On Friday, October 21, the Norris Group proudly presents its 9th 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 for the event benefit Make a Wish and St. Jude Children’s Research Hospital. This event is not possible without the generous help of the following platinum partners: HousingWire, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association, InvestClub for Women, MVT Productions, the San Jose Real Estate Investors Association, Inland Empire Real Estate Investment Club, Think Realty, and White House Catering. Visit www.isurvivedrealestate.com for event information and tickets.
Bruce opened the event by bringing up his first two guest panelists. The first up was John Burns, founder of John Burns Real Estate Consulting. He founded his company in 2001 to help executives make informed investment decisions. Before founding the company he worked at a national consulting firm for four years, and he worked for ten years at KPMG. He worked as a CPA and aid in their consulting practice. He is a highly sought after speaker, especially adept at making complicated analysis easy to understand. 410,000 people follow him on LinkedIn, and 30,000 plus subscribe to his emails. His new book Big Shifts Ahead offers insights and clarity into demographic shifts that can create exciting opportunities for business professionals.
- Where does John Burns place demographics on a scale of 1 to 10?
- What big game changer occurred in 2008 that would effect the market in the future?
- What is the law regarding portfolios, and who is their main buyer?
- Will we see homeownership continue to descend?
- What would happen if we added a nothing-down loan program?
- How are the millennial groups divided regarding their effect on the economy?
Joining John was Doug Duncan. Doug is Fannie Mae’s Vice President and Chief Economist. He is responsible for managing Fannie Mae’s strategy division in economics and mortgage market analysis groups. Prior to joining Fannie Mae, Duncan was Senior Vice President and Chief Economist at the Mortgage Bankers Association. He was recently honored with the National Association of Business Economics as the most accurate forecaster two years running. This was the first time anyone had won this. Named one of Bloomberg Business Week’s 50 Most Powerful People in real estate, Duncan is a frequent speaker on the national and state economic housing and mortgage market conditions.
Bruce said it was an honor to have them both at the event and he was grateful they took time out of their busy schedules to speak. Bruce started with John, whose book he had just read. He said a book was not a fair definition since it was really a thesis and the best thing he had read on demographics. Bruce asked John where he placed demographics on a scale of 1 to 10, and he said 7. Bruce thought this was an interesting answer because he just spent so much time writing about demographics. Some people said demographics is destiny, so when Johns gave a 7 number it really made Bruce think. He realized this was a great answer because you have these other things that influence demographics, and you enumerate them. There was an economy, tech, and government, and social shifts.
Bruce asked John what happened in 2008 that was really game-changer and changed the direction of generations. John said the demographics were the same in 2008 as they were in 2006. He wrote book on demographics because it was actually confusing to him and there was so much positive and negative as well as making and losing money. There is an acronym G.E.T.S., which stands for government, economy, technology, and society. John said he learned these four things really impact demographics a lot. This is the reason millennials are behaving a lot differently from the boomers and the boomers from their parents. The government investing in infrastructure created the suburbs, and the government investing in infrastructure to rebuild LA created urban. Having mortgage policy and brining Fannie Mae in creates homeownership, while bringing the CFPB in prevents it.
John learned from what he does that the economy during your early teens into your twenties has a massive impact on your life. A lot of people sit around saying what the millennials are not doing, but they have had a really bad economy. You cannot blame them for being that way. He just had a recent statistic on technology showing that there are 330 million people in the United States today. The birth control pill was invented in 1960; so if fertility had stayed the same today as in 1960 we would have 590 million people in America today. Talk about technology impacting things. John said this has helped him with his framework going forward and how things are going to shift.
In 2008 we had this terrible recession, and that skewed what would have occurred. People who were going to be homeowners had a completely different experience, or those who were homeowners had a bad experience and changed the trajectory. The people born in the 70s have had some tough luck. If you were born in the 70s, you probably started a family right before the housing downturn started. You needed to buy a home, got in, and the financing was loose so a lot got in who could not have prior. They paid a higher price than a couple years earlier. When those born in the 1970s were around 30 years old, they had the highest homeownership rate ever for their age. Today, they have the lowest homeownership rate ever for their age in the same decade. If you want to talk about an economy impacting a generation, that is tough.
Bruce next thanked Doug for being a supporter for the industry and getting him an audience at the big table that made suggestions for financing changes for investors. Doug said we would see if we could move the battleship or aircraft carrier in the right direction. It is kind of a carrier, so he looks forward to the conversation where they can help. This big downturn occurs, and it affects Fannie in a great way. When Bruce last met Doug he Washington, D.C., he remembered the room felt like everyone in the room thought all they were talking about did not really exist. There was a downsizing that was supposed to occur and a mandate to reduce by 10% the portfolio. Bruce asked how long this has been in effect and how it is doing.
Doug said it has been in effect since 2010 when the law was passed. By that law, portfolios are reduced annually and will be capped at $250 billion by 2018. Doug joined Fannie Mae just prior to the crisis when the portfolio was already started, so he does not remember the exact peak. However, it was roughly at $1.3 trillion. Bruce asked if the lowering of the portfolio effects his ability to provide liquidity going forward. Doug said it effects the way they provide liquidity. One of the things we have seen in the last couple years is a new kind of security called credit risk transfer securities. Here they share in the risk of the security that is issued and investors purchase. This is the intent to reduce the risk that the GSEs represent to the public by sharing it with private capital and getting that back into the funding business on the securitization side.
Some of the main buyers of portfolio turned out to be a surprise buyer to Bruce, namely the Fed. Now they are the biggest single investor in mortgage-backed securities in the world. If you think of this from a history perspective going back 50 years, the primary holders of mortgage credit were savings and loan companies. With the thrift crisis at the end of the 80s, as the thrift industry shrank it was the GSEs who became the portfolios. Now with the shrinking of portfolios and the conduct of monetary policies subsequent to the crisis, the largest single portfolio holder is the Fed. They hold around 20% of all the mortgage-backed securities that have been issued. Bruce asked if this is a good idea, to which Duncan just laughed. He may be bigger than Janet Yellen, but he does not wield this over her. The Fed has a very tough job and is expected to do some things that are not within their power. The fiscal side of the way we have run the economy has not been very active. Therefore, this is left on the shoulders of monetary policy.
The intent in the execution of this policy was a couple of things. One was to lower interest rates so that households could refinance and improve their cash flow and financial position. Second, it was to put a floor under house prices to stop the bleeding of wealth at the household level. These are probably reasonable objectives of public policy. The question out there today is about portfolios being four times the largest it was prior to the crisis at about $4 trillion. The question is if whether or not this is a sustainable path for the future. Doug said if you survey investors broadly they would say this is not sustainable into the future. However, since it has never been done before it is difficult to predict what the implications of reversing this will be.
One of the things John Burn wrote in his book is whether homeownership will continue to descend since it has already gone down from 69+% to around 33%. John said it has gone down with almost certain confidence. The people in their 20s-40s today are trending about 8-11% lower homeownership rate than their parents did. The other thing happening over the next decade is we will have 13 million people pass away, 10 million who are homeowners. If you do the math and look at all the people passing away, 80% of them are homeowners. You cannot replace this homeownership level since the percentage will go down.
However, this is just a calculation so you should not get too caught up in that. There will still be a lot of people buying homes, although it will not be the same homeownership rate. More than 50% will get to be homeowners, this is a reasonable assumption although a pretty low percentage. Doug thinks it could be in the 60 by the time we are in our 60s, but this cannot be certain since government policy impacts this a lot. The economy impacts this a lot too, so he assumes policy will stay the same as today.
Bruce said to Doug that for most of his adult life it seemed like the American Dream to own a house was a big deal. A lot of policies backed this, maybe even too well. Bruce asked what the policy is now for homeownership, which he said there has not been a change in the view that homeownership has benefits. He was looking at some data before the event that showed the wealth position of homeowners in their 60s compared to renters in their 60s, and there is no comparison. The wealth level is many times more for homeowners, so he does not think we will see policy that discourages this.
There may not be the same policy to subsidize that there was before, which in some sense was part of the problem. It could also create credit conditions where people who simply cannot sustain their credit are able to access it. This is a debate that is under way today, whether credit is too tight or not tight enough. Doug said he is actually one of John’s sales staff on his new book since he does not like the boomer/millennial gen-Xer thing. Fannie Mae actually did a little thing on the equity that boomers have among the officers. He mentioned boomers sitting together on the porch, and the first said it was windy. The one next to him said, “No it’s not, it’s Thursday.” The one next to him said, “Me too, let’s get a beer.”
When Fannie Mae does a survey, it is of young folks who eventually want to own a home, usually 90%. Doug agreed with John that the math is what it is in terms of demographics, and it is clearer than forecasting interest rates. Whether they will achieve it or not is a different issue, and that is the aspiration. They do start with some financial hurdles because of the nature of the crisis.
John added it is not policy that is the problem, but rather the number one issue is the down payment being worse than it used to be. It is the economy that is a problem; and the other big game changer is when the boomers came of age, you had a job and were comfortable you would not be laid off. These days are over. John just had one of his clients who was quite profitable lay off 400 people so he could make more money. The world has changed; so the question now is whether to take on a 30-year mortgage when you do not have six months of savings. John thinks people want to own, but a large percentage of them will not get to that point.
If you look at the spike in single-parent households, you cannot save a down payment being a single parent. There are things that have happened in society that are holding us back, and government policy cannot do much at this point. We have to get the economy cranking and people saving. It is the biggest single issue. Bruce asked about having a no-down payment loan. John said there is one called a VA, which he said it never blew up. Therefore, it may not have anything to do with a down payment. John thought the biggest impact was actually losing your job.
In Washington, Bruce presented a nothing-down loan program idea. Bruce asked what would happen if we did this. Before, it used to be a simple assumption. FHA could have a loan made to you, and someone like Bruce could pay $45 without qualifying as long as it is current at the end of the transaction. The other question is why we cannot have one loan product where we say for the foreclosure in that product you can make 5 million people nothing-down loans. However, on the foreclosure sale the only thing that goes to bid is the back payments, no principal at risk. We bid investor financing, buy it, and take over the loan. You would virtually have no foreclosures and have occupant ownership way back up.
Bruce said this would serve a big function. When you have a fixed payment that starts with an interest rate of 3, there will be a day where that seems like a car payment if you are young enough. This means you have disposable income that you will never have if you are a renter. This is a big difference to an economy and may be worth the risk. Bruce realized nothing down was probably a bad word, but he wondered what the appetite is for anything like that if it had some safety valves. Doug said if Fannie Mae comes out and says they will start making no money down loans, there will be a lot of political conversation.
To the extent that you can demonstrate empirically that the underwriting criteria and the structure of financing leads to sustainable ownership and strong credit quality, it can have a consideration. Whether it gets it through Fannie Mae in the political environment today or it should be a function served by them is a different question. John asked if we have the highest percentage ever of LTV loans today, which Doug said we do if we aggregate the new loans. People are putting less down than ever. There is a program north of Jacksonville right now where they will make everything free and easy to access. Doug and Bruce had also talked about the assumable mortgage. John proposed this 15 years ago when E Trade was a big lender and they came out with that program. Because it did not pay off early, it was more like a 30-year than a 10-year mortgage and traded 50 basis points higher. It was a real eye opener to John that somebody was assured their mortgage would lock in forever something that is assumable when paying an extra 50 basis points.
Usually generations are divided into much smaller decades long. Millennials were generally divided into two new names. Bruce wondered what the new names were, which John said they were broken down first by those born in the 1980s called the sharers. These were the ones who invented the sharing economy. Those born in the 1990s were called the connectors because they are the ones leading us to being connected 24/7 with our smart phones. Everybody’s definition of when the millennials begin and end is different. Mark Zuckerberg is a millennial, and so is John’s daughter who is a high school junior. However, everybody can relate to what year you are born and your high school classmates.
You can also compare ten-year periods to each other. Some people will say they were born in the 60s or another decade, so it is easier. One thing they seem to have in common is that they are underemployed. Bruce wondered what this meant, whether they have a Master’s degree and cannot get a job for it or have a skillset for which there is not a job. John said it is the latter, and this is actually a government statistic put out by the BLS
Tune in next week as we continue to hear from Bruce Norris and the panel of experts on the economy. The Norris Group would like to thanks its gold sponsors for supporting I Survived Real Estate: Auction.com, Coachella Valley Real Estate Investors Association, Coldwell Banker Town and Country, Elite Auctions, In a Day Development, Inland Valley Association of Realtors, Jennifer Buys Houses, Keller Williams Corona, Keystone CPA, Las Brisas Escrow, L.A. Green Designs, LA South REIA, New Western, North San Diego Real Estate Investors, Northern California Real Estate Investors Association, Orange County Investment Club, Orange County Building Industry Association, Pacific Premier Bank, Pasadena FIBI, Pilot Limousine, Real Wealth Network, Realty411 Magazine, Realty Executives Inland Empire, Rick and Leanne Rossiter, Sonoca Corporation, South Orange County Real Estate Club, Spinnaker Loans, uDirect IRA Services, Westin South Coast Plaza, Wholesale Capital Corporation, and Wilson Investment Properties Inc. See www.isurvivedrealestate.com for sponsor links and event information
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