce has heard that since the Great Recession, we have made up an equal number of jobs, both in California and the nation. Bruce asked how this relates specifically to the construction industry, specifically in California. Dave said we are behind the curb substantially. He thinks the Department of Finance at the state level estimates that the average growth needed to provide the need for housing in the state is somewhere above 200,000 units a year. Dave said the projections earlier this year was that they would do about 100,000 in 2014, and now this has been revised down to about 85,000. You can see where we are substantially below just what is needed to keep up with the projected demands. Their industry is a long way from being back to where we were 5-6 years ago.

The 200,000 units includes apartments. Single-family construction is a very different percentage down from where it was. The difference between the two multi-family housing is a larger percentage that it has been historically. This is due to a number of factors, primarily the ability for people to qualify the home underwriting requirements have become more stringent following the Recession. People are going back to work, and the employment rate is dropping and has dropped. The realities relating to real wage increases are quite bleak, and wages have been pretty stagnant. With the increased price of providing a new home in the state due to the regulatory environment and other costs we face, it gets very difficult to provide an affordable product in which a large part of the market can participate.

Bruce asked Rick if he has quite a few projects that are not financially viable in areas like Riverside and San Bernardino County. They have more than they would certainly expect to see in the normal environment. It is not as bad as it was at the height of the Recession, but in many areas of the state, primarily the inland areas of Central Valley and Sacramento Valley as well as portions of Southern California, it becomes very difficult to provide affordable products. In the areas along the coast in some of the higher dollar areas of the state, it is about having something available to market. It is certainly not as price sensitive, but if you have the product you can probably sell it. They are much less susceptible to any anticipated increase in costs and the impact of that on feasibility.

At the end of 2013 looking into 2014, Bruce wondered if we have lived up to the projections or if it is it not as good as we thought it would be. Dave said no in that they estimated we would be around 100,000 units this year and we are instead closer to 85,000. Bruce asked if the reason for this is a lack of sales. Dave said it is actually permits, although they go hand in hand. Permits are down over what they were anticipated to be.

Bruce asked about unsold inventory and if it is at a mild level and not unsafe. Dave said most have gone back to the mode of building as we sell. There is not a lot of spec building going on, so you do not really have that inventory issue since they build the home after they have sold it. There is not a lot of standing inventory of completed or new homes.

Bruce asked if the target buyer has changed, specifically if you were building new homes in 2003/2004. He may really be leaning toward the first-time buyer, and he wondered if the target buyer has changed for 2014. In a normal market you probably had a fair amount of homes bought by first-time buyers, so Bruce wondered if this was still true. Dave does not think it was the same percentage that it has been historically. The millennial generation seems to be more interested in the more urban housing offerings within larger cities. Dave said a lot of that demographic is a result of the fact that people are getting married later in life and also deciding that families later in life are in the market and become interested in a product more along the lines of the detached single-family residence.

The jury is still out as it relates to what it means long-term for trends in housing. Right now it is one of the reasons we are seeing more development of multi-family rental housing versus condominiums or other types of non-detached single-family residential. It is hard to project this too because if you look at every other generation, they have really not acted the same way. They did not shrug at home ownership like this millennial generation has. This does not make it easy to be in Dave’s business if things have changed. The other thing that has changed is the household makeup themselves. There are a lot of people who are single with one income who would have to qualify on their own in order to buy something. This has not always been true.

The other side of this is they are finding more multi-generational buyers where you will have three generations in the same household. There is more of this than there has been in the past. We just went into a new housing tract in Riverside, and they had this exact thing. They had this set aside to where you had the grandmother suite. This is not something you would have seen in the early 2000s, this is definitely a new product.

Bruce asked Dave if he gets the sense that the financing world is going to become easier to get people qualified going forward than it has the last couple of years. Dave said that history certainly teaches us this. We go through these cycles where credit gets very tight, then it loosens up as a reflection of increased market demand and the economics behind it all. We just have to continue to hope that they learned lessons from the previous cycle. There have been many cases over history where it appears we have not done that and the pendulum will not swing too far. They have certainly been a bit looser than they are now. It is this scenario that seems to develop after we have gone through a major downturn where credit gets very tight. A lot of the people out there now who went through a bankruptcy or a short sale foreclosure have now cured their credit or will be curing it in the next year. In the eyes of an underwriter, they have become a new buyer at that point. If they have cured their credit sufficiently, they can participate. This is a good thing from the standpoint of the market and the ability to provide and sell homes.

In Riverside, one of the things that has been detrimental to builders is the lowering of the FHA loan limits. Riverside went from $500 grand to $350. That number makes it pretty tough to build a very large home in Riverside. The builders have had a lot easier time selling under $350 than they have anything over this. Typically FHA loan limits are a lower ratio to Fannie and Freddie than they are now. Bruce asked Dave if he is getting the sense that it is heading downward from here. Dave said his guess is as good as his, but overall we are going to start seeing more in the way of a loosening of these limits and lending requirements rather than a further tightening. As the economy gets better, more people go back to work. As we start to see wages come back up, you will see these limits start to raise again and overall underwriting requirements become a little more lenient.

When you have a decline in building like we have from where we did tons of construction in 2006 and there has been many years of a downturn. Bruce asked if we have skilled labor problems where we do not have all the skilled labor at our beckoned call and it has moved somewhere else. This is a real concern, certainly in many parts of this state where the industry went so far down as to be literally decimated for years on end. These folks did not have a lot of options other than to move somewhere to find work. They are really not coming back at the level that many of the high dollar areas like the bay area or along the coast of Southern California are. However, in areas like the Central Valley and Inland Empire one would argue it is probably more difficult now to find skilled labor than it once was.

Bruce asked if a new home market has any great participation from foreign investors. Dave said not to a great extent, although right now there is a level of interest out there right now. He had just interviewed a company from Japan who was interested in the housing market in California and possibly becoming an investor in that area. There are large developments in the Bay Area, particularly in Oakland, that’s plan will actually involve Chinese investors. That interest seems to be picking up with the overall recovery of the market, and we can expect to see more of this.

Bruce spoke in front of an audience of Chinese investors, and once it got to the Q and A part, the gentleman mentioned he had just bought a home in Northern California two years ago for $1 million. Now it is worth $2 million; and he was going to hold it until it was $7 million. Mentally he thought this was a lot to expect, but he did not have the context the person holding the home did. Bruce said he knew someone in Beijing who sold three properties, and they went up a percentage of 1500% inside of four years. He invested $50,000 in two different homes, and they sold for $500 grand a piece. He invested $100 grand, and they sold for $2 million. When you walk that money into California, Bruce said he is not buying that you want a safe haven for it. You are looking for a replication of it, and it is interesting this mentality exists in that area.

In an area like San Jose where you have already peaked past 2007 prices, part of it is on the backs of very happy money that is not local. Bruce asked if cash buyers come into play a lot for new homes. Dave said they are more now than they have been in the past, and this goes back to the underwriting requirements and difficulty of getting a loan even with figured credit. You have a lot of folks who are in niche areas. This is especially the case when you are looking at the baby boomer demographic moving the way it has and the way it relates now to more downsizing and situation where they are selling a larger home in an area where the values have increased substantially during their time of ownership. In many cases, they are moving to more rural and suburban areas where they can buy twice the home for a fraction of what they sold the home for in the Bay Area or other parts of California. The rest retire early and have greatly increased the quality of their life from the standpoint of their living conditions. You are seeing more of this than what is reflected in the cash buying that is happening.

Bruce asked if there is any study that has taken a look at the seniors and says they are actually leaving the state of California to avoid taxation. Dave said he knows there has been, although he cannot quote any of them at the moment. However, this is something we have certainly seen over the years. Dave said he is in this demographic, and a lot of the people he talks to have made the same comment about how they moved into Nevada to get an automatic 10% increase in their annual income. As far as the actual numbers of people doing this, he has not seen anything recently.

Regarding the California business climate, Bruce said if he looks at any report we are 49th out of 50. We are not doing anybody favors, so Bruce wonders how this impacts the building industry if it does at all. It certainly does from the standpoint of the unemployment rate and availability of good paying jobs that can afford a mortgage on the average home or product. This relates to the whole environment of higher unemployment rates and low wages that have been pretty stagnant now for several years. This is probably the biggest impact on the ability of this market to function the way it once did or the way we would like to see it again. It is a major issue.

If you want to play political games, you can say things are back to normally, specifically having jobs. However, the trouble is they are 30 hours instead of 40 and they do not pay as well. A lender cannot give you a yes answer when before they could.

Dave Cogdill will be featured on the panel for the upcoming I Survived Real Estate 2014, where they will discuss things with peers from all different walks from the real estate world. 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 LeAnne Rossiter, Personal Real Estate Magazine, SONOCA Corporation, Southpointe Companies, Spinnaker Loans, Tony Alvarez, 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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