On Friday, October 16, the Norris Group proudly presents its 8th 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: HousingWire, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association, San Jose Real Estate Investors Association, InvestClub for Women, MVT Productions, First Lending Solutions, and White House Catering. For tickets and information, visit isurvivedrealestate.com.
Bruce Norris is joined this week by Leslie Appleton-Young. Leslie is the Chief Economist and Vice President for the California Association of Realtors. CAR has 195,000 members dedicated to the advancement of professionalism in real estate. Leslie directs the activities of the association’s member information group. She oversees the analysis of housing markets and brokerage industry trends, member communications, and membership development activities. She is also closely involved with the association’s strategic planning and is well known speaker the in the real estate community. Adding to her fame is her Friday night appearance at I Survived Real Estate.
Bruce and Leslie did their first radio show back in 2008, and he could not imagine having the job of going around to all the different groups and imparting to them no good news. Leslie felt like a motivational speaker. It was a very tough market, even today’s market despite being a good one. Bruce wondered about the mood of the people going into 2016. Although the I Survived Real Estate title was appropriate back in 2008, it is still no picnic out there. There are two huge intractable issues, one being housing affordability. The second one is really a twist on housing affordability, and she is seeing this is in the data. Existing-home owners cannot afford to trade up, and they are staying in their homes longer. They are not listing like they used to, so the rate of turnover in the market has dropped significantly compared to where it was 10-20 years ago.
There are a lot of things going on, such as having a low rate mortgage. There is also the backside of Prop 13, which means you won’t want to lose this by moving. There are capital gains concerns, and it is uncertain how easy it is to qualify for a mortgage now. There are all these other currents going on that are keeping people in their homes a lot longer, and that is rippling through the entire market.
At one time, Bruce had it in his head that ownership would be five years. Bruce had a chance to look at a chart in the report Leslie just provided, and he did not realize it was ten now. There are different ways to measure it, so the ten years she used in her remarks were from her annual housing market survey where they had been surveying realtors in June of every year for 35 years. One of the questions to ask is how long the seller has been in their home, and this year it was ten years. This was the highest they had ever recorded. If you take a ratio of housing units to sales, it is 18 years. This is something that explains a lot. It is like the glue that holds all these disparate pieces together and makes it a clear picture.
In terms of having an attractive rate environment, California is outperforming the nation in job and income growth, most dramatically in the Bay Area as well as Southern California. We are just not seeing the opportunities for first-time homebuyers because the current homeowners are aging in place and figuring out they will get a contractor in to redo their place so they can stay put. One of the providers of housing usually for the first-time buyer is a new house, which has been non-existent in that category of price range. If you are a builder, you would love to be able to produce a profitable house at $250 grand and have it fly off the shelf. However, the costs are so high.
It is a hostile environment for developers in California, and it is very tough. In any other state, to see the type of price appreciation we have seen. If the recovery was from the bottom, you would have seen a much faster supply response. It is responding, and will be upwards of 100,000 units this year and a little more next year. This shows the pain of what we have been through that has happened in construction involving multifamily. When you say 100,000 and it includes multifamily, that is a very different number for the single-family. We are almost at 50-year lows other than the last couple years. We are not building new homes at a pace we used to in 1955. The demographic will be millennials out of California, and it will likely be much more pronounced as you see cities like Portland, Seattle, Denver, and Austin providing a cool vibe in affordable housing.
Austin is one of the places that has benefitted because they have the right people and right job base. The millennial generation is an interesting group of people. Charts show that only 20% of them at this point own their own home. This is low for this age category compared to generations prior to today. This generation got hit with an economy that was not providing the jobs, so they were not able to get their life started. Leslie calls it delayed adulthood by about ten years. They have moved back in with their parents, and the boomer parents are fairly co-dependent with their children and have been only too happy to help out and have their kids back home. Both sides benefited, and there was not a lot of urgency or pressure to get out and get going. The economy was not supporting it, so you will see some very significant quick changes over the next five years as these millennials are getting well into their 30s, getting married, and having children. That is one people start getting serious about having homeownership when they are really looking at the family environment.
Some of the charts showed 2015 was a good household formation years. It is definitely starting to come back and is correlating with the jobs data that is showing how rapidly jobs are growing. The Bay Area is the strongest, so it is a great employment situation for people with those skills. We certainly need to see there are a lot of people being left out of these areas, so there is a lot of retooling, retraining, and redirecting that has to occur. Bruce asked what comprises the typical household at this point.
There used to be a joke about family being 2.3 kids and a mom and dad. This has pretty much changed now. Leslie thinks it is a kaleidoscope. The other category that had households and same sex partners has grown and is a much more significant part of the housing scene. It is most dramatic for the single women who have entered the labor force and either ended up or stayed on their own and buying homes. There does not seem to be a change in the understanding of how important homeownership is to building wealth and a long-time financial plan. What changed was in earlier generations you had job opportunities when you graduated from high school and college. The kids who graduated from 2008-2010 did not have that.
When you are a single adult and have to qualify on your own, that is a pretty impactful thing when you are trying to get California’s median price purchase. Income needed to qualify to buy that median-priced home. Regardless of the area, if you were an IT programmer or a registered nurse, you had a chance of doing it on your own. Everyone else would need a dual income situation in order to qualify to buy that median-priced home. Something else Bruce noticed in the report was if you had the right profession in an area like Sacramento, you would have an easy time to qualify. However, if you were living in San Jose you would have no way to qualify.
Another dynamic that is happening is for the fortunate few who have boomer parents who can help them out, that has been a God send. Being able to have a down payment has been the number one hurdle. Having a job, a W2, and a stable is key, but saving for the down payment has always been an issue. Having parents who can help you out is a huge plus today.
One thing that is starting to occur and has for the last few years is a lot more net coming from the sale of a property. The net was at $120, and now that is down from the peak when it was over $200. It is a much healthier down payment to bring to the next transaction. Bruce asked if this is what happens with most of the dollars where they say they will put it going forward. The great majority today are buying another home. This was not true a few years ago since essentially it was a foreclosure, their credit was not good, and they were not able to do it even if they had the money. They were very low in cash, even in the negative range for some people. Today we have the cash to trade up.
The biggest problem is all the other things you gave up. You gained when you sold your home, but you will give up a 3%, 30-year mortgage and the Prop 13 tax base. You are putting yourself into a competitive market where over half the transactions are multiple offers. A couple years ago it was over 70%, and now 53% of the realtors are saying their last transaction had multiples. It is both scary and expensive. You would have to be pretty sure you are getting a yes answer from your lender, and it is easy to be doubtful in this environment. If you are a borrower with a loan they can easily sell to one of the GSEs, you should not have as much trouble. There is a lot more documentation, and nobody wants to take the loan back if something happens. Leslie will sometimes go to meetings and feel she is the only one who remembers that we almost had a global financial meltdown due to fraud in real estate finance.
Leslie thinks it is important people can qualify and pay things back. Being a lot more careful about cash-out refis is critical to avoiding another problem. When you look at the data of what happened, a great majority of those people got into trouble because they had no cushion when housing prices started to fall. For years monitoring the housing market, up until 2007, one of the things that was mystifying is how sticky housing prices are on the way down. However, that is because people had equity in their home. Now there are a lot of issues to qualifying, and some of them are positive changes. Everyone would agree there were loans made in the mid part of the last decade that should not have been made.
Unfortunately what happened was because of those lending policies, you had prices pushed into an area that was impossible to sustain. Everyone who got in under false pretenses had nothing to lose by walking, so they did. If you were a legitimate buyer who put down 40% in order to make your payment. That 40% disappeared inside of two years. Leslie thinks people’s idea was to take out cash and make their home nicer since this is a very safe investment. Everybody was drinking that Kool-aide, and it all made sense until it did not make sense. Bruce said in Corona there is a tract of homes built by an expensive tract builder. You can see the demarcation and how one house was built in 2006 and another in 2008 since the yard in the earlier year is extravagant and has everything you could imagine. All the 2008 one has is grass.
It seemed like a safe bet, and the industry was supporting that analysis. Bruce said if you were one of the people who thought housing would not go down and you got hammered, is there a hangover for wanting to get involved in the next one. Leslie said the demand for housing has been so strong, and there is not a void where we are missing demand. The question is what is going on with rentals. There is a housing affordability crisis in rental housing. She had a friend who was trying to get a rental in Orange County and had to do what a lot of the buyers do for an ownership situation which was to have a whole file and letter to the landlord since he had lost out on three other opportunities. The housing crisis is not just in homeownership, but the rental side as well. If you are looking at rent prices that are going up as well as home prices, what will make the most sense? Most people are rational enough to make the obvious choice here.
Rental housing is a dynamic moving number because for somebody who owns a rental, at the first of the year they are looking to see if they can move the rent up. If you have a fixed payment, you have taken care of that part of the wild card of your budget and it will stay that way. The affordability number is pretty healthy historically at around 32. Two years ago we were at 50, which had never happened in the past. There are charts and numbers, and then there is the reality. They had just talked about looking at the incomes by profession and what you need to qualify the median-priced home. What an index does not tell you is how competitive the market is, what the overbids look like, and what it looks like to lose out to an all-cash buyer over and over again.
Leslie does not know if 31% or 32% is a good number or not, but she does know that California prices are way out of sync with what we are seeing as a whole. We are not engaging in an adequate supply response, and the result will be losing some of our best and brightest to other states. This does not just mean software engineers, but the middle class as a whole. Teachers and fireman are looking at options in other states. It is a recipe for a bankrupt when people cannot afford to rent or buy reasonably close to where they were. Bruce asked if this happened before as affordability has gone down from 30 to 20. People have to make choices. If they cannot afford here and do not have parents to help them out, they may not be willing to make sacrifices like spending 75% of their monthly income on housing. They will look other places.
You may not see this happening today and could make an excellent argument that 32% is a great number, but Leslie sees storm clouds ahead. She feels very uncomfortable with the inability of California to embrace high density development along transportation corridors.
For the buyer in 2005 or 2006, if you asked them why you are buying it would have been because you would make money. Bruce asked why people in 2015 are buying, which Leslie said is because it is a good long-term investment. She does not get the vibe that there is a short-term in and out as much as a long-term look at it. You have people who have been on the sidelines because of the recession and the slow recovery who are now getting into the market, which is so hard to get into these days. You are still have active investors, even if they are not as active as they were. You still have flipping going on, but in general the buyers is a solid long-term buyer. Bruce thinks the reason he would miss not owning a home is because he would miss not being able to make some of those decisions himself. What we have gotten back to is some of the basics in saying we want to call the shots on a lot we have and make our own decisions without asking someone else. This is healthy but not for everyone, and there is a lot of trade-offs. A lot of people prefer to be in an urban environment, and if you do not have kids who are focused on school quality you may find the suburban lifestyle a little boring. They want to be where they can walk places, and this should be encouraged.
The economic forecast from the LAEDC showed that between January 1 and July 14, all resources we have used up can be replenished. After July 14, we cannot and we are going into a deficit mode. If you look at a household in a 1400 square foot town home or condo versus a 3-4,000 square foot suburban home, it is day and night. The reality of life going forward is going to be by necessity and also by choice. There seems to be more tolerance for high density, and people do not want to spend the time in a car commuting to and from work in order to have that lot size you want.
Bruce and Leslie will be discussing this more in depth at tonight’s 8th annual I Survived Real Estate.
The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate: Adrenaline Athletics, Capital City Wealth Builders, Coachella Valley Real Estate Investors Association, Coldwell Banker Town and Country, Elite Auctions, iMortgage, In a Day Development, Inland Valley Association of Realtors, Jennifer Buys Houses, Keller Williams Corona, Keystone CPA, Las Brisas Escrow, LA SouthReia, Leivas Tax Wealth Management, North California Real Estate Investors Association, North San Diego Real Estate Investors, Pilot Limousine, Orange County FIBI, Real Wealth Network, Realty411 Magazine, Rick and LeeAnne Rossiter, Southern California Chapter of the Appraisal Institute, Sonoca Corporation, Spinnaker Loans, Tri-Counties Association of Realtors, uDirect IRA Services, Westin South Coast Plaza, FIBI Pasadena, Scott Whaley, Wilson Investment Properties, and SDIC FIBI.
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 550 podcasts in our free investor radio archive.